Should you say goodbye to the Fiduciary Rule? Maybe, but not just yet. The DOL has until the end of April to decide whether to let the 5th Circuit decision vacating the Fiduciary Rule stand or try to get it over-turned. If they do nothing, the ruling becomes effective May 7, and bye-bye Fiduciary Rule – the regulation re-defining fiduciary investment advice for plans and IRAs and the related prohibited transaction exemptions.
Many pundits say this is what will happen. But it’s possible that the DOL will either ask the court to reverse itself – this would mean the 15 judge panel agreeing to re-hear and re-decide the case – or try to get the Supreme Court (SCOTUS) to accept an appeal. SCOTUS doesn’t have to do that, so those who think the DOL won’t let this go are betting on the re-hearing request. While requests for rehearing are rarely granted, in this case there might be a better chance. The decision vacating the Fiduciary Rule was a split decision, with Chief Judge Carl E. Stewart dissenting in favor of the Rule.
Regardless of what DOL decides, for at least another six weeks broker-dealers and their advisors should comply with the Rule, the exemptions and their own internal policies and procedures and communications with customers about their status and services. That “status quo” may last even longer if the DOL decides to pursue getting the decision over-turned. This is because the 5th Circuit could grant a stay while the issue is being reviewed.
Let’s assume the 5th Circuit decision stands, and on May 7 the Rule becomes a footnote in history. What then? Here are some things to consider:
- If you’ve told customers that the firm and your advisors are acting as fiduciaries, you have to consider whether to go back to them and say you aren’t. If you don’t, that can create a problem about your compensation because the relief provided by BICE will also go away. This means that you would have to find another exemption for “conflicted compensation” or will have to change how you and your advisors get paid. Some have suggested that the DOL will grant some kind of a “BICE Lite” exemption, but it is not clear that will happen.
- Even if you haven’t said you are a fiduciary, you should review your communications with customers, especially marketing materials, to see whether the description of your services could suggest fiduciary status (eg., if you have said you always act in your customers’ best interest). You should also review your WSPs and supervisory practices to make sure they are consistent with how you operate. Otherwise, you could run into a problem with FINRA, the SEC or state regulators saying you aren’t complying with your own standards.
- You’ll need to assess whether your services still make you a fiduciary under the old test. If the 5th Circuit decision is the final word, the old test will have governed the conduct of broker-dealers and their advisors both before and after last June 9 (when the vacated fiduciary rule would have first applied). That test says you are giving fiduciary investment advice if you give advice that meets a five-part test. The “five part test” applies to advice: (1) as to the value of securities or other property, or as to the advisability of investing in, purchasing, or selling securities or other property; (2) that is given on a regular basis; (3) pursuant to a mutual agreement or understanding; (4) that the services will form a primary basis for investment decisions; and (5) that is individualized, based on the particular needs of the investor.
If you meet the criteria in the five part test, you still need to observe the ERISA prudence requirement and adhere to the prohibited transaction rules, and try to find an exemption for conflicted compensation.
This list is just the tip of the iceberg, and even if the Rule goes away, there will still be plenty of disruption.
Most significantly, there are on-going efforts to change the standard of care applicable to your customer dealings. At the 2018 SIFMA C&L Annual Conference, SEC Chairman Jay Clayton said the SEC would produce its own best interest standard to govern brokers and investment advisors “soon” because “sooner is better.” He said the 5th Circuit decision does not affect the SEC’s approach, and the SEC will continue to move forward regardless of the outcome of that case. Seconding Chairman Clayton, FINRA’s President and CEO, Robert Cook, said that while the landscape is still shifting, FINRA has long supported a best interest standard and believes that standard is best developed by the SEC. And don’t forget that the DOL has been working on a revised rule and exemptions.
Bye-bye Fiduciary Rule? We’ll have to wait and see.