The core of the Labor Dept's rule is 237 words; blame the prolix portion on exemptions accorded to complainers' interests

July 19, 2016 — 6:53 PM UTC by Guest Columnist Ron Rhoades

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Brooke’s Note: I keep searching for a way to define “Wall Street.” It hasn’t referred to a group of people at one geographical location for a while. Rather, it is a mindset and culture of convenience that rewards financial advisors for doing work that is good for their companies. Those financial firms, in turn, give their employees and partners a plum living, self-esteem and a sense of belonging. Part of that energized attitude of entitlement can be attributed to the compact between company and staffer, which comes down to a belief that the mores of Wall Street were somehow grandfathered in; indeed, that leapfrogging customers’ interests ahead of their financial advisors would be a breach of the very spirit of grandfathering itself. Ron Rhoades remains vigilant against such arguments and won’t let them go unanswered. In this war of attrition, he’s not backing down when faced with one of the more inane arguments proffered in a while.

The broker-dealers and insurance companies, i.e. Wall Street lobbies, have recently berated the U.S. Department of Labor’s fiduciary rules for their length and complexity. Yet, a close examination reveals the both the rules’ elegance and how the DOL’s strong effort to accommodate Wall Street compensation practices was the reason for the rules’ reputed length. See: The DOL’s final rule contains a litany of 11th hour concessions to brokers that show Wall Street lobbyists earned their keep.

In examining the legal arguments advanced by the Wall Street lobbyists in the three current suits challenging the DOL rules, it is apparent that: first, the cause of any “complexity” about which the broker-dealer and insurance communities complain is the direct result of their own appeal to the DOL to adapt the fiduciary principle to the conflicted compensation practices of the broker-dealers and insurance companies; and, second, that the rules themselves — with their common impartial conduct standards — are neither as long nor as complex as the B-D/insurance company communities frequently complain.

In fact, as set forth in the Federal Register, the actual “Conflict of Interest” rule language is only five pages long. This rule redefines the DOL regulations’ definition of “fiduciary.” The explanatory text in the issuing release for these core final rule changes is only 30 pages; these pages include discussions of the sales exemption, swaps, and the provision of education. See: Why exactly DOL’s latest action is so shocking to so many brokers — and even ERISA lawyers — despite years of warnings.

Why so long?

From where does the much-complained-about length of the DOL fiduciary rules emanate? To accommodate Wall Street’s conflicted compensation practices, the DOL — in the years-long windup to the final rule — issued several class exemptions, including modification to prior exemptions. These included: the Best Interest Contract Exemption (authorizing the receipt of third-party compensation), subject to various conditions; an exemption for fixed-rate annuities; an exemption for principal transactions, and an exemption for proprietary products. See: Why exactly DOL’s latest action is so shocking to so many brokers — and even ERISA lawyers — despite years of warnings.

While each of these separate rules, crafted to address Wall Street concerns and to make them operative, have their own specific provisions, they are united by simply stated fiduciary principles that are elegantly written as the “Impartial Conduct Standards” — and which comprise a mere 237 words (see Appendix A, below).

In each rule’s release, several nearly identical pages are devoted to an explanation of these principles. In addition, the required economic impact analysis, the justifications for the prohibited transaction exemptions granted in each rule, as well as other language discussing the purpose of the rules and how they interrelate, also reflect common themes. See: Why I disagree with Don Trone’s characterization of Obama’s fiduciary stance as 'punitive’.

Play of dismay

Rather, the real reason the rhetoric from Wall Street lobbies remains so intense is their dismay that they actually will be required to place clients’ interests ahead of their own, and their inability in the future to sell the highly expensive investment and insurance products that so negatively affect the retirement prospects of hundreds of millions of our fellow Americans. See: Morningstar report suggests jiu-jitsu tactic for buying annuities: Game them right back by waiting.

Surprisingly, one Wall Street lawsuit even challenges the imposition of the applied principle of “reasonable compensation.” (Which begs the question — what do broker-dealers and insurance companies desire instead — continued unreasonable compensation? Or perhaps they would prefer that government establish actual compensation levels. See: FINRA’s scandalous litany of failures and its efforts to redefine the true fiduciary standard out of existence.

At their core, the DOL fiduciary rules enunciate and apply the fiduciary principle correctly. The Impartial Conduct Standards operate to properly restrain greed while permitting the professional-level compensation to which expert advisers are entitled.

With great care and thought, the DOL promulgated their fiduciary regulations in a manner responsive to industry concerns, while still fulfilling the statutory mandate that the DOL ensures the best interests of retirement investors remain paramount.

Just as importantly, the fiduciary principle has been richly preserved. See: The Fiduciary Debate: Getting past the vested interests.

Appendix A: Impartial Conduct Standards

Impartial Conduct Standards. The Financial Institution affirmatively states that it and its Advisers will adhere to the following standards and, they in fact, comply with the standards: (1) When providing investment advice to the Retirement Investor, the Financial Institution and the Adviser(s) provide investment advice that is, at the time of the recommendation, in the Best Interest of the Retirement Investor. As further defined in Section VIII, such advice reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party; (2) The recommended transaction will not cause the Financial Institution, Adviser or their Affiliates or Related Entities to receive, directly or indirectly, compensation for their services that is in excess of reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2). (3) Statements by the Financial Institution and its Advisers to the Retirement Investor about the recommended transaction, fees and compensation, Material Conflicts of Interest, and any other matters relevant to a Retirement Investor’s investment decisions, will not be materially misleading at the time they are made.

Read more RIABiz columns by “one-man think tank” Ron Rhoades here.

Ron A. Rhoades, JD, CFP serves as Director of the Financial Planning Program at Western Kentucky University, where he serves as an Asst. Professor of Finance within the Gordon Ford School of Business. The views expressed herein are his own and are not necessarily those of any firm, organization or institution with whom he may be associated.



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