DOL Digest February 21, 2017

SSN Marketing Compliance, DOL

Delayed or Not: How the DOL Fiduciary Rule Is Transforming Commission Products

We still await formal response from the Department of Labor (DOL) to President Trump’s executive order instructing the DOL to re-evaluate the fiduciary rule. The DOL reportedly filed documents with the Office of Management and Budget (OMB) last week regarding how it will respond to the executive order, but those documents will not be made public until the OMB has reviewed them.

On the legal front, the Texas federal judge in the lawsuit brought by industry groups against the DOL ruled last week in favor of the DOL, allowing the rule to stand.

Many advisors have asked us if a delay of the April 10, 2017, implementation date – or even a full repeal of the rule – would mean all the changes we have discussed over the past year will simply roll back to their pre-DOL state. While a delay, review or repeal of the rule would likely alleviate some aspects, the industry has already begun an evolution to increase transparency and further reduce conflicts of interest.

As we’ve previously mentioned, this evolution began before the DOL finalized its fiduciary rule in April 2016. The Securities Exchange Commission (SEC) has driven the movement to eliminate 12b-1 fees in advisory accounts, as well as the conversion of mutual funds within advisory accounts to lower-cost share classes specifically designed for advisory accounts. In accordance with SEC guidance, as of Jan. 1 of this year, Securities Service Network rebates all 12b-1 fees in advisory accounts back to the clients. The mutual fund share class conversion project is under way, with a new approved mutual fund list anticipated by the end of February and conversions beginning in March.

Regardless of the outcome of the DOL fiduciary rule, the SEC-driven changes in advisory accounts will not be rolled back. We encourage you to take action, if you haven’t already, to adjust your practice – including service and pricing models – to reflect this new reality of the advisory business. To assist you, we created a guide for evaluating your service and fee matrix and discussing fees with clients.

Like the SEC, FINRA has been focusing on conflicts of interest, including costs to clients and compensation structures within similar products. In 2015, FINRA paid significant attention to the use of L-share variable annuities due to the “shorter surrender periods, but higher costs.” In 2016, FINRA focused on the use of mutual fund A, B and C share classes within 529 plans, indicating firms should assess which share class is appropriate based on the client’s investment time horizon and liquidity needs. In 2017, FINRA again is focusing on mutual funds and variable annuities to identify sales practice violations such as excessive and short-term trading of long-term products. The past several years of examination letters show FINRA has a focus on conflicts associated with the compensation for product share classes.

Similarly, the DOL made it clear that one of the biggest conflicts for advisors is differing compensation for the same type of product. Product companies and firms have been working together to eliminate compensation incentives to sell one product over another by leveling commissions for each product type. Doing so would significantly reduce the ability for a plaintiff’s attorney to argue that compensation played a part in the selection of the product within its own category of product.

The potential delay of the DOL rule adds another layer of uncertainty around the changes occurring with commission products. Tracing the entire compensation chain for these products, analyzing each action and entity for issues under the rule, and proposing action that doesn’t create a chain effect of unintended consequences, has been incredibly challenging for product sponsors and broker-dealers.

With so many changes already in motion to level compensation on product types and reduce costs to consumers, the proliferation of new lower-cost products may be the new normal, regardless of what happens to the DOL rule. When we have clarity around whether the rule will move ahead as planned, be delayed for a specified amount of time or be repealed, we will reassess the new product landscape and make adjustments to our policies and processes as needed to best serve clients and advisors.

If you have questions regarding the DOL Fiduciary rule, please send an email to

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