What makes the DOL's fiduciary rule so transformational is that while most regulations impose significant costs, this rule also will have a material impact on revenue, especially related to individual retirement accounts. It's a principle-based rule that gives firms flexibility to choose how they comply. Here are paths to compliance for firms to consider.
Be a fiduciary
It is possible to comply with the fiduciary rule without the use of a new or existing exemption, including by exiting the brokerage model. This route means avoiding prohibited transactions and essentially operating free of conflict. But as the DOL states, “IRAs are governed by the [tax] code, not by ERISA, and the code, unlike ERISA, does not directly impose responsibilities of prudence and loyalty on fiduciaries.”
Use the best interest contract exemption (BICE)
BICE offers firms the ability to maintain existing forms of compensation, but only by accepting “impartial conduct standards” that need to be documented, warranted and disclosed.
With the BICE, firms are required to insulate advisers from conflicts of interest, but are permitted to receive third-party payments and sell proprietary products. While existing forms of compensation may remain, firms will need to ensure that any variability in differential compensation is based on “neutral factors.”
(More: Everything you need to know about the DOL fiduciary rule as it develops)
Use the streamlined BICE for level-fee fiduciaries
For firms willing to level compensation at the adviser level as well as the firm level, the DOL offers the level-fee fiduciary option. Ordinarily, a firm that offers level fees would not require an exemption. However, in cases where a level-fee fiduciary is making recommendations related to switching from a commission to fee-based account or recommending a rollover, the streamlined exemption is required.
Use the principal transaction exemption (PTE)
In order to allow principal trading in certain circumstances, the DOL offers the PTE, which would allow the purchase in a principal capacity of a debt security, UIT or CD based on certain credit and liquidity standards. Additionally, the exemption allows the sale in a principal capacity of all securities.
Much like the BICE, the PTE includes requirements to adhere to the impartial conduct standard. Additionally, PTE requires firms to achieve best execution and provide an annual disclosure.
Rely on pre-existing transaction relief/transition period for the BICE or PTE
When considering the BICE or PTE, firms also need to decide whether they will avail themselves of the pre-existing transaction relief. The purpose of the exemption is to preserve compensation already in place, and would apply to investments acquired before April 10, 2017. Additionally, firms may consider taking advantage of the transition period from April 10, 2017, to January 1, 2018.
Use other amended prohibited transaction exemptions
It's important to note that several other exemptions were amended as part of the DOL package published in the Federal Register on April 8, 2016. Firms relying on these exemptions should review these exemptions carefully, as most of them seek to impose the impartial conduct standards.
Rely on existing advisory opinion or statutory exemption
The DOL acknowledges that “nothing in the final rule alters” existing advisory opinions. They also reference the use of statutory exemptions established as part of the Pension Protection Act of 2006.
Don't be a fiduciary
Another way of complying with the DOL fiduciary rule is simply to not be a fiduciary by qualifying for an exception to the definition, including offering investment education only, taking orders without giving advice or performing transactions with independent fiduciaries.
NEXT STEPS
Firms may choose multiple paths to compliance, but in moving forward, they should think about the following questions:
• What paths to compliance will ensure a seamless experience for clients?
• What is the impact on financial adviser compensation and incentives?
• How will litigation risk be managed? What supervisory structures need to be in place?
• What are the implementation costs and long-term impact on profitability?
• While lawsuits have been filed, the current applicability date is April 10, 2017. What can reasonably be accomplished in that time?
• How can implementation be flexible in order to accommodate any new guidance by the DOL or changes as a result of litigation?
The DOL rule represents a challenge for the financial services industry. Achieving compliance with it isn't just about establishing compliance, it's a wholesale re-examination of the business.
Manisha Kimmel is the chief regulatory officer, wealth management, at Thomson Reuters.
