What ERISA Attorneys Will Look for in Final Fiduciary Rule

More than a thousand reporters and industry practitioners dialed into a recent regulatory review session put on by two ERISA experts at Drinker Biddle and Reath.

Natixis Global Asset Management hosted the call, which drew more interest than any previous regulatory webcast the firm has hosted focusing on the employer-sponsored retirement planning space and the Employee Retirement Income Security Act (ERISA). It’s safe to say, the industry has Fiduciary Fever.

Well known to the ERISA industry, attorneys Fred Reish and Brad Campbell cut to the quick during the hour-long call, warning listeners the final fiduciary rule language could emerge as soon as this week, “with all signals being that it will be here before the last week of March is out.”

Campbell, who is counsel in the firm’s Employee Benefits & Executive Compensation Practice Group, says he expects the final rule to look a lot like the proposed rule, with some potential softening around the roughest edges, “but not much.” Perhaps most importantly, he believes the final rule will in all likelihood still be quite strict, lumping many financial services providers into the fiduciary domain, while also striving to allow current variable compensation business models to survive through the Best-Interest Contract Exemption, or BIC.

“The question we are all asking and that we will have to answer when the final rule comes out is, will this arrangement actually be workable?” Campbell asked. “Will the contract exemption function the way DOL intends?”

Looking to the Drinker Biddle Reath client base, Reish and Campbell suggest “some clients believe they can avoid using the BIC, but most folks say they are going to need to start using the BIC because they will not be able to immediately change over their compensation structures,” Campbell explains. “Again, we are still left to ask, will this all be workable?”

In this sense, Campbell and Reish both agree that they will be watching closely for any and all information the Department of Labor (DOL) supplies as it pertains to the implementation process for the rule.

“The BIC requires very detailed disclosures, down to dollar amounts in some cases,” Campbell says. “Some of our clients have raised arguments that complying with the BIC could even conflict with some elements of securities law, which forbid some forward-looking projections. I suspect these elements of the rule will have to be modified in the final rule, at least temporarily during the rollout process, to make it something people could potentially comply with.”

NEXT: Other concerns with the BIC

Reish points to a list of other aspects of  the fiduciary rule proposal that the firm’s clients are hoping will be changed in the final rulemaking, highlighting the importance of the BIC’s “84/24” carve-out, which pertains to individual variable annuities and the associated fees advisers may collect.

“It gets pretty technical here, but essentially folks are concerned that the individual variable annuities often sold to individual retirement accounts or defined contribution plans aren’t eligible for being carved out in the BIC,” Reish explains. “The advisory and insurance industries requested these be put back in to the 84/24 carve-out. They have a fairly extensive list of other changes they would like to see in the BIC, but it’s all speculation right now as to whether the DOL will listen.” (See “The New Fiduciary Rule and Annuities.”)

For his part, Campbell did not seem to think it was likely that the DOL would take any major steps to soften the fiduciary rule from the perspective of insurers, asset managers and advice providers. “As such, they need an orderly transition rule to avoid big challenges for our clients, so I’ll be watching for that aspect of the final rule. How do we get from A to B, and how do we deal with old business arrangements? They won’t exempt old business entirely, but it can’t just be that in eight months they expect the entire asset management industry to recreate its services for retirement plans and IRAs.”

Campbell also cited the importance of the “education carve-out” to the way individuals will be able to interact with their advisory firms’ or asset managers’ call centers, or other third-party education providers hired either by the adviser or the sponsor.

“The final rule is going to redefine how call centers and others on the service team can talk to participants,” he explains. “In the proposal, they said discussing asset class model allocation charts would just be education, for example, but if you mention specific products at all, that is fiduciary advice, and so there would be big implications for compensation. Even if a participant asked the call center for advice directly, acknowledging they understand any conflict, they won’t be able to answer it.” 

Reish concludes that the DOL “may fix some of this with respect to DC plans They’ll probably force you to mention a list of options. On the IRA side, it is tricky to see how this carve-out would be workable. So this will be very important.”

The full webcast will be published on the Drinker Biddle and Reath website.