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Expect DOL Rule to Look Much Like the Preliminary Version

Well, it’s finally done.

After months of comment letters, emails, hearings, webinars, meetings and plenty of lobbying on both sides, the Department of Labor (DOL) is finished with its fiduciary rule.

The rule was sent to the Office of Management and Budget (OMB) on Jan. 28. Now a new reality is overtaking the insurance industry: it’s time to get prepared to work like a fiduciary.

That doesn’t mean opponents are conceding — far from it. Lawmakers are still working on alternative legislation. And litigation is all but expected from some quarters.

But changes that will be required, accompanied by substantial record keeping and beefed-up technology, cannot be completed overnight. So agents and advisors are in scramble mode to get up to speed on the rule.

Once OMB finishes its review, expected to wrap up well within its 90-day time limit, the rule will be published in the Federal Register. That’s when the industry will learn what it mandates.

Analysts are warning opponents not to expect many changes from the preliminary rule.

“It certainly would seem logical that the rush to deliver to OMB would indicate fewer changes to the proposal were made by the DOL,” said James F. Jorden, shareholder at the Washington, D.C., law firm of Carlton Fields Jorden Burt.

Once the rule is published, agents will have eight months to transition to fiduciaries. The costs of this transition have been estimated at as high as $3.9 billion by the Financial Services Institute and Oxford Economics.

The DOL’s preliminary regulatory impact analysis pegged the cost on broker/dealers and advisors at between $2.4 bullion and $5.7 billion over 10 years.

“We think that the rule will result in large operational cost increases to advisors — time, money and resources,” said Jules Gaudreau, president of NAIFA. “We’re very concerned that insurance carriers and broker/dealers would not be able to change their technology, their systems (and) their processes within the eight-month time period.”

The Devil in the Details

The DOL re-proposed its fiduciary rule in April after a 2011 effort proved unsuccessful. The agency’s revised rule includes six proposed prohibited transaction exemptions, designed to govern advice provided regarding qualified employer-sponsored retirement plans and individual retirement accounts.

DOL officials and public interest groups say the proposed rules are necessary to protect retirement investors from high commissions. As fiduciaries, agents must always act in their clients’ best interest financially. If they don’t, they can be held liable.

Industry observers are focused on three areas of potential transition difficulty:

  1. Administrative — The rule adds substantial paperwork in the form of disclosures. For example, it requires information on all direct and indirect pay an advisor’s company receives on assets sold in the past year. This is going to require new systems to handle the record keeping, and a commitment by agents to learn the new reporting rules.
  2. Education — Agents must take care to be disciplined in their conversations with potential clients. Answering questions and sharing information on products can easily morph into what the DOL will consider “advice.” Exemptions can apply in certain situations.
  3. Variable Annuities (and maybe Fixed Index Annuities) — All sales of VAs will require a Best Interest Contract Exemption. That means a contract signed by agent and client. The preliminary rule calls for the contract to be signed up front, but this is one requirement analysts expect the DOL to soften in its final version. The BIC is still a significant change to how VAs are sold. Likewise, there is some speculation that the DOL will require a BIC exemption for fixed index annuities as well.

Analysts say the most difficult week-to-week work transition for agents will be getting familiar with the exemptions. When and how the exemptions apply will be the key.

Perhaps the biggest decision is whether to pursue an exemption at all. The DOL has said the exemptions allow advisors to receive common types of payment for services, including commissions, revenue-sharing and 12b-1 fees.

“The rule is intended to provide guardrails but not straitjackets,” DOL Secretary Thomas Perez said when the rule was unveiled.

But critics say the DOL is trying to push all agents and advisors into a fee-only model. 

Whether agents hire consultants or go it alone, the fiduciary transition is going to be costly. That means a cost will be paid somewhere down the line, Gaudreau said, perhaps by ignoring small savers.

“We’re very concerned with the moderate-income, smaller investor in America and their access to qualified financial advice,” he said. “The very people who need it the most would be deprived of that advice.”

NAIFA will create a program for agents and advisors to get a crash course in converting to a fiduciary standard, Gaudreau said.

What’s Next?

Within OMB, regulatory reviews are handled by the Office of Information and Regulatory Affairs (OIRA). While the agency can take longer than 90 days to review some rules, the fiduciary proposal is expected to be completed in less time.

President Barack Obama has made the rule a priority for his administration, which means he wants it implemented by the time he leaves office in January 2017.

