Wednesday, June 22, 2016

The Final DOL Rule: 1,000 Pages, 1,000 Questions

By Gissou Gotlieb, Field Suitability Compliance Officer

Before the Department of Labor’s “fiduciary” rule became public, there were scores of opinions, movements, and efforts of all kinds addressing the merits, shortcomings, and impact of the proposed rule. When the final rule came out on April 8, 2016, a hush fell over the crowds. The rule and amendments were over 1,000 pages long and significant changes had been made to the rule since its proposal in 2015. That left anyone not close enough to the rule to have known the revisions – most everyone in the industry – scrambling to read through the rule and understand what it was saying, what it wasn’t saying, its immediate and future impact, implications, options, and next steps.

The rule was commonly referred to as the “fiduciary” rule when discussed up to its release. However, upon closer examination, the rule is much more than that – hence the prolonged silence on figuring out what just happened and what to do. The final rule lays out terms and conditions for how and when a person will be considered a fiduciary, and also provides information on types of accounts, plans, products, and transactions that will be impacted by the rule, and how they will be impacted. As with most rules, it offers enough ambiguity to provide food for thought for months and years to come (e.g., “reasonable” compensation), and addresses some issues in more certain terms (e.g., fixed index annuities no longer treated like their partner, fixed annuities, under the Prohibited Transaction Exemption 84-24).
 

Given the sheer volume of the rule, we will attempt to lay out at a very high level some known elements of the rule and some considerations for financial professionals (FPs) and financial institutions (FIs) in preparing for the impact and implementation of the rule.
 

The Department of Labor (DOL) rule comes as a result of the DOL’s concerns about how qualified retirement savings are impacted by potential conflicts of interest through the practice of FPs, in the DOL’s opinion, putting their own interest ahead of their clients’ when making recommendations. While some would argue rules were already in place to address such concerns, the DOL pushed to create additional rules redefining who would be considered a fiduciary and outlining new standards for care.
 

As it stands, the rule covers activities (recommendations) involving ERISA plans, IRAs, and other qualified accounts. The rule does not cover non-qualified accounts, but has carve-outs for other types of non-ERISA plans that are tax-advantaged accounts such as health savings accounts. The product being sold may drive the processes and compliance requirements that may be triggered based on the rule. For example, fixed annuity sales may be conducted under the Prohibited Transaction Exemption 84-24. However, fixed index annuities fall under the Best Interest Contract Exemption (BICE) and trigger different requirements. Under BICE, the financial institution (FI) and advisor must generally: 1) acknowledge the fiduciary status, 2) give prudent advice that is in the best interest of the retirement investor above all other interests while avoiding misleading statements and receiving no more than reasonable compensation, and 3) implement policies and procedures designed to mitigate harmful impact of conflicts of interest and disclose information about their fees and cost of advice.
 

In our business, most people offering any type of financial advice on qualified plans, such as agents, registered representatives, and investment advisor representatives, will likely be impacted by the redefining of who will be considered a “fiduciary”. And once under this category, a number of other processes and activities will be triggered. While FIs will have to figure out what the rule means to their business models, products, and services, everyone else waits with bated breath to see how the FIs defining and redefining their business will impact them. Below are a few considerations that have yet to be fully addressed:

  • What are practical differences between Investment Advisor Representative fiduciary responsibilities, liabilities and requirements versus a fiduciary under the DOL rule?
While IARs are considered fiduciaries, they are held to a higher standard for all clients and accounts they serve and their fiduciary status is not just for qualified accounts. Also, under the DOL rule, there are specific compliance requirements of a fiduciary, including new documentation, disclosures, affirmations, etc., as well as the BICE, which potentially creates additional liability and introduces new regulators, including the Department of Labor itself.

  • How will the rule impact small investors after implementation?
There are concerns that the additional liability that is created by the FI acting as a fiduciary will drive financial institutions and/or FPs to not take on smaller account sizes and less affluent investors, in order to better manage the cost of doing business.

  • What are some of the ways in which something could be considered a conflict of interest for the involved FP?
Over the years, those subject to FINRA rules have had to make several adjustments to how they do business as some arrangements previously commonplace were considered to be conflicts of interest. For an insurance producer, receiving a perk of some sort (e.g., certain commission structures, qualifying for an incentive trip, receiving a prize) due to selling a particular product or using a particular insurance carrier’s product may be considered a conflict of interest. Only time will tell what specific situations will be viewed as conflicts.

  • How will “reasonable compensation” be determined?
This may be one of the more burning questions on the minds of FPs everywhere as it may, in part, drive how future products are built by the product manufacturers and impact overall distribution strategy. The DOL did not define “reasonable compensation” in the rule. We anticipate that the marketplace will ultimately determine what compensation is “reasonable” for the value of the product or service being offered.

  • Who will monitor and enforce compliance with the DOL rule?
The DOL has set up a structure where consumers, through private litigation, will play a part in its enforcement. However, the DOL does have the authority to conduct examinations and can assess a 15% excise tax on parties that violate the fiduciary rules.

  • What are the implications of what has been addressed and not addressed in the rule?
Product manufacturers, broker/dealers, and others will have to make adjustments for what the rule covers, such as qualified retirement accounts. However, the question remains whether FIs will make changes across the board impacting account types/transactions outside the scope of the rule as consistent processes irrespective of account types/transactions may be easier to manage for financial institutions.


While the FIs determine how to address these considerations and many more, questions loom regarding the longevity and effectiveness of any change that is made now. It is possible that strategies and processes will be further adjusted as more FIs become public with their future plans and as changes are implemented, interpreted, and enforced.
 

As mentioned earlier, the rule is complex and its impact far-reaching. Ann Arbor Annuity Exchange is committed to bringing our producers the most up-to-date industry information on matters that may affect their business, which includes the new DOL rule. We will continue to analyze this rule and also share with you any insights we receive from our partnering financial institutions. Please call AAAE to ensure you have access to our resources on this topic: 800.321.3924

Gissou Gotlieb | Field Suitability Compliance Officer
Ann Arbor Annuity Exchange
Ph: 800.321.3924 x134 | Dir: 734.786.6134
ggotlieb@annuity-exchange.com


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Ann Arbor Annuity Exchange and its representatives do not give tax or legal advice. Please consult your tax advisor or attorney.

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Designed for Financial Professionals.

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