The Department of Labor (DOL) finalized and published on April 6, 2016, its long awaited Fiduciary (or “Conflict of Interest”) rule for advisers overseeing retirement accounts. Following the proposal introduced in early 2015, and after an extended commentary period, the final published rule contains key changes by the DOL that addresses comments and concerns voiced by firms and industry groups. The rule marks the first significant update in the regulation of retirement accounts since 1975, when the Employee Retirement Income Security Act (ERISA) was enacted to protect investors in private pension plans.1
The rule addresses those who provide retirement investment advice to plans, plan sponsors, fiduciaries, plan participants, beneficiaries and IRAs (individual retirement accounts) and IRA owners. It outlines that advisers may not receive payments that create conflicts of interest or operate under certain exemptions as provided by the DOL. A cornerstone exemption is the Best Interest Contract Exemption (BIC Exemption). Other exemptions allow advisers to receive compensation such as commissions and revenue sharing payments if they commit to putting their client’s best interest first and adhere to the BIC requirements.
The final rule addresses concerns raised by the industry, including timing, operational challenges/questions, and clarity on communication/definition from the original proposed rule. Many in the industry felt that the proposed rule unduly favored certain products by implicitly allowing more options and less stringent requirements compared to others, as well as being unclear as to certain provisions of the regulation. Concerns also were raised around the timing/method of operationalizing the rule. The DOL took these comments into consideration and published the finalized version by revising provisions within their proposal, while preserving the rule’s goal and authenticity.2
The Labor Department estimates that their “best interest” rule could potentially impact about $14 trillion in retirement savings, and the stricter standard may change the players that would be eligible in providing investment advice in the future.3
The industry has been following and awaiting the final rule since the proposed rule was released in early 2015. The confirmation of certain requirements, particularly around the exemption options will now allow organizations to confirm and move to implement this regulatory change.
Final Rule Overview
The rule addresses the conflict of interest concern by outlining the following:
- Clarifying and redefining what constitutes investment advice that falls under the fiduciary standard. The DOL also includes provisions on what is not considered investment advice that would fall under the fiduciary standard including certain educational, appraisal, transactions with Independent Plan Fiduciaries with Financial Expertise (“seller’s carve-out”), and general communications. The final rule also makes clear that the customer can hire the adviser (or affiliate) for advisory or asset management services without the recommendation counting as a fiduciary recommendation. The adviser’s investment recommendations, however, such as the recommendation to roll money out of a plan or invest in a particular investment, are considered fiduciary recommendations.4
- Creating the Best Interest Contract Exemption (“BIC” Exemption). The BIC Exemption mandates that firms and advisers acknowledge their status as “fiduciaries” and clearly disclose conflicts of interest, along with other provisions. It allows advisers to conduct transactions, activities, and receive compensation, otherwise prohibited, as long as they act in accordance with Fiduciary standards, as well as other provisions of the exemption rule. Additionally, firms and advisers will be required to charge only reasonable compensation and not make misrepresentations to their customers regarding recommended investments.
The final rules also addressed operational concerns voiced by the industry, and provided guidance on the allowance of negative consent letters and that BIC contracts will not be required between call center representatives and clients. The DOL also commented that the contract requirement can be incorporated into other account opening documents and can be entered into before or at the same time the recommended transaction is executed. However, any advice given before the contract is signed must be covered by the contract.6
|BIC Requirements / Key Elements5|
- Other exemptions. The DOL also included additional exemptive relief for certain transactions and payments, including principal transactions of debt securities and relief for insurance agents, brokers, and companies to receive compensation for recommending fixed rate annuity contracts to customers and plans for these simple income products. More complex products, such as variable annuities and indexed annuities, will require advisers to adhere to the terms of the BIC exemption. In response to comments received by the DOL, the BIC exemption has been revised to facilitate compliance, along with the release of additional guidance.
