Fiduciary Rule Less Complex, but Questions Linger

Pension & Benefits Daily™ covers all major legislative, regulatory, legal, and industry developments in the area of employee benefits every business day, focusing on actions by Congress,...

By Sean Forbes

April 7 — The Department of Labor made a number of reasonable concessions in its final rule fiduciary rule, but there are still some muddy waters that will need to be clarified—either by the DOL or by the courts—benefits attorneys and others said.

Benefits attorneys and the financial industry were generally satisfied with the concessions made to the best-interest-contract exemption, considered the “heart” of the rule by the DOL. The changes streamlined the BICE and removed some of its complexities.

“Is the rule perfect? No,” said Linda Rittenhouse, director of capital markets policy at the CFA Institute in Charlottesville, Va. Adapting to the new requirements will still be a “complex undertaking” for advisers who don't already work under a fiduciary standard, but the rule does recognize the importance of investors to rely on the “sanctity” of advice that they receive, she told Bloomberg BNA April 7.

The DOL describes the BICE as allowing firms to use certain compensation arrangements that might otherwise be forbidden as long as they commit to putting their client's best interest first. They must take such steps as adopting anti-conflict-of-interest policies and procedures and disclosing any conflicts that could affect their best judgment as a fiduciary rendering advice.

The proposed rule had caused a great deal of confusion in the industry about when to sign a BICE contract, with may wondering if it had to be signed the moment a potential client walked in the door, Rittenhouse said. The final rule states that a contract doesn't have to be signed until any time before, or at the time of, the execution of a new recommended transaction. The revision adds clarity by giving a definitive time when the contract takes effect, and lets advisers know when they actually would become liable, she said.

The DOL made another important change by allowing advisers to get negative consent for existing clients, Robert S. Kaplan, an associate in the Philadelphia office of Ballard Spahr LLP, told Bloomberg BNA April 7. Under the final rule, if a client doesn't respond within 30 days of being alerted to the BICE, the contract will take effect. The revision was “critical for the investment community,” because contacting existing clients one by one and getting affirmative consent would have been “impossible,” he said.

By reducing the BICE's complexity and streamlining disclosures, the DOL also helped investment advisers with implementing the new requirements, David G. Tittsworth, counsel in Ropes & Gray LLP's Washington office, told Bloomberg BNA April 7.

The DOL extended the eight-month implementation period under its proposed rule to a phased-in approach, with full implementation as of Jan. 1, 2018. Until 2018, the DOL will take a compliance, rather than enforcement, approach.

Some commenters, such as the U.S. Chamber of Commerce, had asked for up to three years for implementation, but because the rule is less complex, advisers won't need as much time as under the proposed eight-month period, said Tittsworth, previously president and chief executive officer of the Investment Adviser Association.

Enforcement

Others are still unsatisfied with the final rule, and find the BICE less than satisfactory.

The BICE is “not more workable by much,” said John Berlau, senior fellow at the Competitive Enterprise Institute in Washington.

One of the reasons the BICE provisions are problematic is because the rule leaves intact the proposal's private right of action to bring a lawsuit, and the rule's definition of a fiduciary “goes way beyond common law” or the definition under the Investment Advisers Act of 1940 or other areas of the law, Berlau told Bloomberg BNA April 7.

Patrick C. DiCarlo, counsel in the Atlanta office of Alston & Bird LLP, said the reasons for which a plaintiff can sue are listed under the Employee Retirement Income Security Act, and so may be difficult to enforce under the BICE. It may be up to the courts to determine whether the BICE is even enforceable, DiCarlo told Bloomberg BNA April 7.

Kaplan, who mostly favored the new rule, also said that the private right of action could be nettlesome. Because the DOL doesn't have the manpower to enforce the rule across the industry, “the people who will win the most will be class action lawyers,” he said.

But it could take up to three years after the new contracts are signed to see how common class actions become, Kaplan said.

Lawsuits to Overturn Rule?

There's also the possibility of lawsuits to overturn the rule.

The U.S. Chamber of Commerce and others have threatened to sue, but there's an uphill challenge, Tittsworth said: There's a limited time frame in which to bring a case, and any cases would be sent to the U.S. Court of Appeals for the District of Columbia Circuit, where the chief judge happens to be Merrick Garland—President Barack Obama's nominee to the U.S. Supreme Court.

To contact the reporter on this story: Sean Forbes in Washington at sforbes@bna.com

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