Articles About Regulation & Compliance

After a nearly 18-month process of working to update its Standards of Professional Conduct, the CFP Board’s Commission on Standards has released newly proposed Conduct Standards for CFP professionals, expanding the breadth of when CFP professionals will be subject to a fiduciary duty, and the depth of the disclosures that must be provided to prospects and clients.

In fact, the new CFP Board Standards of Conduct would require all CFP professionals to provide a written “Introductory Information” document to prospects before becoming clients, and a more in-depth Terms of Engagement written agreement upon becoming a client. In addition, the new rules also refine the compensation definitions for CFP professionals to more clearly define fee-only, limit the use of the term fee-based, and updates the 6-step “EGADIM” financial planning process to a new 7-step process instead.

Overall, the new Standards of Conduct appear to be a positive step to advance financial planning as a profession, more clearly recognizing the importance of a fiduciary duty, the need to manage conflicts of interest, and formalizing how CFP professionals define their scope of engagement with the client.

Ironically, though, the CFP Board’s greatest challenge in issuing its new Standards of Conduct is that the organization still only has limited means to actually enforce them, as the CFP Board can only make public admonishments or choose to suspend or revoke the CFP marks, but cannot actually fine practitioners or limit their ability to practice. And because the CFP Board is not a government-sanctioned regulator, it is still limited in its ability to even gather information to investigate complaints in the first place, especially in instances where the complaint is not from a client but instead comes from a third party (e.g., a fellow CFP professional who identifies an instance of wrong-doing).

In addition, the CFP Board’s new Standards of Conduct rely heavily on evaluating whether the CFP professional’s actions were “reasonable” compared to common practices of other CFP certificants… which is an appropriate peer-based standard for professional conduct, but difficult to assess when the CFP Board’s disciplinary proceedings themselves are private, which means CFP professionals lack access to “case law” and disciplinary precedents that can help guide what is and is not recognized as “acceptable” behavior of professionals. At least until/unless the CFP Board greatly expands the depth and accessibility/indexing of its Anonymous Case Histories database.

Nonetheless, for those who want to see financial planning continue to advance towards becoming a recognized profession, the CFP Board’s refinement of its Standards of Conduct do appear to be a positive step forward. And fortunately, the organization is engaging in a public comment process to gather feedback from CFP certificants to help further refine the proposed rules before becoming final… which means there’s still time, through August 21^st, to submit your own public comments for feedback!

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The big news this week was an Op-Ed published by Labor Secretary Acosta in the Wall Street Journal that declared, in no uncertain terms, that there will not be any further delay in the Department of Labor's fiduciary rule beyond June 9th. Despite all the industry protests, that have continued for more than a year, and various attempts at (further) delays, financial advisors who provide investment advice to retirement investors will be required to adhere to the "Impartial Conduct Standards" after June 9th, requiring that they give Best Interests advice, for Reasonable Compensation, and make No Misleading Statements... as any fiduciary should. However, the permanence of the rule on June 9th still doesn't mean the fighting over DoL fiduciary is done yet!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the coming fiduciary obligation for advisors serving retirement investors after June 9th, why the implementation of the DoL fiduciary rule was not delayed again, and why the DoL fiduciary rule still isn't a done deal yet, despite (and in fact, because of) what Secretary Acosta announced this week. 

As regular followers of this blog know, the fact that the DoL fiduciary rule will not be delayed further shouldn't be news. As has been discussed here repeatedly in the past, and now fully confirmed by Secretary Acosta, the requirements of the Administrative Procedures Act simply left "no principled legal basis" to further change or delay the June 9th applicability date. However, it's crucial to recognize that the full DoL fiduciary rule is still not going into effect come June 9th, because part of the prior delay also delayed enforcement for most of the rule until January 1st of 2018. As a result, there is no actual Best Interests Contract... annuity agents will not have to honor the Best Interests Contract Exemption between now and the end of the year (and can rely on the less stringent PTE 84-24 when selling annuities into an IRA instead)... new disclosure requirements won't apply... and firms can still sell proprietary products while brokers receive conflicted compensation!

What does apply, though, is the requirement to adhere to the Impartial Conducts Standards, which is the core of what it takes to be a fiduciary under the rule: providing best interests advice, for reasonable compensation, and make no misleading statements. However, there will be no requirement to actually sign a Best Interests Contract, which means there won't necessarily be a full fiduciary contract in place, and in turn means it's not really clear how enforceable the fiduciary rules will really be through the end of the year. Especially since the Department of Labor itself said, in a follow-up 11-page 15-question FAQ, that it will be focused on "compliance assistance" in the coming months (and not necessarily focusing on citing violations and doling out penalties).