Industry Impact of the Final Rule and Readiness
The rule will have far reaching and broad impact across the retirement advisory industry, including Asset and Wealth Managers, Broker-Dealers (Independent, Bank, Regional, National/Wirehouses, etc.), Insurance Companies, and Fund and Product Manufacturers.
Impact is expected across product classes, platforms, and distribution channels, both directly and indirectly. Additionally groups within the enterprise will have to address strategic, operational, compliance, finance/commission, technology, communications, training, supervision, surveillance, and account conversion/maintenance/opening challenges posed by the rule.
Firms across the industry have varied in response and maturity in anticipation of the final rule; some preparing during the proposal phase of the rule, while others waited to address the requirements once the rule was finalized. Whereas in the proposed rule, the BIC exemption requirements were vaguer and operationally harrowing, the relaxing of the requirements in the final rule could attract firms to consider the BIC as a viable option and promote adoption.
What Organizations Should be Doing to Prepare
The rule goes into effect on April 10, 2017, requiring compliance with the broader Fiduciary definition, and certain limited conditions for the BIC. On January 1, 2018, firms will need to fulfill the remaining BIC requirements. Organizations should prepare now for enterprise-wide changes that may be required for compliance. Organizations should review the final rule in detail to determine applicability, and if required, firms should:
- Establish Governance and Setup Program: Institutions should look to analyze and address the impact to their business model due to the new rules. This should be driven from the top and as such, a Steering Committee established to provide a standardized response and strategic review. This will help define overall top-down governance (including roles and responsibilities) across the organization.
- Business Strategy, Product, and Current State Analysis: A dedicated team of resources coupled with “subject matter professionals” should be put in place to validate any impact identified and develop recommendations on the compliance strategy to follow. This strategy should also touch upon creating additional business opportunities, i.e., business operating model, strategic branding and vision for the Wealth Management business, etc.
- Develop Solution on Operational, IT and Framework: Operational review and changes should be implemented to deliver the target state model for the organization. People, process, and technologies should be reviewed, updated and created so that regulatory requirements are satisfied and operational capabilities strengthened to take advantage of the change.
- Conversion and Operational Execution: With strategy and operational changes in tow, Organizational readiness, Communication, and Training across groups will be critical to a smooth conversion transition and effective operational execution.
Accenture’s Charles Ludden shares his thoughts on the new DOL rules for retirement advice.
- “Department of Labor Proposes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year”. Access at: http://www.dol.gov/sites/default/files/documents/featured/protectyoursavings/factsheetcoi.pdf
- “U.S. Unveils Retirement-Savings Revamp, but With a Few Concessions to Industry,” The Wall Street Journal, April 6, 2016. Access at: http://www.wsj.com/articles/u-s-unveils-retirement-savings-revamp-but-with-a-few-concessions-to-industry-1459936802
- Federal Register, Department of Labor, “Fiduciary”; Conflict of Interest Rule – Retirement Investment, 29 CFR Parts 2509 and 2510, RIN 1210-AB32. Access at: https://www.federalregister.gov/articles/2016/04/08/2016-07924/definition-of-the-term-fiduciary-conflict-of-interest-rule-retirement-investment-advice
- S. Department of Labor Press Release – Chart Illustrating Changes From Department of Labor’s 2015 Conflict of Interest Proposal to Final, April 6, 2016. Access at: http://www.dol.gov/ebsa/pdf/conflict-of-interest-chart.pdf
- Federal Register, Department of Labor, Best Interest Contract Exemption. Access at: https://www.federalregister.gov/articles/2016/04/08/2016-07925/best-interest-contract-exemption
- Federal Register, Department of Labor: Adoption Of Amendment To And Partial Revocation Of Pte 84-24; Adoption Of Amendment To Pte 75 1, Part V; Adoption Of Amendments To And Partial Revocations Of Pt Es 86-128 And 75-1; Adoption Of Amendments To Class Exemptions 75-1, 77-4, 80-83, 83-1; Adoption Of Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs. Final April 8, 2016. Access at: https://www.federalregister.gov/agencies/employee-benefits-security-administration
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