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Final DOL fiduciary rule issued

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Insurers will be given greater latitude than initially forecast in selling proprietary products, such as annuities, into investment accounts under the final fiduciary standard, or Best Interest Contract (BIC) regulation published by the Department of Labor today.

However, an expert on retirement income legal issues is reacting with great caution to the revised rule.

C. Fred Reish, a partner in Drinker Biddle’s Employee Benefits & Executive Compensation Practice Group, says that while the DOL has made “significant changes” to the proposed rule, its structure is still the same.

Reish, based in Los Angeles, is chair of its Financial Services ERISA Team and chair of the Retirement Income Team. He explains that the foundation of the rule is a very broad definition of fiduciary advice.

“A consequence of that definition is that virtually all common investment and insurance sales to plans, participants and IRAs will be fiduciary acts,” Reish said. As a result, the advisors will need to investigate the facts that are “relevant” to the circumstances of the retirement investor and make a prudent recommendation in the best interest of the investor. 

In addition, Reish says, if the advisor is paid by commissions or can affect his compensation through his recommendations, the advisor must satisfy the conditions of a prohibited transaction exemption, probably the Best Interest Contract Exemption, or BICE.

“While the conditions have been liberalized, they will require more effort and expense,” Reish concludes. 

Keefe, Bruyette & Woods analysts pointed out in their initial thoughts on the rule the number of positive concessions and clarifications that were made.

The “one notable negative,” KBW analysts said, is that indexed annuities were removed from the PTE 84-24 insurance exemption and moved into the BIC alongside variable annuities.

“We expect indexed annuity sales to be negatively impacted as result,” noting that “this is also a modest negative for retail advisors that sell the product.”

As for the positives, KBW analysts said this includes the BIC exemption, the 401(k) carveout, the proprietary products provisions and grandfathered compensation rules.  

The revised rule

The final rule, however, was modified to provide greater than expected flexibility on implementation, at least in the view of DOL officials. In particular, a special exemption for the sale of fixed annuities “will allow for sale of these products in a more expedited fashion,” explained Thomas E. Perez, DOL secretary, in an advanced briefing for reporters.

Moreover, to facilitate the sale of variable annuities, and so-called “lifetime annuities,” the final rule adds new preamble language emphasizing that fees are not the only factor in making investment decisions. It also gives firms more flexibility on how to comply with disclosure provisions. These, Perez said, “should also make it easier for insurance firms to recommend their products.”

In a move to assuage insurance industry opposition, the final rule says that insurers and agents will be allowed to simply disclose to existing clients that they must comply with the new standard. The DOL says this is acting in the best interest of the client by what it called “negative consent.” Clients can accept simply by not responding to the email acknowledging the new standard.

For new customers, a statement that the agent is acting in the best interest of the client will now have to be disclosed only as part of the documentation associated with the sale of the product, not when the agent first talks to the potential client.

Agent compensation

Industry concerns that the proposal would not allow common payment of commissions is also addressed in the new rule, which says the exemptions provided will allow firms to accept common types of compensation — like commissions and revenue-sharing payments — if they commit to putting their client’s best interest first.

“Under the BICE, firms (and their individual advisors) can continue to receive most common forms of compensation for advice to retail customers and small plan sponsors to invest in any asset, so long as the firms commit the firm and advisor to providing advice in the client’s best interest, charge only reasonable compensation, and avoid misleading statements about fees and conflicts of interest,” the DOL said.

Firms must also adopt policies and procedures designed to ensure that advisors provide best interest advice. They must prohibit financial incentives for advisors to act contrary to the client’s best interest, as well as disclose conflicts of interest. They can do this by directing the customer to a webpage disclosing the firm’s compensation arrangements, and making customers aware of their right to complete information on the fees charged.

Interested parties expressed deep concern over when compliance with the BIC was required. Indeed, Perez said that the agency received 400,000 comment letters on the proposal.

Perez explained that under the final regulation, the BIC contract has to be signed at the same time as other account-opening documents. “However, any advice given before the contract is signed must be covered by the contract and also meet a ‘best interest standard’,” Perez said.

Perez said that provision was inserted in the final rule after some commenters expressed concern that advisors would need to present a contract as soon as someone walks in the door — before they’ve even decided whether to hire that advisor. “The final exemption makes clear that is not the case,” Perez said.


As for implementation, the rule will not start to go into effect until April 2017. “But, to take advantage of the best interest exemption, firms will only be required to comply with more limited conditions, including acknowledging their fiduciary status, adhering to the best interest standard and making basic disclosures of conflicts of interests,” the DOL said in an advanced briefing.

The other requirements of the exemption will go into full effect on Jan. 1, 2018.

In advance of this date, the DOL said it intends to focus on providing compliance assistance to help plan fiduciaries and fiduciary investment advisors make the transition to the new rule, exemptions and consumer protections for investment advice.

In another nod to deep concerns voiced by industry lawyers, DOL officials say the rule “specifies” that education is not included in the definition of retirement investment advice. That means that, “advisors and plan sponsors can continue to provide general education on retirement savings without triggering fiduciary duties.”

The new sales standard

Selling propriety annuities, a primary concern of insurers, will be allowed, Perez said, through “special provisions” in the new rule. This includes a requirement that firms determine that limitations are not so severe that the advisor will generally be unable to satisfy the exemption’s best interest standard and other requirements.

That means, Perez said, that sellers of MetLife annuities “don’t have to say their product is the exact equal of an annuity sold by New York Life.”

The rule also eliminates the contract requirement for ERISA plans and their participants and beneficiaries. However, under the new regulation, firms must acknowledge in writing that they, and their advisors, are acting as fiduciaries when providing investment advice to the plan, participant or beneficiary, though no contract is required. 

The final rule also significantly streamlines and simplifies the required disclosures. The DOL said commenters particularly cited the provision in the proposed BICE that required disclosure of 1-, 5-, and 10-year projections of potential value, noting that this “would be difficult and costly.”

Under the final exemption, transaction disclosure is simplified to focus on the firm’s conflicts of interest, the website disclosure is streamlined but still designed to enable third parties to help customers evaluate different firms’ practices that may affect advisors’ conflicts of interest, and the annual disclosure is eliminated entirely, agency officials said.

Officials also said that clients can request more detailed disclosures on costs and fees; “that way, they can get the information they need at less cost to firms,” the DOL said.

Contractual parties

The final rule also minimizes the number of contractual parties. While the proposal required the firm, advisors, and client to be parties to the contract — which could be difficult in situations like call centers where the customer speaks to multiple advisors at a firm — the final exemption simplifies the contract requirement so that it is only between the firm and the client. “There does not have to be a new contract for each interaction with a different employee of the same firm, minimizing the burden on firms,” agency officials said.

Moreover, advisors recommending any asset — not just those on an asset list included in the proposal — can take advantage of the BIC exemption to continue receiving most common forms of compensation, the agency said.

The rule also specifies that the BIC exemption will be available for advice to small businesses that sponsor 401(k) plans, as well as for advice to IRA customers and plan participants. Additionally, under the final rule, recommendations to plan sponsors managing more than $50 million in assets (vs. $100 million in the proposed rule) will not be considered investment advice if certain conditions are met, and hence will not require an exemption.