Compliance November 3, 2017

OMB Reviews Second Fiduciary Rule Enforcement Delay

The final version of a proposed rule that will extend by 18 months the transition period for the implementation of the DOL fiduciary rule is now being reviewed by the Office of Management and Budget. 
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The Department of Labor (DOL) this week submitted for review by the Office of Management and Budget (OMB) the final version of a regulation to delay—likely by 18 additional months—full enforcement of the strengthened fiduciary rule.

OMB will take some time to review the regulation language, but it will very likely approve it and return the rulemaking to DOL for publication and implementation in the near-term. As readers may recall, first indication that a second delay from DOL was in the works came back in August with the preliminary publication of a proposed extension.

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Until the final rule’s publication in the Federal Register, the exact details and length of the second enforcement delay will remain unclear, but industry reports are widely discussing an 18-month delay. As proposed, the extension is clearly crafted to give the Trump administration more time to consider what it will ultimately do with the signature Obama-era rulemaking. In particular, this additional year-and-a-half of transition would give the DOL and the White House a reasonable amount of time to consider the vast amount of industry commentary submitted in response to President Donald Trump’s preliminary request for information about the current and future impacts of the fiduciary rulemaking.

During a discussion with PLANADVISER on these developments, attorneys George Michael Gerstein and Larry Stadulis, respectively counsel and partner at Stradley Ronon, suggested the DOL fiduciary rule has remained a very hot topic in client conversations—recently but also since long before the Trump administration took over. They expect the OMB “will not take very much time at all” to review and approve this final regulation.

“And this is a good thing,” Gerstein says, “because this will provide some important amount of certainty to the plan adviser community and, by extension, the plan sponsor community.”

The two are eager to see the language of the second delay and are specifically interested to see what new class exemptions—either permanent or only transitory—which the DOL may create. The pair is hearing “some anxiety on this idea from different quarters.” Specifically, there is concern that if the DOL allows exemptions for investment products offering “clean shares” or “transactional shares,” this will “look a lot like the DOL picking winners and losers.”

Gerstein and Stadulis warn that “a delay in enforcement of some portions of the fiduciary rule does not mean the same thing as the rule going away entirely.”

“There are some folks out there who think that all the rules are delayed 18-months and that it’s basically the Wild West out there right now,” Gerstein notes. “That is simply not true. It is important to make the distinction that the rule itself is still in place, it’s just that there are these exempting conditions that have also been put into place that ease some of the burden of compliance as part of a transition period.” 

In Practice November 3, 2017

Fund Managers Respond to Shifts in Adviser Market

New research follows previous Cerulli analyses showing home-office discretion over advisory clients' investment exposures will increase significantly under the DOL fiduciary rule and other competitive pressures.
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Data from the November 2017 issue of The Cerulli Edge – U.S. Edition demonstrates the ongoing centralization of investment influence in the hands of the home offices of large broker/dealers and registered investment advisers.  

The research is presented mainly for the benefit of asset managers, but there are important implications for the advisory audience. As Cerulli researchers explain, nearly three-quarters of fund manager wholesalers polled consider broker/dealers’ centralization of investment decisionmaking to be an emerging challenge that could threaten and redefine the way they do business.

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“The convergence between retail and institutional markets is causing asset managers to shift their distribution structure,” explains Marina Shtyrkov, an analyst at Cerulli. “Some of the most attractive opportunities they see in the retail financial landscape resemble an institutional sale. In response, asset managers are reassessing how their distribution teams are interfacing with the different pockets of the market.”

This new research follows previous Cerulli analyses showing home-office discretion over advisory clients’ investment exposures will increase significantly under the Department of Labor (DOL) fiduciary rule and other competitive pressures. Tom O’Shea, associate director at Cerulli, explains a big part of the trend comes from the fact that home office leaders, tasked with meeting new fiduciary compliance standards across potentially large groups of advisers/reps in the field, are increasingly desperate to boost control of and visibility into day-to-day practice operations. In addition, they can now leverage new tools and strategies allowing firms to clearly identify underperforming or non-process-compliant advisers, “who can then be persuaded to use portfolios created by the headquarters consulting group.”

With the latest data in hand, Shtyrkov observes that “B/Ds are also encouraging their adviser forces to outsource investment management responsibilities to the home office in order to reduce liability, which inherently limits the wholesalers’ potential for demonstrable influence.”

“Due to these challenges, asset managers are moving towards coverage models where they can better serve the largest [advisory] practices with professional buyer tendencies,” states Kenton Shirk, director at Cerulli. As fund distribution teams work to refocus their energies on top practices, they will be reconsidering and “blurring” the old distinctions between wirehouse and independent mega teams, Shirk says.

“Distribution leaders are beginning to consider approaching coverage through a different lens—one that is not built on channel affiliation,” he concludes.

According to Cerulli’s analysis, which defines retirement specialists as advisers who generate a minimum of 50% of their revenue from retirement plans, “only approximately 6% of all advisers qualify as a retirement specialist.”

“There are not enough advisers with the retirement expertise and experience to serve the 500,000-plus plans in the adviser-sold segment of the defined contribution market,” the analysis warns. “The responsibilities of a retirement specialist adviser are evolving beyond investment expertise to include DC plan design and participant engagement.”

Information about obtaining Cerulli Associates research is available here. 

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