Since the Department of Labor released its final fiduciary rule in early April, ERISA guru Fred Reish has been answering questions from existing clients at all hours of the day and night, and his client roster is ballooning.
That’s not surprising, really, for an attorney who’s been steeped in ERISA law since “before there was an ERISA,” he likes to quip. Reish started practicing pension plan and retirement plan law in 1972. “Things were much simpler then, and [retirement advice rules were] primarily driven by the Internal Revenue Code, not by ERISA,” which was enacted in 1974.
Based in Drinker Biddle & Reath’s Los Angeles office, Reish serves a nationwide clientele — 90% of which are east of the Mississippi River — that includes hedge funds and mutual fund managers, RIAs, insurance brokers and broker-dealers as well as banks and trust companies. But it’s broker-dealers that are clamoring for his help in deciphering DOL’s rule.
While Reish’s practice has evolved over the years as retirement advice rules have changed, the changes ushered in under DOL’s rule— at least for BDs — “are revolutionary and highly disruptive; these rules are truly complex.”
Broker-dealers “have the most difficult issues” to deal with under DOL’s rule, he continued. “For the most part, RIAs are unaffected; the only area if they are doing it right now is the capturing of rollovers. But for BDs, they’re affected on advice to plans, advice to participants and rollovers.”
For BDs, the biggest challenge is that DOL’s rule is “essentially based on a fee-for-service concept, and they’re being applied to a transaction-based industry.”
What’s more, “the fiduciary standard is different from the suitability standard, and more demanding.”
For instance, to recommend an insurance product under the fiduciary standard, an advisor has “to determine that the insurance company is financially stable and likely to be there 30 to 40 years from now to pay the benefits,” Reish explained. “You have to determine that the terms of the contract are commercially reasonable and determine that the costs are not excessive and your compensation must be reasonable. So that’s pretty different from how historically advisors could approach commission-based sales.”
An “equally big difference,” Reish maintained, is in the BICE, in which “advisors and financial institutions must agree to the ‘prudent man rule’ and the duty of loyalty in ERISA in order to be able to sell commissionable investments to IRAs”; plus advisors “must make a host of disclosures, and the compensation of the advisor cannot vary in ways that might incent the advisor to give advice that’s not in the best interest of the investor.”
While that all “sounds good on paper,” Reish added, “nobody quite knows how to comply with it.”
DOL will no doubt issue some supplemental guidance to clear up questions about the rule. “They’ve already said they’re willing to,” Reish said. One way to do that is via a frequently asked questions (FAQs). DOL can issue FAQs “on interpretational issues, but they can’t just issue a FAQ that conflicts with the [final] rules.”
Another possibility is issuing exemptions. DOL can’t issue additional exemptions to the fiduciary rule, he added, “because it’s a regulation,” but DOL could issue “supplemental exemptions” to the rule’s existing exemptions. That, however, is a process. DOL has “to propose it, get comments and then issue it. They have until next year to clear up some of these things.”