DOL Promises Answers to Welter of Fiduciary Rule Questions

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By Sean Forbes

May 11 — The financial advisory industry is resigning itself to the Department of Labor's broad-reaching definition of “fiduciary,” but has a welter of unanswered questions about how to adapt to the new environment.

A DOL official was peppered with questions about the new fiduciary rule at a conference on May 10, and while he said the department will make adjustments to help make the rule more workable for the industry, the enforceable best-interest requirement will remain intact.

The core of the rule is “making sure advice when delivered to retirement investors is intended to be in that investor's best interest, and it's going to be enforceable,” Timothy D. Hauser, deputy assistant secretary for program operations at the DOL's Employee Benefits Security Administration, said at a daylong Investment Company Institute conference focused on the rule. “We don't view the enforceability of that promise or of the commitment as a problem. We view that as critical to these rights meaning anything.” Rights without associated remedies that customers can enforce aren't rights at all, he said.

The changes that the DOL made from the proposed rule to the final, as well as forthcoming subregulatory guidance, should help with operations and implementation, he said.

Hauser also expressed confidence that the industry is innovative enough to quickly adapt to the new regulation.

The rule was released April 6 (67 PBD, 4/7/16). The effective date is April 10, 2017, and the compliance date is Jan. 1, 2018.

“My belief—and we'll be watching very closely how this all plays out—is that there is enough creativity, there's enough competitive drive, that this industry is going to continue to deliver advice to their customers in a competitive and effective way” while hewing to the best-interest standards set out by the fiduciary rule, Hauser said.

Hauser also urged all industry members to ask questions as soon as possible. “We'd rather get advice out early than have you build out your systems and then have us say, no, that doesn't comply,” he said.

Subregulatory guidance will probably come in the form of questions and answers, which could be rolled out as the DOL is able to address them, Hauser said.

The DOL has taken a similar strategy in providing guidance on the Affordable Care Act.

But the industry's first objective will be compliance, and creativity and innovation will have to follow, Robert H. Dearman Jr., vice president of Lansing, Mich.-based Jackson National Life Insurance Co., told Bloomberg BNA at the conference.

The DOL “is hoping we will innovate, but don't pretend that the purpose of the rule is to get innovation,” he said. The primary goal, as Hauser and other DOL officials have emphasized, is that customers get financial advice that is in their best interest, Dearman said.

More Questions Than Answers

One of the questions on most audience members' minds appeared to be the rule's definition of “reasonable compensation.”

The concept of “reasonable compensation” isn't new, Hauser said. “What's surprising to me in the comments is that this has been in” the Employee Retirement Income Security Act since the law was enacted, he said.

In the preamble to the rule's best-interest-contract exemption, the DOL said “reasonable compensation” is already required under ERISA Section 408(b)(2) and tax code Section 4975(d)(2) of service providers, including financial services providers, regardless of whether they are fiduciaries.

In response to audience questions, Hauser said the DOL isn't attempting to become a rate-setting agency, determining on its own what is reasonable. The rule is intended to deal with outliers, and act as a constraint on abusive practices, he said.

This answer by Hauser drew skepticism from Daniel R. Kleinman, a partner at Morgan, Lewis & Bockius LLP in Washington. Advisers will have to puzzle out which metrics and comparisons to use to determine reasonable compensation. “You heard Tim say they're not in the business of setting those, but they'll definitely tell when it's wrong,” Kleinman said.

The advisory industry can also help the DOL by supplying possible answers, Hauser said. For example, supervision of advisers' compliance with the rule will require that firms have in place strong and thorough policies and procedures regarding incentive structures, Hauser said. He said the DOL has approached several industry groups for exemplars of best practice policies and procedures, but has received no feedback yet.

To contact the reporter on this story: Sean Forbes in Washington at

To contact the editor responsible for this story: Jo-el J. Meyer at

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