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With start date approaching, fiduciary rule still expected to see revision

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With start date approaching, fiduciary rule still expected to see revision

Just days before being implemented, the Labor Department's Conflict of Interest Rule is still in the crosshairs of industry leaders, regulators and legislators.

The first phase of the rule is set to go into effect June 9, after nearly two years of heated debate over the stricter fiduciary standard it applies to financial and retirement advisers. Many in the industry expected the rule's implementation to get pushed beyond the already-delayed start date, but Labor Secretary Alexander Acosta claimed there was no legal justification to postpone the rule further in a May 22 op-ed in The Wall Street Journal.

Despite solidifying the rule's start date, the Labor Department is still reviewing it through further public input and a possible partnership with the Securities and Exchange Commission, Acosta wrote. Industry observers believe the rule may not last through the year's end in its current form.

"The spirit of the rule is to have companies and financial advisers put their customers' best interests first, but if they're all doing it differently, that creates additional complexity," Devin Ryan, an analyst with JMP Securities, said in an interview. "Ultimately, it does sound like there will be revisions."

The so-called fiduciary rule, introduced in 2015 under then-President Barack Obama, was aimed at ending possible conflicts of interest in the sale of retirement and investment products. Its supporters argue that brokers can be incentivized to sell products that pay them high commissions even if those products underperform for the investors who buy them.

As the department shifts its focus to revising the rule, many have pegged the litigation risk associated with the best interest contract as a key part of the rule they hope to see eliminated, according to Laura Bazer, vice president and senior credit officer at Moody's Investors Service. Some financial advisers have criticized the rule for lacking guidelines on how regulators will determine whether a client's best interest is being served, which could leave the formation of that guidance up to client lawsuits and court decisions.

"[The litigation risk has] been a big concern from the industry for asset managers, life insurers and distributors," Bazer said in an interview. "I think that has partly been responsible for [the decline in] variable annuity sales, which come under the DOL's fiduciary rule."

The sales of variable annuity and fixed-indexed annuity products, which are common offerings in retirement plans, have "absolutely" dropped because of the rule, said Michael Spellacy, global wealth management leader for PricewaterhouseCoopers. Spellacy said growing customer awareness about retirement plans has also led to the drop.

Prior to the fiduciary rule, fees related to such products were "extraordinarily high" compared to other available products in the market, he said.

In the first quarter of 2017, estimated industrywide total variable annuity sales fell 8% year over year, while estimated fixed-indexed annuity sales fell 13% year over year, according to the LIMRA Secure Retirement Institute.

Meanwhile, reports have emerged that the SEC may be examining fiduciary duty on its own. In his op-ed, Acosta wrote that the SEC "has critical expertise in this area," and that he hoped the SEC would be a "full participant."

The SEC pursued its own fiduciary rule in 2015. At the time, then-Chair Mary Jo White said the agency was interested in pursuing a universal fiduciary standard, particularly to aid retail investors.

Several companies have said the SEC would be a more appropriate regulator for a fiduciary rule. Randy Binner, an analyst with FBR & Co., said following Acosta's op-ed that the SEC could take over the oversight of the fiduciary rule if it teams up with the Labor Department. SEC spokeswoman Judith Burns declined to comment.

JMP's Ryan said a majority of the industry favors a broader fiduciary rule, which the SEC would likely put forward. The Labor Department's rule only applies to retirement accounts, thus creating inconsistencies across a company's clientele, Ryan said.

"At the end of the day, the industry is in favor of some fiduciary responsibility for their customers, but it just has to be done in a responsible, clear way," he said.

Alongside the Labor Department's review, which was prompted by President Donald Trump in February, some legislators have started to take the fiduciary rule into their own hands.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, targeted the rule with his proposed Financial CHOICE Act, which would effectively repeal it and shift any responsibility of a fiduciary rule to the SEC.

Hensarling said in a statement May 23 that he was "disappointed" with the department's decision to stand by the June 9 date. The Financial CHOICE Act is set for full-chamber consideration in the House on June 5.

But whether the rule is repealed, revised or fully enacted in its current structure, having clients' best interests in mind is "an ingrained concept now," Bazar said. "Regardless of whether the official rule is repealed, best-interest selling is probably here to stay."