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Mona Amin

January 09, 2017

Preparing for DOL’s Fiduciary Rule

Many in the financial services sector are awaiting the January 20, 2017 ascendancy of a new presidential administration. Some in the sector are anticipatory, other are all but ecstatic, but all financial operators innately understand that a slew of changes could be on the horizon.

There is another looming date, however, that some in the sector, particularly investment advisors, are dreading. And that dread will magnify unless the new administration takes up the cry of a chorus of advocates and acts quickly to intervene and squelch the April debut of the “fiduciary rule.”

The Department of Labor’s new fiduciary rule will, explained simply, require financial advisors to act in the best interest of their clients. In other words, they will have to act as a true, defined “fiduciary” when recommending investment products to those who seek their advice and counsel.

Currently, investment advisors are asked to follow a “suitability” standard, which binds advisors to developing investment strategies that meet the “objectives” and “means” of their investors. The new fiduciary rule will impose a heightened standard for investor protection on advisors, and will place an added legal responsibility on investment advisors by requiring them to act in their client’s best interest at all times, while avoiding conflicts that generally arise when advisors receive commissions. Not only will this new rule fundamentally change how the retirement planning and investment industry operates by imposing hefty fines on violators, it will also increase a company’s chance of entering into litigation if advisors cannot prove that they prioritized the client’s interest over their own, or those of the investment vehicles they have recommended.

The rule has already had a major impact on the retirement planning sector, with advisors taking on increased legal obligations and additional expenditures to ensure their own compliance. Across the country, investment advisory companies and financial service organizations are partnering to halt the application of the rule, at least until the new Administration has time to determine whether to dismantle the lawfully, or in part.

In Texas, for example, the U.S. Chamber of Commerce has joined with several financial organizations, including the Financial Services Institute and the Financial Services Roundtable, in a suit alleging that the Labor Department exceeded its authority in creating the rule. The complaint filed in June 2016 claims that “The Department bootstrapped its way into regulating matters outside its jurisdiction by first defining the term ‘fiduciary’ in an impermissibly broad manner, and then exploiting its exemptive authority to obligate financial services professionals to accept special duties and liabilities that have no basis in ERISA and the Code.”[1] The Chamber and its partners are seeking an injunction to halt enforcement of the rule.

Elsewhere across the country, two district courts have already denied motions to halt the enforcement of the rule, and two more have yet to decide.

The new Republican-led Congress has indicated a desire to overturn the fiduciary rule, as have some of the President-elect’s advisors. Financial advisors should wait, however, to pop the champagne and celebrate the death of this rule because it may not happen anytime soon, given the administration’s other stated priorities for its first 100 days of operation.

In the meantime, we can likely expect affected companies to continue filing litigation against the government until the new administration figures out its position on the issue.

As the financial industry prepares for the rule to go into effect, companies and organizations looking to exert pressure on the new administration and Congress to speed up a review of the fiduciary rule should develop a well-thought-out communications and public affairs strategy. If the company is currently in litigation over the matter, its communications strategy should complement its legal strategy. Lastly – and this is one point that is often overlooked – companies publicly attacking the rule should consider the long-term effects of their opposition to a rule that requires financial advisors to act “in the best interest of their clients,” and what the optics of a negative position suggests to those clients, who may find the company’s position disingenuous and unsavory.

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Posted by: Mona Amin

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