Compliance December 21, 2015

Was 2015 the Year of the Fiduciary?

Did you ever think so much controversy and confusion could be tied into one little word? 
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Looking back over a year of compliance coverage on www.planadviser.com, few topics match the volume of reporting filed on the Department of Labor’s (DOL) fiduciary rulemaking effort.

Heading into 2016 the DOL has clearly made real progress on getting new advice standards in place—much to the chagrin of retirement plan industry providers, who will be policed by the tightened regulations. The text of the proposed “conflict of interest” rule, as it’s now commonly called, emerged months ago and will soon be reissued in final form.

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Those informed enough to guess about such things project final rule language will be published as soon as January or as late as March or April. It remains to be seen whether the final rule will factor in any of the tremendous volume of industry criticism (and, to a lesser extent, support) registered during several formal comment windows and in-person hearings; whether advisers will still be able to sell to qualified retirement plan clients on commission or other forms of variable compensation; or whether a given segment of advisers will have to start papering best interest contracts. Things should finally become clear as 2016 progresses. 

Immediately after the mid-August hearings the DOL appeared to double down on its tough-cop approach, yet later in the year Labor Secretary Thomas Perez hinted at the prospect of more flexibility in a final rule. Industry professionals, especially those on the business development side of the equation, believe the rule-as-proposed is far too restrictive, even punitive, towards an overwhelmingly upright group of companies and individual advisers.

PLANADVISER columnist David C. Kaleda, principal in the Fiduciary Responsibility practice group at the Groom Law Group in Washington, D.C., predicts most advisers will be at least functional fiduciaries by this time in 2017 or 2018 with respect to individual retirement accounts (IRAs), as well as tax-qualified 401(k) and 403(b) plans governed by the Employee Retirement Income Security Act (ERISA), unless major changes are made to the rule language. Perhaps most important for advisers in the new rule language, he says, is the Best-Interest Contract (BIC) exemption approach, which “represents a significant shift in the DOL’s philosophy regarding class exemptions.”

NEXT: More of 2015’s best from the magazine and online 

Columnists Fred Reish, chair of the Financial Services ERISA practice at the law firm Drinker, Biddle & Reath, and Joan Neri, counsel for the Employee Benefits and Executive Compensation group, agree that key aspects of the fiduciary rulemaking clarified in 2015 involve retirement plan distribution advice.

According to Reish’s and Neri’s interpretation, the proposal also “says you would be a fiduciary for recommending a distribution or advising a participant about the investment of assets to be rolled over to an IRA. Under a 2005 DOL advisory opinion (2005-23A), the department said these acts are fiduciary acts if the person making the recommendation is already a fiduciary to the plan. In that guidance, though, the DOL also concluded that, if a person is not already a fiduciary in that context, the recommendation would not be fiduciary advice. The proposal eliminates that distinction.”

For columnist Marcia S. Wagner, managing director of the Wagner Law Group in Boston, equally important is how the fiduciary proposal might impact advice around annuities.

The most recent news on the fiduciary rulemaking effort was perhaps more show than substance. After a great deal of partisan wrangling, Congress reached an agreement on a somewhat long-term budget deal that did not include riders that would have changed or otherwise delayed the DOL’s fiduciary rulemaking. 

For many Republicans and some Democrats in both the House and the Senate this was no small defeat, given the large number of bills and proposals forwarded and/or endorsed by legislators in 2015. It took mere days for new proposals to be introduced in the wake of the budget agreement, but they have little real likelihood of making it into law before the DOL can act.

Whatever happens with the rulemaking in 2016, you’ll be able to find the most up-to-date coverage at www.planadviser.com and in PLANADVISER print. 

