IFLR speaks with Morrison &
Foerster’s Anna Pinedo and Hillel Cohn, who helped
compile the questions, to discuss the results of the poll and
the best course of action for the fiduciary
Despite its unpopularity, more respondents feel that the
fiduciary rule should be retained than revoked. Why do you
think that is?
My view is that, at this point, many firms have committed a
lot of resources to the fiduciary rule and compliance with it.
They also may have planned their communications with clients
when it comes to the rule and so may be reluctant to change
course. They may think it is expensive to change course, and
may believe that any messaging relating to a change of course
of action would be a challenge. I also think it is reasonable
to predict, given public statements, that the Securities and
Exchange Commission [SEC] will in earnest work on a rule. It
may be different in some ways from the existing Department of
Labor [DoL] rule, but will be shaped around some kind of
broader best interest rule. I think many firms view this as an
inevitability of sorts.
I would add that even in Congress now there appears to be a
coalescing of views that some type of enhanced standard conduct
is required for broker dealers. It just seems that we have gone
too far down the road to do a 180 and completely eliminate the
More than 60% of respondents feel that it would be
practical to roll back the fiduciary standard required by the
DoL rule, even if compliance is now at an advanced stage. Why
do you think that the market is so certain that this can be
I was a little bit surprised at that outcome of the poll,
because it does seem inconsistent with the result of the first
question. Congress could pass a bill which would basically put
a full stop to the DoL rule and effectively rescind it.
There is no question that there is a legal basis to reverse
course. However, I think the practical factors that Anna just
cited are going to argue strongly against a complete reversal
or revocation of the rule.
I think when some clients talk about the rule, they still
believe that there will be some kind of best interest rule or
standard. But they find a lot of the prohibited transaction
exemptions like the best interests contract agreement and all
the paperwork and requirements that go with it very burdensome.
Even though they may sort of grudgingly think that there will
be a best interest standard or some of them may even support
this, they find the DoL rule as currently constructed difficult
to navigate, and burdensome from a document and compliance
perspective. I think that, during this transition period, they
certainly find it easier to function, but they find moving to
the ultimate requirements as currently drafted or currently
formulated to be challenging.
I would take away from responses, or this response compared
to the prior one, that many people are just worried about
specific parts of the DoL rule.
There has been a widespread call for the SEC to release a
best interest standard that applies to the whole industry,
including that which is covered by the current DoL rule. What
are your thoughts on this?
I think people that we spoke to would heartily endorse that
approach. There is a lot of concern about having different
standards: many, many, many clients of broker-dealers have
retirement accounts and non-retirement accounts. Trying to
apply different standards of care in that context may not be
very sensible and may create potential complications which will
be eliminated by having a single standard that applies across
What aspects of the current rule do you think this new look
best interest standard would likely keep, if any, and what
would it shed?
I think the SEC's request for information and the request
that the DoL has put out are helpful in terms of giving a road
map. One of the centrepieces of the regulation of conflicts
sets a fiduciary standard for advisers: they have to disclose
conflicts of interest and they seek informed written consent
from clients to proceed, and clients are able to opt out.
Something along those lines, which is already part of the
DoL rule, is the idea that conflicts of interest have to be
clearly and prominently disclosed, and that there should be
some contract or agreement between the broker-dealer and the
customer. From the SEC's report that they were required to put
out by Dodd-Frank in 2011, where they talked about how clearly
it was a standard that was higher than the current suitability
standard, it does require this consideration of alternative
products and fee structures. It goes beyond what is part of the
current suitability standard, and those are going to be some of
the basics of what we see from the SEC.
I think that is exactly right, and I think it is consistent
with the SEC's fundamental charter which is basically to
regulate through full disclosure rather than dictate what
people should or should not invest in.
If a comprehensive roll-back were to happen,
what would be the best way to go about it without there being a
direct negative impact for the early adopters of the rule?
It is difficult to believe there will be a complete
roll-back. I think what Anna said is likely to be the outcome:
there will be some kind of best interest standard – or
something akin to a best interest standard – that
survives and which is not going to be rolled back. Many of the
more onerous provisions that are in the rules adopted by the
DoL last year will be substantially revised, trimmed back or
eliminated. For early adopters, I think compliance with a best
interest standard will probably be something they are going to
continue to live with and promote as demonstrating that their
interests are consistent with those of their customers. The
message is: we are looking out for your best interest Mr.
Customer, we are not just salesmen who will sell you whatever
we happen to have in our inventory.
There has been little change to the way that
smaller, retail retirement accounts have been handled.
Respondents have overwhelmingly made no move to change in this
regard: what is the benefit of this?
I think it is hard to know. There certainly has been a lot
of talk in the industry about changes that are likely to come
about if this rule is fully implemented, and this may simply
reflect people waiting to see what the final shape of the rule
is going to be. It may also be people saying: 'well let's see
how it works and if it is too difficult or too expensive to
comply for the smaller accounts then we will deal with it at
Overall, the poll suggests that there has
been little in the way of changes made so far, including in
internal compensation arrangements and product mix offerings.
Do you think that this is because the market is already
expecting that the rule will be further delayed or rolled back
entirely or another reason?
There is certainly a lot of hesitation to dramatically
change business models. There were a lot of smaller firms that
were waiting to see what some of the larger wirehouse firms
did, and they were waiting to see what would happen with the
Determining what constitutes reasonable
compensation has been expressed to be the most challenging
aspect of complying with impartial conduct standards. What
makes this so difficult?
This struck me as an interesting outcome to the poll. I
think determining the reasonableness of compensation with
respect to a particular product at the firm level is probably
not all that difficult . However, I think the internal
compensation arrangements are much more challenging in that you
basically have systems which were designed to promote sales
which now have to be revisited. This is going to be true even
if only the impartial conduct standard survives – the
systems have to be revisited to make sure that they could not
incentivise brokers to push products that are not in the
interest of the retail client. My sense is that there is a lot
of work to do in that particular area, which may be why this
item was flagged as the most challenging aspect of the
impartial conduct standards.
Opinion is split on whether to sell
proprietary products to retail retirement accounts following
the rule's enforcement. Why do you think that this question saw
I think that market participants don't know clearly what a
proprietary product is. We have been struggling ourselves with
trying to understand what the parameters are in identifying a
The definition in the DoL rule is less than clear with
respect to what would constitute a proprietary product. There
are also some internal inconsistencies in the rule as to how
proprietary products would be treated. The scope of what
constitutes a proprietary product and the consequences of
determining that a particular product is proprietary is an area
that clearly, at a minimum, needs some guidance from whichever
authority is going to administer the new standard. That's
assuming there is a different category of treatment for
How does the market want that principle
transaction exemption to be relaxed?
There are many categories of securities that are excluded
from the current principal transaction exemption. This would
really be disruptive to capital markets as they currently
operate. I don't think, from the industry side that there is
much debate about the need to significantly expand the scope of
products that could be sold under some kind of exemption on a
principal basis, or that it is going to be a very important
part of any rule going forward.
I have heard lots of clients complain. I am sure there isn't
any reason why securities issued by a foreign issuer shouldn't
be allowed to be included
Finally, what is your key takeaway from this
I think that it is probably that most people agree to an
extent that some standard, be it best interest or fiduciary, is
likely to be around. Depending on where you are situated it is
probably regarded as almost a necessity or maybe an
The most surprising thing to me was the relative lack of
steps taken to prepare for the rule. I would have thought there
would have been more pro-active activity than apparently there