Insights from the experts in investment fiduciary responsibility.

DOL Webinar: Your Fiduciary Rule Questions Answered

Posted by Duane Thompson, AIFA®, Senior Policy Analyst, fi360, Inc. on October 21, 2015

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On Oct. 15, fi360 sponsored a webinar with an update on the Department of Labor’s proposed fiduciary rule.  Thanks again for the overwhelming response!  We had more than 700 attendees and over 1,200 registered – evidence of the strong interest by investment fiduciaries in this pivotal issue.

Since Blaine Aikin and I were unable to get to the three-dozen or so written questions posed by attendees we are posting our responses here in a series of blogs over the next several weeks. 

Keep in mind that it will likely be at least several more months before the final rule is published, and DOL officials have pledged to make changes.  What will change, and by how much is the $38,000 question.  We offer some predictions on what the final rule may look like, based on statements by DOL officials and also by identifying those areas of the rule where supporters and opponents appear to be in agreement that changes are needed.  However, as noted in our presentation, we believe the core framework of the rule will remain intact. 

As always, keep in mind that the information provided below is for educational purposes, not as legal or compliance advice.  So with these caveats, here are our responses. 

1. How will existing REITs and similar assets be handled if this goes through?  Is there grandfathering?

The proposed rule provides a safe harbor for transactions made in accounts prior to the effective date of the new rule.  However, the Best Interest Contract Exemption (BICE) would apply to advice on those assets made after the effective date.

It’s also important to keep in mind that the limitation on range of assets that are acceptable under the rule is imposed only under BICE when the advisor or firm receives variable compensation.  If the fiduciary charges a ‘level fee,’ i.e., retainer, AUM, or hourly and the fee is reasonable, the advisor can recommend any suitable investment, subject only to ERISA’s current fiduciary duties of loyalty and care and any other limitations imposed by the plan.

2. I've read numerous times that the DOL's proposed budget for next year has specifically excluded any money for enforcement of any future fiduciary standard - in effect to neutralize it.  Is this true?  Do you think this will happen?

That is correct – the Senate and House appropriations bills include so-called legislative ‘riders’ that prohibit the Department of Labor from using any funding in its fiscal 2016 budget “to finalize, implement, administer, or enforce” the proposed conflict of interest rule (quoting language from the House bill).  We believe that any new effort in December to attach similar language to the final budget bill will fail.     

3. How will the proposed rule affect advisors who don't have security licenses?

Insurance producers selling fixed annuities would not be subject to BICE but would instead be subject to a long-standing prohibited transaction exemption (PTE 84-24) that permits commissions.  However, the DOL has beefed up these old PTEs under the rule proposal with a new “impartial conduct,” or prudence standard that requires the agent to act in the client’s best interest.

4. Any thoughts on how RIAs would be impacted?

Registered investment advisers that receive only level fees for their services are the least impacted by the rule proposal.  However, fi360 and other organizations are closely watching what the DOL will do in its treatment of RIAs providing rollover advice to prospective clients.  While charging a level fee should not be a problem, if it is a new account, the increased income to the advisor from the rollover might be viewed by the DOL as a conflict and require additional disclosures by the level-fee RIA.

5. I have trouble understanding how the BICE can apply to variable compensation that benefits the fiduciary. 

From the DOL’s perspective, BICE is a way of allowing the pension industry to accept commission or third-party compensation that would otherwise be deemed a prohibited transaction under ERISA.  In exchange the DOL is saying that the conflict must be managed effectively and to the ultimate benefit of the client, not the advisor.  Some fiduciaries will argue that BICE loosens the ERISA fiduciary standard by permitting certain conflicts that were previously prohibited.

6. How do you argue that [it] is in the [client’s] best interests and free of conflict?

I’m not sure of the context you’re asking, but if it’s about the Best Interest Contract Exemption, that is the official label in the rule.  I don’t think the DOL is arguing that BICE is free of conflict, and certainly we aren’t, either.  BICE is really a concession by the DOL to the industry, which had charged back in 2010 that the DOL wanted to make commissions illegal, as occurred in the United Kingdom and Australia.  In our view, no paid investment advice arrangement is free of conflict – whether it’s a fee or commission or indirect.  However, as a rule of thumb, the more transparent and direct the compensation arrangement is with the client, the easier it is to avoid or manage conflicts of interest.  

Be sure to keep an eye out for the next post which will continue to answer questions from the webinar.


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