For YOUR Own Good

Congressiuonal Democrats and Republicans, had both voiced concern that the new DOL definition would be too broad and make a fiduciary out of unintended employees and restrict investment choices.

And some in the investment industry are worried that if they comply with the SEC, they could be out of compliance with the DOL. "If they coordinate, they can write rules that comply with each other," said John Little, senior vice president for federal affairs for the Insured Retirement Institute (IRI).

The DOL is working with the SEC to come up with a fiduciary definition. It won't be a standard, one-size-fits-all, but will likely have some overlap on the key elements of fiduciary duty.

Both agencies are likely to work more closely in the fututre and have indicated they will promulgate regulations imposing a single, uniform fiduciary standard of conduct on both broker-dealers and investment advisers, as NAIFA stated in recent testimony embracing FINRA's oversight.

Last February, SEC Chairman Schapiro stated that the SEC was helping the DOL update a definition of "fiduciary," but that the effort was separate from the SEC's own fiduciary standard study, according to her testimony at a House Financial Services Committee hearing.

"I assume that both the DOL and the SEC are going to do a thorough cost benefit analysis—if it is not as thorough as required, the lawyers will go after them again," said IRI's Little.

Some say the DOL's decision to retrench is completely unrelated to any SEC fiduciary rule success, while others say the economic argument cannot be applied to the fiduciary in the same way, and that  not instituting a fiduciary will cost money to investors.

The economic cost of imposing or strengthening a fiduciary duty should be looked at from all points of view, others argue.

"It is imperative that removing excessive costs to investors remain more important than normal regulatory costs from firms," Knut A. Rostad, chairman of the Committee for the Fiduciary Standard, stated after the DOL decision to rewrite its proposed rule. "Let's not lose sight of the most worrisome costs in the current system—excessive fees, conflicts of interest and inappropriate retirement products."

There are two components of fiduciary standard, says fiduciary expert Don Trone, CEO of 3ethos in Mystic, CT. They are: "Duty of loyalty and duty of care."

"I would expect the two regulators to define different requirements under the duty of loyalty, but the duty of care (the details of a prudent process) could be uniform. The reason why the duty of loyalty will not be the same is that ERISA has much more stringent rules regarding prohibited transactions," Trone explained.

The duty of loyalty is the biggest concern to broker-dealers because it deals with conflicts of interest, disclosures, principle trades and prohibited transactions, he noted.

It is this duty of loyalty that is at the crux of "harmonizing" agencies' rules. The IRS, after all, is apparently working on a fiduciary rule as well.

 Instead of looking at whether broker-dealers will fall under a fiduciary standard, look at how, and what will fall into what Trone calls the "fiduciary box"—all activities occurring within the box will be subject to a fiduciary standard, and all activities outside the box, will not.

"Since this is the area where there is the most contention, its promulgation will be delayed—my best, uneducated guess, would be 12 to 24 months," Trone stated.

Indeed, even back in March, House Republicans had noted that the standard-of-care issues did not provide an adequate basis for changing the existing rule.

But "the consequences of not applying the fiduciary standard are clear," reminded Rostad, also regulatory and compliance officer at Rembert Pendleton Jackson Investment Advisors in Falls Church, Va. "The longer many advisors or brokers are not held to the fiduciary standard, the longer conflicts will continue to increase costs and reduce returns."