But the real reason it matters that full DoL fiduciary enforcement won't be coming until the end of the year, is that it provides another 6 months for fiduciary opponents to lobby for modifying the rule. In other words, DoL fiduciary may not be getting repealed and the June 9th date is final, but that doesn't mean this is the final rule. President Trump's Executive Memorandum back in February, which directed the DoL to re-evaluate the rule and consider amending it, is still in effect, and a proposal may be coming. In fact, Secretary Acosta's Op-Ed emphasized that while the rule is final, the Department of Labor is still considering revisions to the fiduciary rule, but that "the process requires patience", and that there may even be another enforcement delay (further into 2018) while the DoL considers new exemptions or other potential revisions as it issues a new Request for Information and new Public Comment periods.

In the end, this means that while a new fiduciary rule may soon be the law of the land for all retirement accounts, what, exactly, will be required to comply with that fiduciary rule in the long run, is still wide open and uncertain. The Impartial Conduct Standards requiring best interests advice, for reasonable compensation, with no misleading statements, will take effect soon. But the true obligations of Financial Institutions to monitor and oversee that activity, and the nature of enforcement and accountability for the fiduciary duty, is still not yet fixed and permenant... so get ready for a whole lot more DoL fiduciary debate over the next 6 months!

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This past Tuesday, April 10th, the Department of Labor's new fiduciary rule and its requirement for advisors to engage in a Best Interests Contract with their clients, didn't happen. And it didn't happen because last week the Department of Labor finalized a new regulation which enacted a 60-day delay to the applicability of the rule, which means the final DoL fiduciary rule is now scheduled to take effect June 9th, instead. Yet while many commentators have been suggesting that we'll see further delays until opponents of the DoL fiduciary rule ultimately kill it, I wouldn't be so sure of that, and particularly when you delve into the details of what this delay actually said.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we delve into the fine print details of the recent DoL fiduciary 60-day delay, why it was actually more like an 8-month delay for many key provisions, and why that actually reduces the likelihood of more DoL fiduciary delays!

First and foremost, the new regulation that enacted a 60-day delay (shifting the applicability date for the Department of Labor's fiduciary rule out until June 9th), was actually a 63-page regulation with a number of key changes, and even a few surprises. First, while the new definition of "fiduciary" is delayed until June 9th, the requirement to actually fully implement the Best Interests Contract Exemption (the crux of the new fiduciary rule) was delayed until the end of the year. Which means that the Impartial Conduct Standards (that advisors must give best interests advice, for reasonable compensation, and make no misleading statements) will go into effect on June 9th, but the remainder of the new disclosure rules, policies and procedures requirements, and enforcement mechanisms – such as the ability to bring a class action lawsuit against Financial Institutions for fiduciary breach – will not go into effect until 2018.

This delay is important to acknowledge because, contrary to much speculation, it ultimately reduces the likelihood of further delays! Segments of the industry have been fighting hard against DoL fiduciary – lobbying the DoL, suing the DoL for overreach and hastiness, lobbying Congressional Republicans to block it, and ultimately lobbying the current administration for a delay. But as I noted immediately following the election, the rule is still a done deal, finalized and formally adopted last year. Which is ultimately why President Trump didn't unwind the rule, but instead, only issued a proposal to consider whether to delay another 60 days. And based on the prior lawsuits over the "hastiness" of the rule (which was originally developed over five and a half years!), it's hard for opponents to now come back and say the rule should be killed or substantially changed in as little as 60 days! Especially when 90% of the 193,000(!) public comment letters received by the DoL were against even the 60-day delay! It's getting harder and harder to substantiate further delays to the rule now.

In fact, it seems that the only real path currently open for significant delay would be if a new regulatory impact analysis can shed new light on why the fiduciary rule would be somehow harmful after all, and undermine the prior cost/benefit analyses that have been conducted. Yet it's not clear how the industry would make that case, particularly given so many studies out there about the financial services industry's conflicts of interest, and how consumers are being harmed by those conflicts. And with the 45-day comment period to conduct a "Regulatory Impact Analysis" closing next week on April 17th, it's not clear how the DoL would possibly have enough time to substantively review the comments, propose a new rule, subject that rule to another comment period, take that feedback, complete a final rule, and submit that rule to the OMB for review and approval, and publish that new fiduciary rule in the Federal Register, all by June 9th.

