Advisors, executives and regulators have been debating the merits of the Labor Department's proposed fiduciary rule for nearly a year. But now that the rule is likely to be finalized within weeks, is the industry ready to adjust to a new regulatory reality?
It'll be "massive undertaking," according to Ira Hammerman, general counsel for SIFMA, one of the industry's largest trade and lobbying groups, and which has been opposed to the rule.
Under the original proposal, the implementation timeframe was eight months, though that may be modified when the rule is finalized by the White House's Office of Budget and Management, which has been reviewing the proposal since late January.
Hammerman has been with SIFMA since 2004, and oversees the group's legal advocacy efforts. In an interview at the recent SIFMA Compliance and Legal Society Annual Seminar, he discussed the implementation of the rule and how it might change advisor-client relationships.
Will the industry be able to implement the rule within the original proposed timeframe?
Even though we haven't seen the final rule for several months now we've been working with the industry and with consultants to the industry to map out and prepare for a massive implementation.
In our comment letters we expressed the eight-month timetable as unrealistic. We continue to believe that any short time frame for implementing a rule that requires major technological changes and investments will take longer than eight months to implement. At the same time, firms will throw resources necessary to comply with any final regulation. But the eight month anticipated timetable remains unrealistic.
Is there any reason that the Labor Department might extend the implementation process?
I would say that we are hopeful that the final rule will take our implementation concerns into account and grant more than eight months.
Will this rule force firms to change their business model?
I think there will be a wide variety of responses by the industry, literally firm by firm, in response to the final rule. The rule will come out in the next couple of weeks. Everyone will read it and try to digest. Then, firm by firm, decisions will be made regarding how it impacts their business. I think you'll see a wide variety of decisions made in response to that.
Some firms may say it is not worth the risk to comply with the so called BIC exemption because the risk of being second guessed by a plaintiff's lawyer, who has a private right of action, is too great. There might be other firms that might say that for our clientele we can offer them a managed account under our investment advisor registration and satisfy our fiduciary duty under the Investment Advisors Act of 1940 and get an asset-based fee as opposed to commissions and find a way to comply with the new rule.
For smaller accounts, they may be counseled out of the firm because the firm can't offer them a managed account, and the firm is not willing to take the risk of charging commissions and seeking to comply with the BIC. So those clients may be left to manage their IRA accounts on their own.
When the final version of the rule is made public, what aspects will you examine first to see if changes were made?
There is no one aspect that immediately jumps out other than to say how the BIC has been modified is certainly something that we will pay extra close attention to.
How will the department's proposed rule affect advisor-client relationships?
That is one of our biggest concerns. We are concerned that the final rule will limit or exclude important advisor-client discussions about retirement investment and planning. That is not in the best interest of the investing public.
As a result of what DOL is doing, you may have a situation where a client has multiple accounts at a firm and has been working with the same financial advisor for 20 or more years – you may have the government forcing that client into not discussing [important financial activities] with their trusted financial advisor.
This is [also] being driven by an agency, the DOL, which is not the most familiar with the securities markets. This is how people plan and invest for their future. This is why we have been saying for years that the SEC is the expert regulator should be taking the lead on an important issue, the standard of care for investment advice.
Do you expect more action from regulators with regard to protections for senior investors around issues of dementia and diminished mental capacity?
As Rick Ketchum said [at SIFMA's compliance conference], it's not so much that we need senior investor legislation, but with respect to how many more seniors there will be we need to think about compliance and regulation and how we treat this population.
How you communicate with a senior could be literally different than you would with a 30-year-old. Talking about it, thinking about best techniques, reinforcing information and making sure they understand the information – that would be one issue where the industry and regulators could work together on.
We at SIFMA are spending a lot of time thinking about it. I think it will become a fundamental, core function at SIFMA given the known growth and expansion of that client segment. No one – whether you are an industry person, a regulator, a legislator, press – no one will be able to ignore the fact that we have an aging population. So it will definitely be a focus at SIFMA on how best we can serve that growing population.
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