Charles Schwab is warning Congress that the next wave of the Department of Labor fiduciary rule's provisions, set to take effect in January, could be devastating to its RIA clients.

The firm’s adviser services division is calling attention to contractual provisions that it says could impose an excessive compliance burden on small advisers and expose them to potentially crippling legal liabilities, in hopes of influencing the DoL to redraft some of the regulation’s most controversial features.

MAKING THE ROUNDS

Members of Schwab's policy team, along with a handful of advisers, made the rounds on Capitol Hill on Wednesday as part of the Investment Adviser Association's lobbying day. Dozens of advisers from around the country met with lawmakers from their home states to advocate for issues of concern.

With the DoL rule's first phase taking effect late Friday, the Schwab delegation made the rule its focus in meetings with lawmakers and staffers. Some of the more contentious provisions are on track to take effect Jan. 1, 2018.

"Probably the topic that will take up most of our conversations is the fiduciary rule," says Jeff Brown, a senior vice president with Schwab and head of the firm's office of legislative and regulatory affairs, who helped coordinate the Capitol Hill office visits for Schwab's RIAs.

Slideshow
Fiduciary rule leads to costly changes, protests at 13 top firms
Wirehouses, broker-dealers and banks unveiled client-friendly policies while asking the agency for further delays.

"The impact on small advisers like our clients will be something that I want them [the RIAs] to talk about, and to describe the fact that they've always been fiduciaries but now they'll have a new rule that they'll have to comply with," Brown says.

The fiduciary rule requires advisers working with retirement plans and investors to make recommendations in their clients' best interests, and to enter into a contract averring their fiduciary status in instances where they might be conflicted, such as selling products under a commission model.

Brown says that Schwab is supportive of the so-called impartial conduct standard, taking effect Friday, which covers the best interest advice component of the rule and stipulates that advisers working with retirement clients must collect reasonable compensation and refrain from making misleading statements.

But the second wave of the rule’s implementation is more troublesome, Brown asserts.

STRUGGLE TO COMPLY

If the DoL holds the course, come Jan. 1, many advisers will have to operate under the best interest contract exemption to continue with certain products and service models. As a result, they will need to develop a disclosure framework that Schwab argues will create a compliance challenge that smaller advisory practices will struggle to meet.

Quote
"It's going to be really difficult for small business to comply with the DoL's disclosure rules" - Jeff Brown, Schwab senior vice president

"We find that it's going to be really difficult for small business to comply with the DoL's disclosure rules," Brown said. "You have to have disclosure requirements and rules, but they can be far less onerous than what the DoL put out."

Additionally, Schwab — and other critics of the rule — warns lawmakers that the rule could give rise to costly legal campaigns, in which lawyers representing a class of investors whose investments went sour can take aim at advisers.

"The use of class action litigation as an enforcement mechanism is something we don't agree with, so we'd like to see that scaled back," Brown said. "The return to claimants is pennies on the dollar, and the trial lawyers get most of the return, so we don't think that that's a mechanism for helping retirement clients."

Newly confirmed Labor Secretary Alexander Acosta has held open the possibility of revisiting the BIC exemption and other parts of the second phase, as Schwab is seeking.

In Congress, a House bill that would dismantle major elements of the Dodd-Frank Act includes a provision that would block the Labor Department from advancing its rule until the SEC develops its own fiduciary proposal harmonizing regulations for advisers and brokers. Lawmakers had advanced that provision as a standalone bill in past congresses.

The Dodd-Frank overhaul bill, the Financial CHOICE Act, faces an uncertain path forward in the Senate. Brown acknowledges that Schwab's lobbying is aimed at highlighting the compliance and liability concerns the DoL regulation creates for RIAs in an effort to stoke concerns among lawmakers that could exert pressure on the Labor Department to revamp the rule.

"It's not necessarily asking for anything," Brown said. "I think if we could spur interest in further hearings, I think that would be success."

Looking ahead, Brown anticipates that revisiting the second phase of the rule would likely lead to yet another delay, potentially putting enforcement of the impartial conduct provisions on hold, as well.

Even more than half a year out from the Jan. 1, 2018, effective date, it's unlikely that the DoL would be able to push through all of the standard notice-and-comment stages to effect a revised rule by the planned schedule.

"For a government agency, that would be lightning fast," he said. "There's not a lot of time to waste, so if the Department of Labor's going to try to do something about the January provision, they're going to have to move."

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access