In other words, the 60-day delay may have literally delayed the rule, but it's just not long enough of a delay to actually stop the rule. And when the industry's own lawsuits have claimed that the 5-and-a-half-year process of creating the rule was "too hasty", it's hard to make the case for substantively changing it in 60 days anyway. Even a re-delay will actually be challenging now, as with so many of the Best Interests Contract Exemption requirements pushed out to 2018, arguably the industry already has gotten an additional 8 months to adjust to the rule - which means advocates can emphasize that there's no reason to delay the applicability past June 9th anymore.

Notably, this doesn't mean that the rule won't be changed at all - modifications are still a definite maybe, perhaps around certain aspects of the policies and procedures requirements, disclosure obligations, or even the class action lawsuit provision. But the bottom line is that for all of the talk about the DoL fiduciary rule dying or going away, it really doesn't appear to be happening. So, if you haven't finished your preparations for the DoL fiduciary rule, I'd really encourage you to start doing so now!

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With the flurry of activity and attention surrounding the Department of Labor's fiduciary rule and whether it will be delayed or not, there has been a dramatic increase in media coverage around what it means to be a fiduciary, and a push for consumers to seek out RIAs over those who work at broker-dealers. Despite the fact that most advisors, at both RIAs and broker-dealers, are trying to do the right thing for their clients.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why being a fiduciary matters, and why Series 7 licensees technically CAN'T be full fiduciaries to their clients without the DoL fiduciary rule.

The key issue is that the Series 7 exam is technically the "General Securities Representative Examination". This name is important, because it indicates that ultimately, the licensee is acting as a representative of the broker-dealer. In other words, a Series 7 license allows an individual to represent the broker-dealer in the sale of securities products to clients. This is why Series 7 licensees are referred to as "Registered Representatives" of a particular broker-dealer.

And as a representative of the broker-dealer, the broker technically has an obligation to serve the broker-dealer, not the client. This is why a broker-dealer can terminate a broker for outside business activity, or for soliciting a client to move with them to a new broker-dealer. In fact, technically the client isn't even a client of the broker's; it's a client of the broker-dealer's, and the broker is just the sales representative. That's why it's illegal for the broker to take any client information when changing broker-dealers!

Of course, in today's environment, the overwhelming majority of those working at a broker-dealer are dual-registered as a sales rep under the broker-dealer and working under a corporate RIA. Nonetheless, anytime the broker sells a product and earns a commission (i.e., using the Series 7 license), the broker is not a fiduciary, but a sales representative! Notably, these advisors are fiduciaries when they give under the RIA and are paid an advisory fee. But they are still effectively wearing two hats, and cannot be full fiduciaries while the Series 7 hat is on!

And the reason all this matters is because, if someone wants to take money from their clients by selling high-commission products to anyone they can, the suitability standard that applies to brokers is a relatively low caveat-emptor bar. But a fiduciary standard doesn't legally permit such behavior. That's why it matters - it's not about the already-good advisors who are doing the right thing, but about raising the bar to reduce the risk of bad brokers who try to do the worst they (legally) can. Which is why the focus on fiduciaries vs non-fiduciaries has morphed into a discussion of RIAs vs broker-dealers. Because the "easiest" way for the media to recommend avoiding a bad non-fiduciary (broker) is simply to recommend avoiding all of them.

The bottom line, though, is to recognize that Series 7 licensees are legally sales representatives. And if you don't like being treated as a salesperson, (re-)consider how your business is structured! Although ironically, if the DoL fiduciary rule does not get delayed, it may all soon be a moot point - as everyone working with retirement investors will be subject to the same fiduciary duty, regardless of their current business model! Ultimately, though, until brokers either voluntarily move to a new business model or are held to new DoL fiduciary standards, the reality will remain that you can't be a full fiduciary with a Series 7 license!

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With the implementation date of the Department of Labor’s fiduciary rule looming large in April, all attention has been focused on how financial advisors and their Financial Institutions are making adjustments to manage their compensation conflicts of interest, to avoid breaching the fiduciary’s fundamental duty of loyalty to act in the client’s best interests.

However, the reality is that being a fiduciary actually entails two core duties: the first is the duty of loyalty (to act in the client’s best interests), and the second is the duty of care (to provide diligent and prudent advice, and only in areas in which the advisor is competent to provide such advice). After all, a fiduciary obligation is relatively meaningless with only a duty of loyalty, if there’s no expectation of competency; otherwise, consumers would still be harmed by unwitting negligence, even if there was no intentional (or conflicted) self-enrichment.

And the distinction matters, because the Department of Labor’s Best Interests Contract Exemption attaches a fiduciary obligation to the Financial Institution itself, including the potential for a class action lawsuit against the institution for failing to meet its fiduciary obligations. Which means a Financial Institution could face a class action lawsuit not only for systemic breaches of the fiduciary duty of loyalty (e.g., by utilizing too much conflicted compensation), but also by systemically breaching the fiduciary duty of care but not sufficient training their advisors.

