The [Upcoming] Fiduciary Rule: DOL’s not so insidious industry wrecking rule
This proposed rule (once
finalized) would likely require registered
investment advisers, financial
institutions, and other retirement plan service providers to review their
current offerings to retirement investors and update their compliance
procedures, particularly as they relate to 401(k) plan rollovers or sales of
annuity products.
Undoubtedly, all
responsible financial professionals believe firmly in their fiduciary duties
ensconced in ERISA laws and others as it pertains to retirements. Our nations
investment advisors (RIAs, IBDs) and insurance representatives, all licensed,
work every day to help Americans meet their retirement goals. Thus, no one can
argue that fiduciary duties should
not be upheld or enforced. But they already exist, more rules are not needed.
Perhaps that is why as
of the writing of this paper, attempts to stop the Labor Department’s
retirement security rule are in play in Congress and in the courts. Given the
history of this rule fight, overturning the rule will be in the courts, not
Congress. Despite this, advisors should be prepared to comply by this September
23rd, when the rule’s initial requirements take effect.
Under the proposed rule, a person would be a fiduciary by virtue of investment advice if:
- the person makes a recommendation regarding investments of a plan (including an IRA or an employee retirement plan, such as a 401(k) plan or another ERISA plan);
- the recommendation is made in the context of a professional relationship where the investor would have a reasonable expectation that the other party should be acting in their best interest, based on criteria set out in the regulation as described below; and
- the person receives compensation for the advice, either directly or indirectly, such as through a commission
To accept commissions and
revenue sharing, advisers who accept them will be required to have clients
sign a best interest contract exemption. With such a contract in place,
customers will be able to sue their
advisers in court if they believe their interests have not come first. Whoa! Did we forget that
financial services are governed by a self-regulating organization (SRO),
notoriously known as the Financial Industry Regulatory Authority (“FINRA”)?
FINRA already has best interest rules, but moreover, it is a mandatory
arbitration forum, when certain elements are met, so do we have a conflict of
laws?
But this is more than a
rule, it is a 1,023-page rule that was six years in the making, we need to
consider what this is all about.
Is this really about
government’s overarching desire to protect retirement or something more
nefarious?
Recall that since the
McCarran-Ferguson Act of 1945, Congress has delegated regulating the
"business of insurance" to the states. By congressional act, Congress
could rescind its delegation and create a federal regulatory framework, similar
to what we see in the banking industry. Some say it is unlikely for political
and practical reasons, yet we see this takeover begin with the newly proposed
Fiduciary Rule.
The States and insurance
professionals must stop this encroachment into the regulation of insurance. The
regulatory framework of the States is more than sufficient to protect the
public without the DOL killing the insurance industry with its over-reach.
Pardon, the expression, but let’s call a
spade-a-spade. When you introduce a new “law,”
1,023 pages long, masked in the auspices of a rule, a hidden agenda exists. It
has long been the case that the Federal government, by way of the Security and
Exchange Commissions’ delegation of self-regulating organization status of
FINRA, has pursued an abusive approach to small independent broker dealers (“IBD”),
constantly enacting rules to drive small players out of the industry in favor
of larger firms. You see, it is easier to regulate fewer large firms, and FINRA
spares no effort in its abuse of small firms. Now the DOL is joining the
“pile-on.”
Never mind that hundreds
of thousands of Americans are employed by small IBDs and insurance agencies and
brokerages. In fact, only the largest IBDs are expected to have the resources
to build comprehensive compliance programs around the rule’s requirements,
which include requisites such as benchmarking information to measure the
reasonableness of adviser compensation.
Small IBDs and many
insurance professionals will need to craft new administrative steps and invest
millions in technology and training to meet the rule’s requirements. Does this
not sound abusive? Merely reading the 1,023-page rule would put many IBDs and
insurance professionals out of business.
The only firms capable of investing in the understanding, implementation,
and investment to follow the rule will be those that can afford to invest
millions of dollars. Therein lies the truth, a long-term goal of the DOL and
the SEC (through FINRA), which is to eradicate the small finance professionals in America and make them employees
rather than small business owners.
It is not surprising that
large firms such as Fidelity, HUB, Morningstar, and Vanguard came out in
support of the new rule. What is
surprising is that the National Association of Plan Advisors (NAPA) and its
umbrella organization the American Retirement Association (ARA) came out in
support of the rule. Apparently, they fail to recognize how many of their small
member firms will be adversely affected.
As a member firm of NAPA, and a CPFA holder, I am significantly
disappointed.
Given the deplorable state
of Social Security, do we really believe government knows how to protect
Americans’ retirement investments?
It is quite telling that
the DOL refused to extend the comment period on the rule November 14, 2023, as
they are trying to supplant the legislative authority of Congress with their
own rule-making authority. It again requires one to ask who this is trying to
protect?
This rule will increase
costs to Americans.
In its zeal to limit “junk
fees,” the DOL will actually achieve the opposite. The added burden of
administering this rule will be passed on to the American investor.
Furthermore, the burdens will drive many small professionals out of the market,
which will: (i) reduce competition, and (ii) allow a smaller group of
concentrated large firms to control and dictate pricing. Anyone who thinks
large firms will not find a way to recover their fees should reexamine the
history of our financial regulations.
Luka Erceg is Managing
Director of Dynamique Financial, LLC, a firm providing investment management,
wholesale insurance solutions, turnaround and restructuring services for
distressed companies. He is a disabled investment manager at Dynamique Capital
Advisors, LLC, with experience as a turnaround, restructuring, distressed and
special situations investment and asset management professional. His experience
includes energy finance, the founding of Simbol Materials LLC, and substantial
board advisory engagements.
He holds a Juris
Doctorate (J.D.) from South Texas College of Law, Master of Laws (LL.M.) from
the University of Houston Law Center, Master of Business Administration
(M.B.A.) from Rice University, and Bachelor of Marketing (B. Com.) from the
University of Guelph. He is a Certified Turnaround Professional (C.T.P.)
through the Turnaround Management Association and a Certified Insolvency and
Restructuring Advisor (C.I.R.A.) through the Association of Insolvency and
Restructuring Advisors.
On January 11, 2018, Luka suffered a left shoulder disarticulation (amputation) due to a flesh-eating bacterial infection brought on by bad oysters, Scientific American published his blog article “I lost my arm to microbes, but they can save the world”, on his tragic experience but the nonetheless ongoing importance of nature and microbiology in addressing global waste problems.
