Fiduciary Groundhog Day: What Just Happened?

Uncertainty has made it extremely hard for stakeholders to tell

401k, fiduciary, regulation, DOLWe are just as confused as this little guy.

For 401k advisors, it’s the repetitive fiduciary frustration of Groundhog Day; except the part of Phil the weatherman will be played by Alexander Acosta. Constant DOL fiduciary rule delays, new attempts at repeal, and multiple comment periods are now the norm.

On August 10, the DOL submitted proposed amendments to the Office of Management and Budget that extend the applicability date of the Best Interest Contract Exemption (BICE) to July 1, 2019.

The uncertainty surrounding these developments has made it extremely hard for stakeholders to tell what’s happening. In previous comments, we expressed our confidence that it’s too late to stop the key parts of the rule, and that ultimately courts will not allow a reversal.

The June 9 effective date for Impartial Conduct Standard has thus far proven us correct, since on that day anyone involved with IRA assets or annuities essentially became an ERISA fiduciary. ERISA fiduciary status is completely different from SEC fiduciary status and much more stringent.

So, what happened on August 10 and will Punxsutawney Phil see his fiduciary shadow?

What Happened

The DOL is looking to delay the BIC exemption, along with others. But BICE is the primary enforcement mechanism. The DOL was never intended as the rule’s enforcer, rather it was to be left to litigation attorneys. Delaying BICE is (potentially) a huge relief for those subject to it. In addition to enabling class action lawsuits, BICE would require advisors to sign a best interest contract that explains how they might not be acting in the investors best interest—a tough conversation by any standard.

If the delay stands, the best interest contract won’t have to be signed and any class action liability will be delayed or removed.

Next Steps

This delay is not in the effect.

It’s proposed, and the Office of Management and Budget will clear it before it appears in the Federal Register. After that, a comment period on the delay, both on its merits and length, so we have no idea how long it would last. It’s clear the DOL wants to buy more time to revise. However, the question is whether litigation will at some point be brought forth to prevent the delay, as well as reduce its length and substance. At this point, all uncertainties.

What It Means for You

If you’re already a level-fee fiduciary, the delay has less of an impact (assuming it stands).

Working with IRA assets in any capacity still triggers the core pillars of the fiduciary rule. Remember that there is a private right of action under ERISA, so there is an and enforcement mechanism.

It’s a big mistake to think that because you’re level-fee, the rule somehow does not affect you of your business.

In fact, in a strange turn, the effect from a delay means the rule is now more significant for level fee fiduciaries than commission-based advisors. The proposed delay in no way mitigates a requirement to act in the best interest of the investor, and documentation as proof of your fiduciary steps must be kept.

Beginning in January any commissions received must be accompanied by a best interest contract. Advisors may have skirted the threat of call action litigation (for now), but they’re nonetheless subject to the same fiduciary requirements as the level-fee fiduciaries. You must act in the best interest of the investor, charge no more than a reasonable fee, make no misleading statements, and abide by the Prudent Man Rule.

Daniel Satchkov, CFA is president of RiXtrema, a research and fiduciary software company, authors of the IRAFiduciaryOptimizer – the DOL Fiduciary Rule compliance portal.

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