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Bates Research  |  08-17-17

DOL Fiduciary Duty Rule: What Your Firm Should Do Now


The road to implementation of the Department of Labor’s (DOL) fiduciary duty rule (Rule) continues to be bumpy (see Bates posts here and here). The latest turn may mark yet another delay of the Rule. Specifically, the requirements of the Rule that took effect on June 9, 2017 (Transition Period) may be extended from its original, full compliance date of January 1, 2018 to July 1, 2019. Today we report on the DOL’s recent moves and offer recommendations for financial services firms to consider as they navigate the ongoing regulatory and compliance uncertainty.


Recent Developments

On August 10, 2017, the DOL requested a delay in the applicability date for full compliance with the Rule. The Transition Period went into effect on June 9th after Secretary of Labor R. Alexander Acosta concluded there were no legitimate grounds to delay it. As we reported, the first set of provisions concerned the definition of the term “fiduciary” and compliance with new requirements known as Impartial Conduct Standards (ICS).

The new request for delay concerns a second set of more contentious provisions scheduled for applicability on January 1, 2018. The provisions concern important exemptions under the Rule, including the Best Interest Contract Exemption (BICE) and two complex exemptions known as the Principal Transaction Exemptions (PTEs). In brief, BICE requires “a written statement of fiduciary status; specified disclosures; a written commitment to adhere to the ICS (see here for interesting commentary on the ICS); designation of a person or persons responsible for addressing material conflicts of interest; monitoring advisers' adherence to the ICS; and compliance with certain recordkeeping requirements.” The PTEs relate “to purchases of certain securities (primarily debt instruments) from a fiduciary, and sales of securities and other investments to a fiduciary.”

The request for a delay to the BICE and PTE provisions was communicated without much fanfare. Secretary Acosta filed a Notice of Administrative action in a federal lawsuit in the U.S. District Court for the District of Minnesota, stating that the Labor Department had submitted to the Office of Management and Budget (“OMB”) a request for an 18-month delay to the exemptions under the Rule. The delay must be approved by OMB, a process that can take as long as 90 days.


The Challenge for Financial Institutions

“The challenge with the current state of the Rule is that we do not know what, if any, changes will be made to the exemptions,” said Michael Bernardo, Managing Director of Bates Compliance Solutions. “We also do not know if some other intervening force will change any part of the Rule that is in effect now, or will be in effect at some point. What is known is that the requirements applicable during the Transition Period are still effective.”

Clearly, the provisions that were implemented in June remain in effect. According to commentary published in the National Law Review, this means that investment advice “is subject to the following standards: Any recommendation (defined under the new broad definition) must be in the best interest of the investor, meaning that it must be based on the investor’s investment objectives, risk tolerance, and financial circumstances (and not financial considerations of the fiduciary); a fiduciary must not make misleading statements about investment transactions, compensation, or conflicts of interest; and a fiduciary may not charge more than a reasonable amount for services.”

To date, thousands of comments have been submitted in the process of adopting a fiduciary rule. (See, for example, SIFMA’s response to the DOL's July 6, 2017 "Request for Information” submitted only days before the DOL’s most recent request for delay.) Given the number and nature of these responses, as well as the clear intention demonstrated by the Trump administration, the SEC, and the Secretary of Labor to move in a different direction than the previous administration, it is clear that no firm can be certain of what its potential future compliance obligations will be.


Handling the Uncertainty: Recommendations

Bates Compliances Solutions’ Michael Bernardo recommends the following four-step approach to managing compliance during this period of regulatory uncertainty.

Take Stock and Reassess

It is an appropriate time for a reassessment. Identify and catalog everything you do, how you are paid, and how you pay others. If you did an assessment during your first attempt at implementing changes 12 or 18 months ago, refresh it. Review it to adapt to any changes over that time period, and consider what you may have missed.

Measure and Test Your Business Plans Against Various Scenarios

To best determine how to comply with a rule that may or may not be 18 months away, while complying with the parts that are currently effective, create or modify your strategic plan to factor in a wide range of compliance scenarios. You should evaluate where you want to take your business during the next 18 to 36 months. Will you merge with another firm? Will you divest a business line? Will you acquire a sizeable production team? These are all considerations that will help shape the type of effort and costs you may need to incur in anticipation of future compliance obligations.

Commit to Your Decisions

Planning through regulatory uncertainty is challenging. The most challenging part can be sticking to core business decisions in the midst of conflicting and changing information and conditions. One technique is dividing decision points into two categories: “Final” and “Parking Lot.” The Final category addresses long term business goals. The Parking Lot contains items that relate to the possible regulatory hurdles that can affect those goals, but that cannot be ignored. You should make sure your commitments to core goals are not compromised by Parking Lot issues. You should assess, document, and define the options on the table, understanding these decision point categories in order to maintain clarity and purpose.

Engage and Communicate With all Team Members Often

The next 18 months will require flexibility, continuous communication and continuous adjustments both in planning and operations. To address the challenge of building a business while simultaneously working through the changes to the Rule, you will need to enlist the help of your entire team – senior managers, operations group personnel, the sales force – and communicate with each other often.

Whether it is adjusting the routine (i.e., setting up monthly reminders for team members and regular status meetings with staff), or reprioritizing to consider the latest compliance information (i.e., utilizing regular planning meetings with senior managers and principals) you must put yourself in the best position to navigate toward your final goals. Do not assume that once you announce your plan for success, compliance, and growth, that everyone will be aware of it and follow it. Continuous and engaged communication with your whole team will ensure more favorable outcomes.


Final Thoughts

Michael Bernardo’s advice makes clear that despite the uncertainty around the details and the implementation of a final fiduciary rule, financial firms should not wait for some distant government resolution. The bottom line is that market participants must contend continuously not only with a complex financial marketplace in a confusing regulatory and compliance environment, but also with partisan bickering, intra-governmental disputes, and frequent delays to the implementation of any regulatory framework. Bates will continue to provide insight as we monitor these emerging developments.

What do you think? Learn more about Bates Compliance Solutions and DOL support services.