The Department of Labor has little choice but to loosen some of the Best Interest Contract requirements in its fidcuciary rule, says a leading expert on ERISA regulations.
It is likely the new rule will not require a client to sign the BICE immediately and will also not include some of the proposed disclosures, said Fred Reish, a long-time industry analyst.
Reish, a partner at Drinker Biddle & Reath in Los Angeles, sees changes the industry will like, but he does not expect opponents to get everything they want.
Unlike 2010, when the DOL withdrew its proposal in the face of withering criticism, this rule will make it to the finish line, predicted Reish, who has written four books and many articles on the ERISA, IRS and DOL audits.
“Most people who are following this closely believe the DOL is going to adopt a rule that is very close to the proposed rule,” he said.
The DOL proposal is actually three rules: extending the fiduciary standard to anyone who gives retirement plan advice, changes to the 84-24 exemption, and the Best Interest Contract Exemption (BICE).
It is the BICE proposal likely to see the biggest changes, Reish said. The financial services industry strongly objects to the BICE requirement that potential clients sign a contract before any financial topics are discussed. Many of the 330,000 comments the DOL has received pertained to the onerous nature the BICE would place on their attempts to serve retirement savers.
“Right now, it’s largely unworkable as it’s currently written, so I think they’re going to have to make some significant changes,” Reish said. “I think the DOL has been persuaded that (the contract stipulation) is unrealistic.”
The likely compromise is a contract signed a bit later in the process, with terms that apply “retroactively,” he explained.
Likewise, the BICE requires a number of disclosures to the client, including descriptions of material conflicts of interest, a statement about all fees, and information on whether the financial institution offers any proprietary products or receives any third-party payments with respect to any underlying investments.
Reish does not think these disclosures will survive the final rule.
“I believe the DOL has been convinced that there just aren’t the systems in place to do that,” he said. “There’s a little uncertainty about what those things will be replaced with. The most common thing you hear is those things will be replaced with disclosures that are already made.”
Fiduciary rule opponents want the 84-24 exemption, which permits commissions in sales to IRA participants, left alone. The DOL rule would remove variable annuities, as well as other contracts considered securities under federal law, from this exemption, unless the client signs a BICE.
Reish does not see the industry winning this fight.
“What I’m hearing from people who have had meetings with the DOL, is they did not seem receptive to that idea,” he said. “At this point, the odds are that individual VAs for IRAs will remain subject to the Best Interest Contract Exemption.”
Reish does not expect the DOL to release any details on changes before its final rule goes public. The next step is for the department to send its final proposal to the Office of Management and Budget, where it will remain shielded from public view for about 60 days.
The OMB will then publish the rule in the federal registry, the first public release of the rule. Factor in a six-month compliance period, and the law will go into full effect just prior to President Barack Obama leaving office, Reish said.
The heated political climate isn’t likely to derail the DOL proposal, Reish said, since the administration has months and months of work invested. If the regulatory process doesn’t result in a completed rule by January 2017, a new president could toss it out.
“I guarantee the DOL will make some mistakes,” said Reish, adding that he expects the department to encourage financial professionals to apply for exemptions even if they don’t think they qualify.
“My general view is it won’t be as good as the proponents are saying and not as bad as the opponents are saying,” Reish said. “One way or another I have faith that the DOL is going to make some good changes.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].
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