DOL Tweaks Fiduciary Rule; Plan Sponsors Struggle to Comply



The Labor Department issued July 7 the first guidance regarding the new fiduciary rule

The guidance consists of several technical corrections and clarifications to affirm what most people already understood the rule to mean. 

The DOL renamed two exemptions: The best interest contract exemption (BICE) is now Prohibited Transaction Exemption 2016-01, and the principal transactions exemption is now Prohibited Transaction Exemption 2016-02. The BICE, which has caused the most discussion, allows financial advisers to retirement investors to use certain compensation arrangements that might otherwise be forbidden as long as they put their client's best interest first. 

Marcia Wagner of the Wagner Law Group in Boston told Bloomberg BNA July 14 that the “nearest brush with substance is to substantiate that, although the Best Interest Contract Exemption cannot be used by a fiduciary advisor with discretionary investment authority, merely holding discretionary authority over other plan assets not eligible for the exemption will not disqualify the advisor relying on the exemption with respect to a pool of plan or IRA assets over which the advisor does not have discretion. The changes to PTE 2016-02 indicate that this concept also applies under the Principal Transactions Exemption.” 

The other corrections in the guidance affirmed that insurance firms can use the BICE; clarified the negative consent procedure by providing that an existing contract must be executed before Jan. 1, 2018, and that if a retirement investor does not consent, the exemption continues to provide relief for 14 days after receipt of termination; clarified that exemptions apply to sales as well as purchases; and fixed a few typographical errors. 

David Cowart of Dentons US LP, Dallas, told Bloomberg BNA July 15 that the change in the definition of an insurance company qualified to be a Financial Institution and the expansion of an exemption for a purchase to include sales as well both seemed to be more substantive than technical drafting errors. “I am confident that the Department of Labor wanted to make those changes but was not about to re-open the notice and comment process on the BICE in particular.  So, maybe this was better for the regulated community than the alternatives.” 

Now that the fiduciary rule has been out for three months, what are companies doing to comply? 

Wagner told Bloomberg BNA, “Most practitioners have accepted the new regime…The devil is in the details and now that we are attempting to apply the new rule’s detailed requirements to business operations, we are only beginning to appreciate how difficult compliance will be.  This is proving to be an exhausting process.” 

“If there is an unexpected aspect to the new rules, it is in the realm of insurance products.  While the insurance industry must comply with the new rules along with other providers of investment products, the regulations are not well adapted to how insurance is marketed  and distributed and do not provide needed mechanisms for compliance.  Whether this is by design or due to the DOL’s unfamiliarity with the insurance marketplace is a matter for debate,” Wagner said. 

Cowart told Bloomberg BNA, “The rule itself has been the game changer prophets expected it to be. Companies are devoting considerable resources to planning and programming and designing new processes that provide protections under the rule. I think there are going to ultimately be improvements, but I am still skeptical that the improvements are going to be worth the costs and upheaval created by the rule. There is still a split in the business community's responses to the rule, and the divide created by that split appears to be growing. Some are wholeheartedly into compliance planning, while others are equally devoted to resisting and attempting to reshape the rule and the exemptions. As clients have taken their initial positions, so have their advisors and attorneys, and criticism of technical aspects of the rule seems to be continuing largely unabated from the practitioner community.” 

See the related story, Labor Department Clarifies Fiduciary Rule Exemptions.

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