425 Broadhollow Road
Suite 417
Melville, NY 11747

631.282.8985
Freiberger Haber LLP
10 Grand Central
155 East 44th Street, 6th Floor
New York, NY 10017

212.209.1005

Update: The Dol Fiduciary Rule Gets Support From Lpl Financial While Congress Continues To Find Ways To Undo The Rule

Print Article
  • Posted on: Jul 14 2017

On July 13, 2017, Charlotte-based LPL Financial, the largest retail investment advisory firm and independent broker-dealer in the United States, announced that it planned to provide its advisers with a new mutual fund platform early next year to improve the way its advisors offer mutual funds in brokerage accounts with participating fund companies, reduce fees for investors and standardize adviser compensation.

“With this platform, LPL is striving to preserve choice for investors while managing the evolving regulatory environment,” said Rob Pettman, LPL executive vice president of product and platform management, in the firm’s press release. (Here). “We will be delivering a price-competitive solution with the benefit of free exchanges across participating fund companies to help our advisors differentiate their practices in the market and serve a broad range of investors.”

The new platform, known as the Mutual Fund Only (“MFO”) platform, would standardize advisers’ upfront and trailing compensation for mutual fund sales, and slightly reduce the number of fund families available to clients.

Under the MFO platform, advisers will receive a 3.5% one-time upfront commission for onboarding a client, who can then transfer funds in and out of 1,500 mutual funds across 20 asset management firms without incurring additional upfront sales charges. Advisers will receive a 0.25% annual trailing commission regardless of the subsequent fund selection. Clients who currently hold positions in the eligible mutual funds can avoid the onboarding commission if they transfer their positions to an MFO account.

LPL’s decision to implement the MFO platform addresses one of the compliance requirements of the Fiduciary Rule (i.e., disclosure of compensation), which partially went into effect in June of this year. (Here [subscription required].) The Fiduciary Rule will become fully effective in January 2018, barring any congressional legislation to repeal the Rule, changes in the effective date, or amendments/modifications to the substance of the Rule. As this Blog previously noted, the DOL recently issued a request for comment on the Rule to guide any future changes. (Here.)

While the industry is adjusting to the requirements of the Fiduciary Rule, Congress is trying to legislate it out of existence. On the same day that LPL announced the implementation of its MFO platform, the House Financial Services Subcommittee on Capital Markets, Securities, and Investment held a hearing on the Fiduciary Rule, the purpose of which was “to gather evidence” about “the unintended consequences of the DOL fiduciary rule.…” [Editor’s Note: the subcommittee’s press release incorrectly dates the hearing as occurring on July 14.]

Also on the agenda for the hearing was a discussion draft of a bill written by Rep. Ann Wagner, R-Mo. that would repeal the Fiduciary Rule and replace it with a best-interest standard for retail brokers providing retirement advice. Representative Wagner previously sought to stop the DOL from finalizing the Fiduciary Rule through the Retail Investor Protection Act (H.R. 1090). Though passing the House, the legislation failed to advance in the Senate.

Among other things, Representative Wagner’s new legislation:

  • requires brokers to act in a customer’s best interest by providing recommendations that “reflect reasonable diligence,” and “reflect reasonable care, skill and prudence that a broker-dealer would exercise based on the customer’s investment profile”;
  • requires brokers to “avoid, disclose or otherwise reasonably manage any material conflict of interest with a retail customer”; and
  • imposes enhanced disclosure obligations on brokers, who would have to disclose at the point of sale, the compensation they receive, while providing the SEC with rulemaking authority “to promulgate the content of such disclosures.”

Additionally, the draft measure allows brokers to charge commissions and take third-party payments, engage in principal transactions, sell proprietary products and offer a limited menu of products. It does not, however, require brokers to “recommend the least expensive security or investment strategy.”

The bill would provide an exemption for the sale of annuities, as long as those sales are governed by an advice standard that is “substantially similar” to the one contained in the bill.

The Financial Services Institute, which represents independent brokers and financial advisers, “fully supports this legislation,” said FSI spokesman Chris Paulitz. Others in the industry who oppose the Fiduciary Rule, because it is considered to be too complex and costly and will force brokers to abandon clients with modest retirement accounts, also support the draft bill.

Opponents of the measure believe that it will do nothing to protect investors. “It’s an unnecessary, ill-conceived, poorly written bill that will weaken protections for retirement savers without doing anything to provide meaningful protections for non-retirement accounts,” said Barbara Roper, director of investor protection at the Consumer Federation of America, in a letter to the committee.

Democrats do not support the legislation, calling it a bill that “would be devastating to low-income, middle-income [investors] and senior citizens.” (Here.) To date, Democrats have been united in their opposition to any attempts to repeal the DOL Fiduciary Rule.

 

Though the industry has largely opposed the Fiduciary Rule, with the partial implementation of the Rule this past June, it has taken a pragmatic approach with regard to full compliance. Indeed, as Barbara Roper, Director of Investor Protection, and Micah Hauptman, Financial Services Counsel, of the Consumer Federation of America noted, over the past year, “firms have announced implementation plans that show that the rule is reducing the cost of advice, improving the quality of investment products, and preserving access to advice through both fee and commission accounts for even the smallest account holders.” (Here.) LPL Financial is the latest example of a firm adjusting to the changes required under the Rule.

While the industry adapts, Congress continues to seek repeal of the Rule. The CHOICE Act 2.0 is a reminder of those efforts. (Here.)

This Blog will continue to follow the developments surrounding the industry’s adaptation to the Fiduciary Rule and Congress’s efforts to repeal it.

Tagged with: , , ,

legal500
bnechmark
superlawyers
AVVO
Freiberger Haber LLP Footer Logo
Copyright ©2020 Freiberger Haber LLP | Disclaimer
Attorney advertisement | Prior results do not guarantee a similar outcome.
425 Broadhollow Road, Suite 417, Melville, NY 11747 | (631) 282-8985
10 Grand Central, 155 East 44th Street, 6th Floor, New York, NY 10017 | (212) 209-1005
Attorney Website by Zola Creative