Sec. Perez and Department of Labor Unveil Final Fiduciary Rule

After the better part of a decade in the making the new fiduciary rule from the Department of Labor has finally arrived, and on first review it appears to look a lot like the version proposed in the Spring of 2015, albeit with some important softening around the sharpest edges.

Labor Secretary Thomas Perez introduced the final regulation during a pre-release conference call with reporters on Tuesday evening, during which he stressed the final version of the Department of Labor’s (DOL) fiduciary rule is the result of years of collaboration and discussion between government regulators and the financial services industry, especially recordkeepers and advisory firms concerned about what the rulemaking will do to their compensation models.  

He also stressed from the start that the DOL knows the “vast majority of men and women giving retirement advice already do right by their clients.” However, he said, “there are some powerful interests aligned against this rule, who will insist that the only good rule is no rule at all. If your business model rests on bilking people out of hard-earned money in retirement plan accounts, you don’t belong in this industry and you will not like this final rule.”

Running through what he referred to as the most important changes in the final version compared with the proposed version, Perez first observed, “We were asked to address mechanics of the best-interest contract (BIC) exemption, and we did this.”

“Industry practitioners said they were worried they would have to put the BIC in place from the very first second they were introduced to a potential new customer, even if that individual never ended up working with the firm or purchasing a service or product,” Perez explained. “Now we have confirmed that the contract can be papered at the same time as all the other paperwork associated with a new purchase or a new client relationship. It’s then and only then that you will have to execute the BIC, which can be as simple as a page or even a paragraph added to existing documentation.”

Perez said the rule’s “forward-looking point-of-sale disclosures were pretty heavily criticized, so we eliminated entirely the one-, five- and 10-year forward-looking disclosures, as well as the annual disclosure requirement. Other disclosures have been streamlined and simplified, as well.”

NEXT:  DOL also addresses ‘anti-proprietary bias’

Continuing down the list of key changes programmed into the final rule, Perez said “firms that sold proprietary products have been readdressed too.”

“We heard a variety of concerns about how proprietary products were to be treated under the proposal, and that there might be a bias against proprietary products,” he said. “We listened carefully to these concerns and we addressed them, and I will confirm right now that there is no bias against proprietary products in the final rule. We’ve added clarifications on all this that will be very helpful, I believe. We think we have made it very clear there is no bias against proprietary products.”

The final implementation date, when firms will have to be in full compliance with all the new provisions being implemented, has been extended from the proposed eight months to a full year, “meaning firms will have until January 1, 2018, to be in full compliance.”

Perez added that, “for firms that have millions of existing customers that would require a BIC under the final rule, there are also changes. Unlike in the proposed version, firms can now simply send a notice that tells these clients that the firm has taken on new obligations for them as a result of the changing fiduciary standard. An email or letter will suffice when it comes to alerting existing customers of the change.”

Perez concluded the call by noting “these are just a few examples of the lengthy list of issues that have been clarified in the final rule, while also remaining true to our North Star of greater consumer protections. There are many advisers who are already using this best interest model. They have all told me putting customers first has been great for business.”

Beyond all these changes, Perez also said the final rule “does not include a list of approved assets qualifying for use under the BIC exemption or other exemptions.”

NEXT: DOL fact sheet reveals additional changes 

Following the call with reporters, the DOL circulated a dense fact sheet that lists in greater detail the differences between the proposed rule and the final version. The rulemaking package also includes a regulatory impact analysis outlining the monetary harm caused to retirement investors from conflicted advice, and the expected economic impacts of the rule.

According to the fact sheet, “under the rule, any individual receiving compensation for making investment recommendations that are individualized or specifically directed to a particular plan sponsor running a retirement plan (e.g., an employer with a retirement plan), plan participant, or Individual Retirement Account (IRA) owner for consideration in making a retirement investment decision is a fiduciary. Being a fiduciary means that the adviser must provide impartial advice in their client's best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer’s interests are protected. This change expands protections to IRA owners and people rolling over their savings into an IRA from a 401(k), who now must receive investment advice in their best interest.

“The rule includes examples of communication that would not rise to the level of a recommendation and thus would not be considered advice,” the fact sheet continues. “It specifies that education is not included in the definition of retirement investment advice so advisers and plan sponsors can continue to provide general education on retirement saving without triggering fiduciary duties.”

The fact sheet suggests that under the BIC exemption, firms and their individual advisers 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 to providing advice in the client's best interest, charge only reasonable compensation, and avoid misleading statements about fees and conflicts of interest; adopt policies and procedures designed to ensure that advisers provide best interest advice, and prohibiting financial incentives for advisers to act contrary to the client’s best interest; and disclose conflicts of interest. The firm must direct the customer to a webpage disclosing the firm’s compensation arrangements and make customers aware of their right to complete information on the fees charged.”

The final package also revises existing exemptions, including limiting the so-called “insurance exemption” to recommendations of “fixed-rate annuity contracts.” To sell other insurance products like variable and indexed annuities, firms can use the BIC exemption, DOL affirms. “New preamble language emphasizing that fees are not the only factor in making investment decisions and giving firms more flexibility on how to comply with disclosure provisions should also make it easier for insurance firms to recommend their products.”

NEXT: More from DOL’s fact sheet

The final rule “defines a variety of investment education activities that fall short of fiduciary conduct, and makes clear that advisers do not act as fiduciaries merely by recommending that a customer hire them to render advisory or asset management services. The final rule also expressly provides that investment advice does not include communications that a reasonable person would not view as an investment recommendation, including general circulation newsletters, television, radio, and public media talk show commentary, remarks in widely attended speeches and conferences, research reports prepared for general circulation, general marketing materials, and general market data. Under the final rule, all appraisals (as opposed to just ESOP appraisals in the proposal) will not be considered advice for purposes of this rule but will be reserved for a future rulemaking.”

Turning specifically to the much-discussed BIC exemption, DOL says under the final rule, “advisers 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 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.”

The final BIC exemption “includes special provisions clarifying how it can be used for recommendation of proprietary products, including a requirement that firms determine that the limitations are not so severe that the adviser will generally be unable to satisfy the exemption’s best interest standard and other requirements.”

In other ways the BIC has really been scaled back, Perez said. For example, the final rule “eliminates the contract requirement for ERISA plans and their participants and beneficiaries. Firms must acknowledge in writing that they, and their advisers, are acting as fiduciaries when providing investment advice to the plan, participant, or beneficiary, but no contract is required.”

For advice to IRA holders, the final rule “provides firms flexibility on when to enter into the contract. Some commenters expressed concerns that advisers would need to present a contract as soon as someone walks in the door—before they’ve even decided whether to hire that adviser. The final exemption makes clear that is not the case.  Rather, the contract can be signed at the same time as other account opening documents. However, any advice given before the contract was signed must be covered by the contract and also meet a best interest standard. The exemption also permits existing clients to agree to the new contractual protections by negative consent.”

While there are other changes in the final rule language, the fact sheet concludes by noting the updated BIC exemption contains a streamlined “level fee” provision, “which enables advisers and firms that receive only a level fee in connection with the advice they provide to rely on the exemption without entering into a contract so long as special attention is paid and documentation is kept to show that certain specific recommendations, including a recommendation to rollover assets from an employer plan to an IRA, are in the customer's best interest.” DOL defines level-fee fiduciaries as those who “receive the same compensation regardless of the particular investments the client makes (e.g. they may be compensated based on a fixed percentage of assets under management or a fixed dollar fee) and are not compensated based on commissions or transaction fees.”