Compliance July 6, 2017

Window Opens to Submit Fiduciary Rule RFI Responses

With its publication in the Federal Register, the DOL’s request for information regarding its implementation (or not) of the fiduciary rule is officially open for public comment.
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The Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL) last week announced it would imminently circulate a request for information (RFI) in connection with its examination of the final fiduciary rule under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC).

Today the RFI language has been formally entered into the Federal Register, officially starting the 15-day comment period that applies to some aspects of the RFI. Other elements of the RFI are to be answered within 30 days.

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The shorter comment period, as laid out in the text of the RFI, applies to Question 1, relating to extending the January 1, 2018, applicability date of certain provisions of the fiduciary rule. The agency’s wider RFI also seeks input regarding potential new and amended administrative class exemptions from the prohibited transaction provisions of ERISA and the IRC that were published in conjunction with the fiduciary rule expansion.

EBSA hopes the responses submitted to this RFI can “form the basis of new exemptions or changes/revisions to the rule and prohibited transaction exemptions, as well as provide input regarding the advisability of extending the January 1, 2018, applicability date of certain provisions in the best interest contract exemption, the class exemption for principal transactions in certain assets between investment advice fiduciaries and employee benefit plans and individual retirement accounts, and PTE 84-24.”

Probably the most efficient way for advisers and their clients to submit commentary is through the Federal eRulemaking Portal (http://www.regulations.gov). The fiduciary rule RFI has been assigned the docket ID number EBSA-2017-0004. Comments can also be electronically submitted via email at EBSA.FiduciaryRuleExamination@dol.gov.

Interesting to note, the RFI’s formal publication comes only a couple days after the DOL filed an appellate court brief arguing it must not lose its broad authority to regulate the workplace retirement planning market—notwithstanding the fact that it may very well decline to implement or aggressively enforce the fiduciary rule under President Trump. 

The Markets July 6, 2017

Cerulli Measures Mutual Fund Subadvisory Marketplace Evolution

Asset managers and their institutional clients, DC and DB retirement plans included, are demanding more rigorous due diligence of mutual fund subadvisers.
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New research from Cerulli Associates examines how investment managers looking to enter the business of subadvising must prepare for the rigorous due diligence involved.

While the findings are focused on asset managers and their business outlook, the results also should offer some insight to retirement plan professionals tasked with selecting and monitoring multi-asset-class mutual fund investments. The Cerulli analysis suggests, for example, that some asset managers struggle more than others with compliance in the institutional space—and that firms succeeding in either retail asset management or institutional management do not always transition smoothly into working with other types of clients/assets.

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James Tamposi, research analyst at Cerulli, observes that the modern subadvisory due diligence process is “extremely thorough.” Asset managers that are excelling have “a clear investment philosophy and process, combined with adherence to a stated investment objective.” These factors are “paramount in winning business” from institutional investors, many of them hyper-concerned with compliance challenges. 

“When dealing with compliance, managers should view it as an opportunity rather than a cost,” he adds. “Especially in the subadvisory industry, effective compliance is an asset to the relationship.”

To that end, the analysis suggests due diligence processes implemented by institutional investors and the asset managers serving them will only grow more rigorous in the future—and this is a good thing. In the defined contribution and defined benefit world, a lot of the pressure has to do with the Department of Labor (DOL) fiduciary rule, along with the increased threat of investment-related litigation.

Research highlights shared by Cerulli suggest “many of the forces propelling the U.S. subadvisory market have existed for some time, but are coming to a head as asset managers perceive new opportunities.”

Notably, interest in multi-asset-class solutions is “drifting away from traditional balanced funds and global tactical asset allocation toward strategies with more specific objectives or absolute return investments.” Cerulli further finds “much of the growing use of multi-asset-class solutions occurs with corporate retirement plans and other types of institutions utilizing outsourced chief investment officer services.”

Also notable, according to Cerulli, is how the hedge fund-of-fund industry, “which has been under pressure from client withdrawals in recent years,” is trying to position itself within multi-asset-class mandates.

Cerulli concludes the shift away from commission-based accounts and the move to eliminate non-transparent layers of fees will encourage additional product providers to launch proprietary multi-subadvisor mutual funds. Investors and asset managers, in considering subadvisers, “will be more inclined to hire a manager with superior performance, but the manager also needs a clear investment philosophy, a consistent approach, and the ability to manage to the objective for which it was hired.”

These findings and more are from the July 2017 issue of The Cerulli Edge – U.S. Edition. Information about obtaining Cerulli research reports is available here. 

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