In other words, Financial Institutions face the risk that they will be sued in a class action lawsuit for failing to put their financial advisors through the training and education (e.g., professional designations) necessary to ensure that the advisor would even know what the “best” advice for the client was in the first place!

Unfortunately, right now there actually is no universally accepted minimum competency standard for financial advice (or in the case of DoL fiduciary, retirement advice), though certainly recognized rigorous designations that include both education and an advice process – such as the CFP Board’s CFP certification, and RIIA’s RMA designation – provide a likely path of safety for Financial Institutions. Which means in the coming year, there may soon be explosive growth in programs like the CFP and RMA, as Financial Institutions recognize and then try to minimize their exposure to a class action lawsuit for failing to meet the fiduciary duty of care.

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With this week's "surprise" presidential election victory of Donald Trump over Hillary Clinton, combined with the success of the Republicans holding both the Senate and the House of Representatives, the question arises as to whether the Republican clean sweep in Washington spells an imminent demise for the Republican-opposed Department of Labor fiduciary rule. What is the likely fate of the fiduciary rule once the change in power occurs next January?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss why I actually do not think that the Republican victory is going to lead to an immediate and total repeal of the Department of Labor fiduciary rule.

Because the reality is that while the rule will not be enforced until next April - after President Trump takes office - the regulation itself became official this past April. And the President doesn't have the power to just immediately enact a massive change to an existing regulation. Remember, it took President Obama's Department of Labor nearly 6 years just to get the prior fiduciary rule changed to what it is now becoming! If President Trump tried to halt it immediately, the fiduciary advocates would have their own opportunity to sue the Department of Labor, and would likely be successful!

Of course, the reality is that even if President Trump would have trouble eliminating the rule, he could "defang" it by directing the Department of Labor to only minimally enforce it, akin to the SEC's similar failure to enforce the existing provisions of the Investment Advisers Act of 1940 that already requires brokers who give substantive investment advice to register as fiduciary investment advisers. Which would mean the fiduciary rule is still on the books. But the Department of Labor wouldn't be much of a threat for those who didn't follow it.

On the other hand, the existence of the fiduciary rule's requirement that consumers must retain the right to a class action lawsuit against a financial institution for breaching its fiduciary duty (across a large number of advisors) means the threat of DoL fiduciary enforcement remains, even if the Department of Labor itself isn't funded to do it. Which means perhaps the most likely Republican "fix" to the rule will simply be to pass a law that eliminates the class action provision, which doesn't kill the DoL fiduciary rule but does drastically reduce its threat.

In addition, while President Trump would be limited in just issuing an Executive Order to kill the DoL fiduciary rule, Congress itself could pass a law to end the rule altogether (as opposed to just its class action provision). However, it's not clear how politically feasible this actually is. The Republicans still don't have enough votes to overcome a filibuster in the Senate, and with so many major firms already implementing changes to adjust to the DoL fiduciary rule, some previously anti-fiduciary foes may now become fiduciary advocates to keep the rule (because they believed they're more prepared than their competition to succeed if it sticks around). And with President Trump having already put a lot of other rule changes on his agenda for his first 100 days in office... and the DoL fiduciary rule enforcement beginning just 80 days after the change in power in January... it's entirely possible that by the time Congress is even ready to take the issue up, it will be a moot point because the Department of Labor's fiduciary rule will already be fully implemented and enforced!

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On April 6 of 2016, the world of professional financial advice took its first step into the future with the issuance of a Department of Labor (DoL) fiduciary rule, declaring that brokers can no longer earn commissions and other forms of conflicted advice compensation from consumers, unless they agree to do so pursuant to a Best Interests Contract (BIC) agreement with the client, which commits the advice-provider to a fiduciary standard of giving advice in the “best interests” of the client, earning “reasonable compensation”, and providing appropriate disclosure and transparency about the products and compensation involved.

Fiduciary advocates have lamented that the Department of Labor conceded several major points in its final DoL fiduciary rule, including shifting a number of key disclosures to be provided “upon request” or via the Financial Institution’s website (but not outright to the client), incorporating the Best Interests Contract into existing advisory and new account agreements (rather than as a separate fiduciary agreement), and not adopting a “restricted asset list” and instead keeping the door open to everything from controversial illiquid products like non-traded REITs, high-commission products like some variable and equity-indexed annuities, and companies that implement their own proprietary products as the “recommendation” at the end of every financial plan.

