As expected by some people close to the process, DOL scaled back its final fiduciary rule based on extensive consultation with financial services industry groups, consumer advocates and the public.
Under the new regulation, a fiduciary is defined as any person who receives compensation for providing investment recommendations that are “individualized or specifically directed” to a particular plan sponsor, plan participant or individual retirement account owner. This expansion of fiduciary now covers individuals who own IRAs and/or who are rolling over their 401(k) savings into an IRA.
The final fiduciary rule includes significant changes - both substantive and administrative - that some in the financial services industry are already welcoming.
Robert Gerstemeier of Gerstemeier Financial Group, a fee-only investment firm, participated in some of the DOL industry consultation activities. He said he expected the final rule would be different than the proposed version. Gerstemeier said he is pleased with some of the changes in the final regulation because it “removed some of the ambiguity about what types of investments fall under certain exemptions.”
Notably, the final rule limits the “insurance exemption” to recommendations of fixed rate annuities. It also places variable and indexed annuities under the Best Interest Contract exemption. The BIC exemption will allow firms to continue to sell these insurance products with associated, “reasonable” compensation.
DOL also clarified the grandfathering provision of the BIC exemption, meaning that all commissions from existing agreements may continue to be paid as long as the additional advice meets the basic best interest and reasonable compensation requirements of the rule.
The president-elect of the National Association of Insurance and Financial Advisors, Paul Dougherty, who also participated in the DOL consultation process, said he is “pleased that existing client contracts will be grandfathered.”
In the final regulation, DOL specifies how advisors can continue to recommend proprietary products under the BIC exemption. As Labor Secretary Thomas Perez said today, “We clarified that there is no bias against proprietary products and we created special rules to ensure those advisors could meet the standard.”
In addition, the refined rule permits advisors to provide education and general communications that do not constitute advice to clients. DOL included examples of allowable education and communications in the final regulation to help the financial services industry better comply with it.
DOL issued the final rule to apply the fiduciary standard to additional types of investment advisors, making this the first regulatory update in over 40 years. These professionals are prohibited from accepting compensation that would create a conflict of interest unless they qualify for an exemption intended to protect the consumer.
Overall, the refined regulation requires brokers to use a legally-enforceable contract that promises to put customer interests first in order to receive compensation that may pose a conflict of interest. In addition, firms now must disclose and publicize any conflicts of interest.
The financial services industry will have up to 20 months to comply with the implementation of the final rule.
Julie M. Anderson served as an executive in the Obama Administration and at IBM. She now leads AG Strategy Group, which provides strategy consulting and management training services to government agencies and federal contracting companies. Julie may be contacted at [email protected].
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