Fiduciary Rule Phase II Implementation Delayed

A U.S. Department of Labor (DoL) proposal to delay implementing Phase II of the Fiduciary Rule has been approved. While the Rule’s ultimate fate remains unclear, global withholding tax recovery continues to represent a best practice regarding pensions with available entitlements.

Why is the Fiduciary Rule so controversial?

Many market participants argue that the rule is complicated, limits investor choice, increases compliance costs, and impacts revenue models. In February 2017, the White House directed the DoL to reevaluate the Rule to determine if it should be rewritten or rescinded.  

If a Phase II is being discussed, has a Phase I already taken effect?

Yes. The rule became effective in June 2017 with the implementation of Phase I. That phase required advisors to adhere to “impartial conduct standards” that ensure they are acting in clients’ best interest, receiving reasonable compensation, and refraining from making misleading statements. Phase II, now scheduled to take effect in July 2019, will establish rules on a range of topics including that advisors may be held liable for their recommendations and that clients may file class action lawsuits, an action currently prohibited under many existing “arbitration only” contracts. The central question regards what the DoL will do now:  halt implementation at Phase I by delaying Phase II indefinitely, or make changes to Phase II. A more thorough explanation of the primary issues at stake can be found here.   

What to look for next?

To resolve lingering questions, the DoL announced that they will release guidelines instructing advisors how to comply with the rule over the next 18 months. As the DoL public “comment period” for the guidelines ends September 15, 2017, these recommendations are expected in the coming weeks. 

The main takeaway?

Though the Rule’s status remains unclear, it has spurred a vigorous public debate about the concept of fiduciary duty, inspiring investors to pay heightened attention to their accounts and financial advisors. Regardless of the ultimate regulatory outcome, recovering over-withheld taxes is a safe bet: it improves investment performance and demonstrates fiduciary responsibility.