Banks In Focus As Fiduciary Rule Continues To Hang

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April 20, 2017 6:44am NYSE:XLF

financial banks

From Invesco: On April 7, 2017, a final rule delaying the Department of Labor’s (DOL’s) fiduciary rule by 60 days was published in the Federal Register, pushing the applicability date from April 10 to June 9 of this year. But while the extension is settled, there is still a long road ahead for this rule.


The rule is still being studied — and could change further

On Feb. 3, President Donald Trump issued a memorandum directing the DOL to prepare an updated economic and legal analysis concerning the likely impact of the final rule. (See my previous blog entry, “White House directs DOL to examine fiduciary rule.”) However, the DOL’s announcement of the delay indicates that June 9 will remain the effective date of certain requirements of the rule and the Best Interest Contract Prohibited Transaction Exemption, even if the DOL has not yet completed its re-examination, which is expected to last more than 60 days. Given that the confirmation of Labor Secretary Alexander Acosta may not occur until May, the DOL will likely need more time to coordinate the views of its career staff and political appointees about the rule and what changes to make.

“After the passage of a year since the Rule and [Prohibited Transaction Exemptions] were published, and based on public comment, the Department finds little basis for concluding that advisors need more time to give advice that is in the retirement investor’s best interest and free from misrepresentations in exchange for reasonable compensation,” the DOL said in its announcement.

At the same time, the DOL further explained that, following the completion of the re-examination, “some or all of the Rule and Prohibited Transaction Exemptions may be revised or rescinded, including the provisions scheduled to become applicable on June 9, 2017.”

Certain parts of the rule will be effective Jan. 1, 2018

While the Best Interest Contract (BIC) Exemption and the Principal Transactions Exemption (as well as other amended exemptions) also go into effect on June 9, it is significant to note that these exemptions will only require fiduciaries to adhere to the “impartial conduct standards” (including the “best interest” standard, charging only reasonable compensation and not making any materially misleading statements) from June 9 through Jan. 1, 2018, for covered transactions.

The other conditions of the BIC and Principal Transactions Exemptions (and the other amendments to PTE 84–24 dealing with the sale of annuities, including the removal of indexed and variable annuities from the scope of that exemption) will not become applicable until Jan. 1, 2018, at the earliest, and could be further delayed if the DOL deems it necessary as part of its re-examination of the rule. The special transition period disclosure requirements for these exemptions that would have been applicable between April 10 and Jan. 1, 2018, have been eliminated.

Most comments opposed the delay

In issuing the regulation announcing the delay, the DOL noted that it had received about 193,000 comment letters, over 90% of which opposed any delay. In explaining its rationale for delaying the rule despite widespread opposition, the DOL noted that a delay is necessary in order to “conduct a careful and thoughtful process pursuant to the Presidential Memorandum … ” In addition, because firms may have slowed down their compliance efforts in anticipation of a delay, the DOL argued that “rigid adherence to the April 10 applicability date could result in an unduly chaotic transition to the new standards as firms rush to prepare required disclosure documents and finalize compliance structures that are not yet ready, resulting in investor confusion, excessive costs, and needlessly restricted or reduced advisory services.”

I’ll keep you posted as the new applicability date draws near and the re-examination continues.

The Financial Select Sector SPDR Fund (NYSE:XLF) was unchanged in premarket trading Thursday. Year-to-date, XLF has declined -1.03%, versus a 4.43% rise in the benchmark S&P 500 index during the same period.

XLF currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #20 of 38 ETFs in the Financial Equities ETFs category.


This article is brought to you courtesy of Invesco.


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