A preliminary read of the Department of Labor’s recently released final rule amending the definition of fiduciary on retirement advice is a mixed bag of “the good, the bad and the ugly,” according to the U.S. Chamber of Commerce, which has opposed the rule.
The good, David Hirschmann, president and CEO of the Chamber Center for Capital Markets Competitiveness, said on a recent call is that the rule includes positive changes DOL fixed; the “bad” is that the rule “remains highly problematic” in certain areas, and the “ugly” initial read of the voluminous final rule shows that the rule “creates a new set of problems.”
Brad Campbell, the former head of DOL’s Employee Benefits Security Administration who’s now of counsel with Drinker Biddle & Reath in Washington, agreed with Hirschmann on the Thursday call that while some good changes were made to DOL’s rule amending the definition of fiduciary under the Employee Retirement Income Security Act — particularly in the best interest contract exemption (BICE) and proprietary products — small plans and small businesses came out big losers.
“It’s clear that everyone would have benefited from even a short reproposal of the DOL rule,” Hirschmann told reporters. “There are areas where DOL recognized the need for changes, and made some, but unfortunately it appears that either the changes don’t work or they [DOL] may have created some new challenges.”
While the Chamber will continue to analyze the rule, Hirschmann noted that the initial read shows that “in many ways DOL has expanded the importance of that [best interest] contract exemption, and we will now need to examine the BIC exemption around the uncertainty of its objective and the litigation risks it creates.”
Campbell agreed that he sees the “most significant issue” still being with BICE, in that “there are frivolous litigation risks and liability risks in the BICE that still remain, and that are going to increase costs for small businesses where advisors are willing to use the BICE exemption at all.”
The final DOL rule, Campbell said, “still requires someone using the BICE to make a series of judgment calls; these are subjective standards, not objective standards, and that difference really matters here.” Advisors could be sued on those “judgment calls,” he continued, and “a trial bar could say that ‘you made this decision but it should have been that decision.’”
The good, though, includes the fact that DOL addressed the “direct conflicts” with securities laws by taking out the requirement within the BICE that advisors make projections about the future performance of assets, Campbell said. “That was taken out and the disclosures were streamlined to make those more realistic on what could be disclosed.”
Other positive moves includes the final rule clarification on how proprietary products can be provided, he added, as well as a more thorough “grandfathering” explanation of how existing IRA accounts “that might not be compliant” with the new rule can be transitioned.
Campbell gave a thumbs down to “education” provisions in the final rule that he said have a negative impact on small businesses. The final rule, he said, limits investor access to educational materials.