However, it appears that in reality the DoL fiduciary rule concessions were a brilliantly executed strategy of conceding to the financial services industry the exact parts that didn’t actually matter in the long run (while still reducing the risk of a legal challenge), yet keeping the key components that mattered the most: a requirement for Financial Institutions to adopt policies and procedures to mitigate material conflicts of interest and eliminate incentives that could compromise the objectivity of their advisors (or risk losing their Best Interests Contract Exemption and cause all their advisory compensation to be a Prohibited Transaction), and a second requirement that clients can no longer be forced to waive 100% of their legal rights and accept mandatory arbitration, instead stipulating that while an individual client dispute may be required to go to arbitration, consumers must retain the right to pursue a class action lawsuit against a Financial Institution that fails to honor its aggregate fiduciary obligations.

In essence, then, financial services product companies claimed that they can offer often illiquid and opaque, commission-based, and sometimes even proprietary products to consumers, while also receiving revenue-sharing agreements, and simultaneously still act in the client’s best interests as a fiduciary. And so the Department of Labor’s response became: “Fine. If and when consumers disagree, you’ll have a chance to prove it to the judge when the time comes.” In other words, while the DoL fiduciary rule didn’t outright regulate what Wall Street can and cannot do, it did change the legal standard by which all of Wall Street’s actions will be judged, and ensure that eventually the courts will have the opportunity to rule on these fiduciary conflicts. And in the long run, that will be a world of difference.

In the meantime, though, the clock is ticking for the onset of an incredibly far-reaching new fiduciary rule, and one that will impact not just broker-dealers, but RIAs as well (albeit to a lesser extent), insurance companies and annuity marketing organizations that sell variable and equity-indexed annuities, and more. The key provisions of the rule will take effect on April 10, 2017, with a transition period through January 1, 2018, by which time the last of the detailed disclosure and other policies and procedures must be put in place.

In this article, we provide an in-depth look at the keystone of the new fiduciary rule as it pertains to advisors working with individual retirement accounts: the new “Best Interests Contract Exemption”, which most broker-dealers and insurance companies will rely upon in their future attempts to provide conflicted advice to IRAs for commission compensation, and the creation of the new “Level Fee Fiduciary” safe harbor, that may (and I strongly suspect, will) eventually become the standard by which all retirement advice is delivered.

Of course, the biggest caveat is that all the new fiduciary rules apply only to retirement accounts, and not any form of taxable investment account or other investment purchased with after-tax dollars… which means the new DoL fiduciary rule will likely ultimately drive the SEC to step up on its fiduciary rule as well, as it’s clearly untenable in the long run for advice to retirement accounts to be held to a fiduciary standard, while everything else remains the domain of suitability and caveat emptor!

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The CFP Board’s Standards of Professional Conduct are the rules by which CFP certificants are held accountable – and a violation of those rules can result in a private censure, a public Letter of Admonition, or even an outright suspension or revocation of the CFP marks. And after 8 years of the current Standards being in place, the CFP Board recently announced that it has formed a new 12-person committee – the “Commission on Standards” – tasked with evaluating whether it is time to update the standards… and if so, how they should be changed.

And arguably, the CFP Board’s standards do have room for improvement. While the last revision in 2008 took the positive step of introducing a fiduciary standard for CFP certificants, it notably applies only when a CFP certificant is actually “doing” financial planning, not merely for being a CFP certificant who works in the financial services industry – creating problematic scenarios where a consumer hires someone with the CFP marks only to find out later that person wasn’t required to act in his/her fiduciary capacity as a professional. Similarly, the CFP Board ‘requires’ a fiduciary duty for CFP professionals providing financial planning, but doesn’t specifically require those advisors to manage or avoid their conflicts of interest, and instead simply requires that such conflicts be disclosed… despite the available research that finds disclosure is a poor remedy to manage conflicts of interest, and can even cause advisors to behave worse. And of course, there’s the CFP Board’s compensation disclosure rules, which have dragged the CFP Board into both a lawsuit, and criticism that its current definitions render its definition of “commission and fees” as meaningless for consumers.

Fortunately, the CFP Board’s decision to revisit the Standards of Professional Conduct – as it does from time to time – gives the organization opportunity to correct these issues. The process this time around includes both numerous public forums with CFP certificants – being held in six major cities in the coming weeks – and will be followed by a public comment period for all CFP stakeholders to weigh in on any proposed rule changes.

So with 2016 shaping up to be the year of major regulatory change for financial advisors – with not just the Department of Labor fiduciary rule, but also the CFP Board’s prospective updates to its Standards – what changes are you hoping to see the CFP Board enact?

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