Top RIA Compliance News Articles for the Week of June 8, 2018

1. DOL Fiduciary Rule on Brink of Death as Key Deadline Passes (Author-Greg Iacurci, InvestmentNews)

With the 5th Circuit Court of Appeals shutting down the DOL rule, the Justice Department has let the deadline pass to save it. The Department of Justice (“DOJ”) also could have asked for a rehearing before the end of April, but that did not happen either. Some states, and AARP, had their efforts to file an appeal denied. Despite this, the court still hasn’t issued the final mandate to officially end the rule. Even legal experts are stumped as to the reason, and a 5th Circuit Court Clerk was unable to comment on a timeline. One far-fetched theory may be that one of the Court judges is looking to re-hear the case. Iacurci explains, “If the court ultimately issues a mandate taking the regulation off the books, rules would revert to the status quo prior to June 2017, when the first of two phases of the fiduciary rule took effect.”

2. SEC Advice Plan Requires Big Change in Broker Behavior: Clayton (Author-Melanie Waddell, ThinkAdvisor)

“The Securities and Exchange Commission’s standard of conduct proposal raises brokers’ advice obligations and changes the way brokers are allowed to operate today, the agency’s chairman, Jay Clayton, said Wednesday,” Waddell writes. During a newly implemented SEC town hall, SEC Chairman Jay Clayton was asked for an example of how brokers’ behavior would change due to Reg BI (“Best Interest”). Clayton stated, “Under our new standard, you `the broker` will not be allowed to do that. You cannot put your interests ahead of your clients’ interest,” he continued, adding that the agency is “going to add to that. This is a proposal…we all have views, we want your views.” Clayton also offered advice to investors, encouraging them to find a professional who is registered and to know whether they are a broker-dealer or and investment adviser.

3. Interesting Angles on the DOL’s Fiduciary Rule #94 (Author- Fred Reish, FredReish.com)

To recap, Reish’s previous articles focused on the SEC’s Reg BI standard of care for rollover recommendations by broker-dealers and their registered representatives”, and “described some of the considerations for developing a best interest recommendation process.” This current article focuses on “the proposed requirement to ‘mitigate’ the conflict of interest inherent in a rollover recommendation.” A conflict of interest would arise here as the broker-dealer would fail to earn compensation with the lack of a rollover. Reg BI mandates that the advisor must disclose this, or mitigate, meaning they get no compensation at all. Essentially, this is the same process as best interest contract exemption (“BICE”) under the DOL rule. Either way, advisors must “gather and evaluate appropriate information about the investments, services and expenses (among other things) in the plan; the investments, services and expenses (among other things) in the proposed IRA arrangement; and the needs, circumstances, risk tolerance, and preferences of the participant.”

4. Schwab Lobbyist: SEC Right Not to Make Reg BI a Fiduciary Standard (Author- Tracey Longo, Financial Advisor Magazine)

Charles Schwab K Street veterans are in Washington to support the SEC’s choice to not make Reg BI a fiduciary rule. Jeff Brown, senior vice president and head of Schwab’s Office of Legislative and Regulatory Affairs, told reporters the following, “We have millions of clients who don’t want to pay for ongoing advice,” Brown said. “If they want ongoing advice they can choose a registered investment advisor. That’s something the rule preserves. If a brokerage customer calls and says, ‘I’ve owned IBM for years, should I sell it?’ That would trigger Reg BI.”  While Brown knows that some don’t think Reg BI goes far enough to protect investors, Brown does note that it covers a wider spectrum of industry professionals than the original DOL rule. 

5.  Hybrids Considering Dumping Finra and Working as RIAs Exclusively (Author – Bruce Kelly, InvestmentNews)

“Fed up with what they say is the expense and headaches of operating under the Financial Industry Regulatory Authority Inc., an increasing number of broker-dealers of substantial size that are also registered investment advisers — so-called hybrids — are considering moving to the RIA channel exclusively,” Kelly begins. Kelly states there are three arguments for this. Firstly, hybrids are still trying to determine their identity, and aren’t sure there is value as a broker-dealer. Another is money, as in maintaining costs to comply with two regulators. Lastly, focusing on one regulator is easier to manage. Small groups are already shying away from Finra, says Kelly. The trend of transitioning broker-dealer to the RIA model continues to accelerate with the number of broker dealer firms declining 24% in the last decade. 

Don’t forget to check out last week’s top RIA compliance news articles on the DOL fiduciary rule and the SEC’s Regulation Best Interest proposal and newly nominated SEC Commissioner, Elad Roisman. Be sure to check back next Friday for next week’s top articles!