Changes ‘Could Happen Soon’ to Fiduciary Rule

Bradford P. Campbell, counsel in Drinker, Biddle and Reath’s Employee Benefits & Executive Compensation Practice Group, and former head of the Department of Labor’s (DOL) Employee Benefits Security Administration, recently testified before Congress about the DOL’s proposed fiduciary, or conflict-of-interest, rule.

Campbell told attendees of a Drinker, Biddle and Reath Inside the Beltway webcast, sponsored by Natixis Global Asset Management, there are several things moving in Congress around the omnibus appropriation budget deal regarding the fiduciary rule. Several groups are concerned with where the proposal is heading, what’s in it and how fast it’s moving. According to Campbell, one group wants to defund the DOL initiative. But he thinks that is probably less likely than other alternatives that could be amended into the bill.

According to Campbell, the idea is that the budget deal is an example of must-pass legislation, so the president will likely sign it and not veto it. Another group is suggesting the DOL be required to re-propose the rule with a short comment period next year. Campbell notes that this will affect the timing of the issuance and effective date of the rule and give interest parties an opportunity to see how the DOL is resolving concerns raised during the first comment period.

In addition, a bipartisan group of lawmakers recently released principles to guide the rule and are coming up with legislation using those principles.

“Stay tuned; we might see a material change in the progress of the rule in the next week,” he says.

Fred Reish, a partner in Drinker Biddle’s Employee Benefits & Executive Compensation Practice Group, chair of the Financial Services ERISA Team and chair of the Retirement Income Team, told webcast attendees he isn’t so sure the budget deal will bring a change to the fiduciary rule process. “My view is that Republicans will focus more on issues such as defunding Planned Parenthood or limiting Syrian refugees,” he says. “Looking at the politics of today, those issues are greater hot buttons than the fiduciary rule, and I can’t imagine the president not vetoing a bill that has that kind of stuff in it.”

NEXT: Changes we might see in the rule

Campbell says that at administrative hearings in August, the DOL was hinting that it could make changes to education provisions in the new rule, suggesting that it could still allow pie charts of investment allocations based on retirement plan participants’ ages, but not citing specific investments, just mentioning asset classes in general. Campbell and Reish speculate that the agency will probably allow more accommodations for employer retirement plans but not for individual retirement accounts (IRAs).

The rule as written could make wholesalers fiduciary advisers to plans; Campbell says there will probably be some changes in the final rule regarding whether wholesalers talk to plans directly or in a meeting with plan and advisers. He adds that the DOL didn’t seem receptive to a broader seller’s exemption.

“Our biggest problem is we’re all speculating because there is little the department has said publicly. For most of these issues, we won’t see what we have to do until the final rule is published,” Campbell says.

Reish says he believes the DOL is going to maintain its position that advice about rolling distributions into IRAs will create a fiduciary role. Campbell agrees, noting that one of the core reasons the DOL made its proposal is its concern that at the point of rollover of employer retirement plan assets, the Employee Retirement Income Security Act (ERISA) and DOL protections are eliminated. He notes that this proposal is more focused on IRAs than employer plans than the proposal made years ago.

Campbell adds that one of the things people are wondering about is whether the DOL will change the treatment of annuities which are not in the 84-24 prohibited transaction exemption. “I predict it will not change 84-24. There weren’t a lot of comments about doing that. The bigger issue is the change [the DOL] makes in the definition of commissions—what is included and not—in its revised rule.”

Campbell adds that the best interest contract exemption (BICE) in the proposed rule is really not written in a way that is conducive to introducing insurance products in retirement plans. Commenters suggested rewriting the BICE to fit insurance products better.

COMING UP: Will the rule prompt lawsuits?

Campbell noted that in the DOL’s latest regulatory agenda, released just before Thanksgiving, it didn’t give a timeline for publishing a final rule. There are rumors that it will be issued as early as January 2016, but Campbell doesn’t see that as being possible considering the sheer volume of issues. “My best guess is March or April, and the eight-months proposed delay means it will go into effect before the end of 2016 and before a change in presidents,” he says.

Campbell notes it will be harder for the new administration to undo the rule if it’s in effect before that time, but there’s a lot of work the DOL has to do to meet that goal. Before it is published, it will have to be submitted to the Office of Management and Budget (OMB), which has 90 days to make a decision, but Campbell doesn’t think once it is passed to OMB it will take three months to get published.

After the final rule is published, Campbell speculates that the DOL’s enforcement of the BICE might only look at the most egregious cases. However, depending on what changes are made regarding the BICE, it could be subject to different interpretation, which may be conducive to private lawsuits.

And, if the final rule is similar to the proposed rule, some financial trade associations could go to court to challenge the process of the rule. There could potentially be litigation over whether the rule was properly done. “I would assume [the DOL] is going to anticipate being sued and formulate a final rule that protects against that,” he says.