Confused about the DOL Fiduciary Rule Lawsuits?

Since the adoption of the Fiduciary rule change in April 2016, BDs and RIAs are scrambling to understand how it will affect them, what to change, how to implement it, and whether or not the stemming lawsuits will prevail. Many compliance officers are confused by the new standard taking place and even further concerned about making changes that will later be reversed if the rule itself is reversed.

Read RND Resources slideshare guide to learn more about the DOL Fiduciary Rule and how it affects your firm.  

Firms cannot count on the flurry of lawsuits to stop this bit of legislation. However they may result in a few changes or further clarifying language. 

What are the Fiduciary rule lawsuits all about?

BICE: Best Interest Contract exemption | The BIC exemption

In May 2016, FINRA weighed in on the fiduciary rule, citing that some parts were likely to be problematic for the broker community and could damper business. The primary objection among industry dealers is the BIC exemption.

Here is how BICE works;

The new DOL rule forbids variable commissions in conducting transactions of retirement investment accounts and deems variable commission opportunities as an inherent conflict of interest. However, firms may still use sales commission based models if the arrangements meet the described standard of “reasonable compensation” and they provide information to their client of the transactions’ commission based compensation structure.  Further, advisors must be certain to give prudent and impartial advice.

This provision was added to allow brokers to continue selling some commission based products if they pledge to act in the client’s best interest. The clause is backed up by a provision that if investors feel they have been misrepresented by advisors, they may file a private lawsuit, and more frightening, they may pursue advisors using a private class action lawsuit. 

Lawsuits filed challenging DOL Fiduciary Rule

Organizations such as SIFMA are asking the court to review the BIC clause on the grounds that the Department of Labor has overstepped its bounds in creating a new legal risk for financial advisors who will now face the threat of private lawsuits.  SIFMA further asserts opening this advantage to investors will ultimately result in fewer product choices with higher fees because firms will be wary of working with senior and retirement investors at all. Small firms will likely pull out of the market altogether due to risk concerns, placing an undue burden on smaller broker-dealer firms.

As of June 2016 there are as many as 5 lawsuits over the Fiduciary Rule, most asserting the DOL overstepped authority by;

• Expanding the definition of “fiduciary” to where it contradicts with existing law,
• Unlawfully creating a private right for citizens to proliferate lawsuits against advisors,
• Unlawfully extending fiduciary responsibilities already covered under ERISA to apply to retirement accounts,
• Unduly restricting the First Amendment free speech rights of investment advisors,
• Failure to consider the undue burden on small brokerage and investment advisory businesses,
• And, unfairly disfavoring certain retirement products over others.

Will the lawsuits prevail?

Industry experts seem to believe the lawsuits may result in modifications to the fiduciary rule but will not absolve the 2016 DOL Fiduciary Rule altogether. Our advice to firms is to err on the side of caution. Analyze retirement investment products and commission structures; make a list of ones that will likely need to be modified. Start now to consider changes needed in policy and procedures manuals. Consider how and when you will implement staff training programs. Expect to make solid changes to disclosures, commission programs on retirement products, and written procedures by the end of the year. Putting in the effort now, will make it easy to back off any unnecessary changes later.

 We'd like to hear your opinion. What do you think of the DOL fiduciary rules?  Long overdue? Too strict?  Weigh in your thoughts here:  

Need help updating your compliance program to meet the new DOL fiduciary rule standards? 

RND Resources Inc specializes in FINRA compliance consulting for broker-dealer firms and other industry businesses. We can bring your company up to date with policy and procedure changes, staff training, recordkeeping standards, disclosures, marketing reviews, and more. Visit our website for more information:  www.finracompliance.com