New Fiduciary Rule Ahead
Art by Andrea D’Aquino
In early July, the text of a proposed Department of Labor (DOL) conflict of interest regulation emerged from the Office of Management and Budget (OMB).
Financial services industry advocates and analysts had been closely watching the OMB for this development, which they call the “new fiduciary rule.” As anticipated by industry analysts, the rule as proposed is closely related to the Regulation Best Interest (Reg BI) rulemaking package now being enforced by the Securities and Exchange Commission (SEC).
The proposed rule includes two main elements. First, the DOL confirms it will continue to enforce the “five-part test” it has historically used to determine who is an investment advice fiduciary as defined and policed under the Employee Retirement Income Security Act (ERISA). Second, it provides a prohibited transaction exemption for fiduciaries that meet the regulatory requirements of Reg BI.
Consistent With Reg BI
The early consensus among industry analysts and commentators is that the new fiduciary proposal, along with Reg BI, will be much more flexible in terms of permitting different compensation models. But this flexibility is not limitless, attorneys warn, and it seems clear that both the DOL and the SEC feel tamping down on conflicts of interest across the financial services industry remains an important and pressing goal.
Commenting on the proposal, American Council of Life Insurers (ACLI) President and CEO Susan Neely says she is pleased to see the alignment with Reg BI.
“Retirement savers will now enjoy enhanced consumer protections while maintaining access to choices in the retirement products they want and need, such as annuities—the only product available in the marketplace that guarantees lifetime income,” Neely says.
Action Among the States
Neely and others point out that the states are moving forward on their own “best interest” proposals. Iowa and Arizona were first out of the gate, adopting a transaction suitability framework finalized last year by the National Association of Insurance Commissioners (NAIC). More states are likely to act this year and next, Neely says.
While the proposed DOL rule, Reg BI and the NAIC framework are seen by many in the industry as creating alignment and clarity for advisory and brokerage professionals, the rules have received negative commentary from other parties, including fiduciary-focused advisers and entities focused on consumer education and protection. There is a significant amount of debate about the topic of rollovers, and whether and how the ERISA fiduciary rule applies to the provision of rollover advice/products by various entities.
In a statement from its leadership, the National Association of Personal Financial Advisors (NAPFA) says the DOL proposal—coupled with Reg BI—might, in fact, contribute to, not mitigate, investors’ confusion when seeking professional financial advice.