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Understanding the DOL's Conflict of Interest Rule

The DOL called Wall Street's bluff, with a big sniff test.

W. Scott Simon, 10/06/2016

W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.

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Julius Caesar, in a letter to the Roman Senate, purportedly said in describing a quick victory in a short war: "Veni, vidi, vici": "I came, I saw, I conquered."

I thought of a variation of this phrase after hearing Tom Perez, Secretary of the U.S. Department of Labor (DOL), explain the final conflict of interest rule (Rule) issued by the DOL on April 8: "I came, I saw, I caved."

"Caved" as in capitulating to the non-fiduciary business model championed by Wall Street and actively followed by many on Main Street who are, in fact, the ones on the front lines dealing with investors all over America--both in the (non-taxable) retirement investment environment (which falls under the purview of the DOL's Rule) as well as in the (taxable) retail investment one (which doesn't fall under the Rule).

In preparing to write a series of columns on the Rule, naturally enough I began by reading the first of its approximately 66,000 words (which take up 58 pages in the Federal Register and are said to cover 1,023 pages of 11 by 8.5 inch paper, double-spaced). A clue about the length of the Rule should have been its longish 12-word title: "Definition of the Term 'Fiduciary'; Conflict of Interest Rule - Retirement Investment Advice."

After a few starts and stops in attempting to read every word of the Rule's text, I was reminded of a warning given to me by my mother when I was but a mere tyke. One of the games my little buddies and I used to play was, "Who Can Cross Their Eyes and Hold Them That Way the Longest." Mom, who eventually got wind of this socially useful behavior through the Mother's Neighborhood Communication System, sat me down and warned me sternly that if I kept engaging in such a silly activity, my crossed eyes would remain permanently stuck for the rest of my life. My mother's warning took hold, and I recalled it as I tried to get some traction in beginning to read the Rule. After a number of fitful attempts to do so, I decided that I didn't want to go through the rest of my life with permanently crossed eyes and gave up.

I did skim the Rule and referenced it often as I did my penance for not being up to reading every last word by devouring, since April, nearly 340,000 words of commentary on, and legal analyses of, the Rule. As might be expected, opinions about the Rule and its implications are diverse. Most say that the Rule is the best thing since sliced bread so offending advisors will now be reined in. Others say that it is much ado about nothing, so offending advisors will continue to run amok.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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