Among its duties, OIRA is responsible for determining which agency regulatory actions are “economically significant” and, in turn, subject to interagency review.

A rule is deemed economically significant if it “is likely to have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy or a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local, or tribal governments or communities.”

Rules that are determined to be economically significant require agencies to “provide (among other things) a more detailed assessment of the likely benefits and costs of the regulatory action, including a quantification of those effects, as well as a similar analysis of potentially effective and reasonably feasible alternatives.”

As part of the final rule, the DOL must describe and respond to the public comments it received.

All of these steps give more information to opponents in search of possible legal challenges. Several leading analysts, such as Fred Reish of Drinker Biddle & Reath in Los Angeles, say litigation is inevitable.

“We need to fight it all the way to the end,” said Kim O’Brien, vice chairman and CEO of Americans for Annuity Protection. “I don’t concede that this is a train that has an eventual stop at the end and we just have to roll over.”


** Fiduciary Timeline **

  • 1934-1940: Investment advisors are subject to a fiduciary standard under the Investment Advisors Act of 1940. But broker/dealers are held to a suitability standard under the Securities Exchange Act of 1934.
  • 1974: The Employee Retirement Income Security Act of 1974 (ERISA) defines a plan fiduciary to include anyone who gives investment advice for a fee or other compensation. 
  • 1978: The DOL is given fiduciary oversight responsibility under Title I of ERISA.
  • 1981: U.S. workers are introduced to 401(k)-style retirement plans. This starts the beginning of the shift away from defined benefit plans.
  • July 2010: The Dodd-Frank law gives the SEC the authority to establish a fiduciary standard for brokers and investment advisors if it determines there is a need. The SEC has yet to act on that authority.
  • October 2010: The DOL announces plans to redefine when a person providing investment advice becomes a fiduciary under ERISA.
  • January 2011: The SEC releases a staff study recommending a uniform fiduciary standard of conduct for broker/dealers and investment advisors.
  • March 1-2, 2011: The DOL conducts a two-day public hearing for its fiduciary proposal. The agency hears from 38 speakers and receives more than 300 written comments.
  • September 2011: The DOL withdraws its fiduciary-only rule, vowing to re-propose the rule later. 
  • June 14, 2013: Rep. Ann Wagner, R-Mo., introduces the Retail Investor Protection Act (RIPA), which would bar the DOL from establishing a fiduciary-only rule until the SEC acts.
  • February 2015: The White House releases a Council of Economic Advisors report, “The Effects of Conflicted Advice on Retirement Savings,” endorsing a conflict of interest standard for retirement savers.
  • February 2015: The DOL sends a retooled fiduciary rule to the Office of Management and Budget for review.
  • Feb. 25, 2015: Rep. Wagner re-introduces the RIPA bill to the House. 
  • April 2015: The DOL officially re-proposes a fiduciary-only rule, which is followed by a public comment period, which is extended from 75 to 90 days.
  • Aug. 10-13, 2015: The DOL conducts a four-day public hearing on the fiduciary-only rule. About 75 speakers address the agency over the four days. Written comments and petitions number more than 391,000.
  • Sept. 7, 2015: The DOL publishes the hearing transcript, which kicks off a second two-week comment period.
  • Mid-September 2015: Ninety-six House Democrats sign a letter to Perez asking for improvements to the rule.
  • Sept. 30, 2015: The House Financial Services Committee passes the RIPA bill. 
  • Oct. 6, 2015: In a letter, 105 GOP House members urge the DOL to correct “shortcomings” in its proposal. The DOL ignores the request.
  • October 2015: Several industry groups say they are switching from trying to defeat the rule to changing troublesome aspects. Analysts say a final rule is inevitable. 
  • Oct. 27, 2015: The RIPA bill passes the House by a 245-186 margin. Obama says he would veto it.
  • November 2015: The SEC says it plans to release a fiduciary rule by October 2016.
  • Fall 2015: Speculation centers on opposing lawmakers inserting a “rider” crippling the DOL rule into a broader budget bill, but the rider fails to materialize.
  • Jan. 28, 2016: The DOL sends the fiduciary rule to the Office of Management and Budget for a review, which is expected to take 90 days at most. Opponents are poised to file suit against the rule after it becomes public.
  • Summer to Fall 2016: The financial services industry prepares for full compliance with the new rule. Decisions must be made — the biggest being whether to take the Best Interest Contract Exemption and to continue the commission-based model.
  • Jan. 1, 2017: Projected date the new fiduciary rule will go into effect.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].

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