Wealth Management
(Washington)
Brokers all over the country have been nervous about enforcement of the new Reg BI rule since its implementation a couple weeks ago. While the law itself is understood, enforcement of its particulars is not, as there is no precedent or real world examples to go on. For its part, FINRA recently made comments about its forthcoming enforcement policy. According to the Associate General Counsel of FINRA, “by and large, we're going to be looking at the compliance obligations of policies procedures and training, and we're not looking at it to say
‘did a firm do everything the way that we would have done it,’ or ‘did they do everything perfectly.’ We're looking to see do they understand the obligations, and do they make a good faith effort to implement the changes that needed to be made and incorporate those in their policies procedures and training.”
FINSUM: This is generally what firms have been expecting because it is what has been broadcast, but this is a little more comforting than previous efforts out of other regulators.
(Washington)
The SEC’s new Reg BI rule has been in full force since June 30th. However, many brokers are still nervous about complying with the rule as the whole industry is still waiting on more practical guidance. Many firms feel reasonably comfortable following the principals of the rule, but certain items—rollovers being key among them—are still a little uncertain. The SEC has said it will take “good faith efforts” into account in this initial enforcement period, but that is not nearly as comforting as knowing you are following the letter of the law.
FINSUM: Given this is a whole new regulatory package and there is no historical precedent, anxiety is high. We expect new guidance will be issued soon.
(Washington)
It has not gotten much major media attention yet, but there is a big battle brewing between asset managers and the Trump administration. The reason why is a new rule proposal by the DOL which seeks to require private pension plan administrators to prove that they are not sacrificing client returns by putting money into ESG-oriented investments. The proposal was not some by-product or unintended consequence of a larger regulation, it was the point. In the words of Eugene Scalia, head of the DOL, “Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan”.
FINSUM: In our opinion, this rule by the DOL is very out-of-step with current market trends. We totally understand the need for the DOL to protect retail investors, but Millennials and Gen Xers love ESG and will be the ones inheriting wealth soon. This seems heavy-handed.
More...
(Washington)
A top industry legal firm—HaynesBoone—has done a nice brief write-up about the new DOL rule. The piece summarizes the key components, including the five-part test and key exemptions. The new rule brought back the 1975 standard five-part test for determining who is a fiduciary. The test consists of:
1. Render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
2. On a regular basis;
3. Pursuant to a mutual agreement, arrangement, or understanding with the employee benefit plan, plan fiduciary, or IRA owner;
4. The advice will serve as a primary basis for investment decisions with respect to the employee benefit plan or IRA assets; and
5. The advice will be individualized based on the particular needs of the employee benefit plan or IRA.
Now to the exemptions. According to HaynesBoone “fiduciaries may not (i) engage in self-dealing, (ii) receive compensation from third parties for transactions involving such plan assets, or (iii) purchase or sell investments with plans when acting on behalf of their own accounts. Provided the conditions of the exemption are met, the Proposed Exemption would allow investment advice fiduciaries to receive compensation for certain transactions that would otherwise be prohibited.” HaynesBoone continued “The Proposed Exemption would require investment advice to be provided in accordance with the “impartial conduct standards.” Under this standard, investment advice fiduciaries must provide advice that is in the retirement investor’s “best interest” (i.e., in adherence to the duty of prudence and loyalty), charge only “reasonable compensation,” make “no materially misleading statements,” and satisfy various other requirements, each as further described in the Proposed Exemption. The Proposed Exemption also requires certain disclosures be made to retirement investors, the implementation of certain policies and procedures, the performance of certain retrospective compliance reviews, and the adherence of recordkeeping obligations”.
FINSUM: This coverage makes it clear why this is such an industry-friendly rule versus the first iteration.
(Washington)
Democrats are pushing for more time with the new DOL rule. The party says that the 30-day comment period on the new DOL rule is insufficient for public comment. They argue that since the new rule is 123 pages itself and relies on thorough knowledge of the SEC’s 770-page Reg BI, 30 days is simply not enough time to fully digest and comment on the rule. In their words, “As the Obama Administration twice respected the requests of those who asked that the fiduciary rule comment periods be extended, we call on this Administration to do the same. At a minimum, we request the DOL provide an additional 60 days so as to give the public a more appropriate amount of time to consider the impact of such a significant proposal and better align this comment period with past precedents.”
FINSUM: Two industry perspectives here. On the one hand, going slow is not necessarily bad—who wants new regulations sooner? On the other, getting the rule done before Trump may leave office would be more beneficial to the industry than a new version that a new Democratic administration might propose.
(Washington)
It comes as no real surprise, but those who have seen the new DOL rule (which was kept very private until recently), have said it is largely exactly what was expected. In particular, those who are currently abiding by Reg BI (implemented today) will be considered to be abiding by the new DOL Rule. The rule is much narrower in scope, lacks the lawsuit component of the first, and interestingly, uses the five-part test of the original rule, but in a way that allows loopholes for firms to essentially decide if they want to abide by the rule or “disclaim away” their need to follow the regulation. About the five-part test, according to Barbara Roper, head of the Consumer Federation of America, “That means firms will essentially be able to choose whether they want to operate under what’s left of the fiduciary standard or disclaim away their fiduciary obligations”.
FINSUM: No big surprises here, this is the DOL rule “light” version the industry was hoping for and expecting.