Compliance December 18, 2015

Post Budget Act Stumble, Congress Tries Again to Impact Fiduciary Rule

It’s a particular skill of Congress to make the improbable appear promising—whether it comes to overturning the Affordable Care Act or, as was the case this week, delaying the DOL’s fiduciary reform.
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Republican and Democratic lawmakers introduced a pair of legislative proposals that, supporters suggest, would “ensure retirement advisers serve their clients’ best interests and preserve access to quality financial planning,” in part by delaying the Department of Labor’s (DOL) fiduciary reform effort. 

Sound familiar? The proposals come in the immediate aftermath of a failed Congressional effort to stymie the DOL’s fiduciary rulemaking effort through the budgetary process. They are being championed by Representatives Peter Roskam (R-Illinois), Richard Neal (D-Massachusetts), Phil Roe (R-Tennessee), and John Larson (D-Connecticut).

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The representatives say their new proposals would take steps to codify a set of bipartisan principles members introduced in November. “The bills represent a legislative compromise that will protect consumers and keep high-quality financial advice affordable for all Americans,” they argue.

In short, the Strengthening Access to Valuable Education and Retirement Support (SAVERS) Act, led by Rep. Roskam, and the Affordable Retirement Advice Protection (The ARAP) Act, led by Rep. Roe, would require an affirmative vote by Congress before any final rule by the Department of Labor goes into effect. If Congress fails to approve the department’s regulatory proposal, a new fiduciary standard would take effect that, according to reps:

  • Raises the bar for the entire financial services industry by requiring advisers to serve in their clients’ best interests;
  • Roots out bad actors by penalizing financial professionals who violate the trust of their clients; 
  • Requires advisers to clearly communicate key information to ensure investors are well-informed to make investment choices; and 
  • Ensures that individuals and families saving for retirement have access to advice and investment options to meet their individual needs and circumstances.

The new fiduciary rule thus formulated would take effect by amending the Internal Revenue Code of 1986 (The SAVERS Act) and the Employee Retirement Income Security Act of 1974 (ARAP Act). The representatives suggest the proposals “together will raise investment advice standards for the retirement industry to ensure financial advisers act in the best interests of their clients, while also ensuring low- and middle-income Americans have access to quality, affordable financial advice to help plan for retirement.”

NEXT: Industry reaction is swift, generally positive  

Supportive industry groups were clearly expecting this action given the swift flurry of commentary broadcasted to reporters and industry analysts Friday afternoon.

For example, American Council of Life Insurers (ACLI) President and CEO Governor Dirk Kempthorne, suggested “an issue as significant to the retirement security of millions of Americans as the Labor Department’s proposed fiduciary rule demands Congressional involvement, which is why ACLI supports bipartisan bills introduced today.…Many of the 10,000 Baby Boomers reaching age 65 every day need help now, or will need help in the near future, financially planning for retirement. These bills are pro-consumer because they enhance consumer protections by ensuring savers and retirees maintain access to financial professionals who will be required to act in their clients’ best interest.…We urge more members of Congress to co-sponsor these bills and encourage swift action in the House and Senate.”

The Insured Retirement Institute (IRI) also weighed in, releasing a statement from IRI President and CEO Cathy Weatherford. Like Kempthorne, she suggests matters involving the retirement security of millions of Americans “are far too important for Congress to remain on the sidelines.”

“We applaud Congressmen Peter Roskam, Richard Neal, Phil Roe and John Larson, as well as the other co-sponsors including Buddy Carter, Michelle Lujan Grisham and Tom Reed, for demonstrating tremendous leadership by ensuring Congress has its say on this issue and delivers important protections for retirement savers,” she says. “We support a best interest standard of care for financial professionals when recommending investment products, but remain concerned that the DOL’s proposal will restrict and limit access to retirement planning advice and result in fewer choices for retirement savers.…We fully support the underlying principles behind this legislation and encourage all policymakers to back this approach.”

Investment Company Institute (ICI) President and CEO Paul Schott Stevens agrees the proposals “would set a best-interest standard covering those providing retirement advice and include other provisions that serve as an alternative to the current fiduciary-standard rule proposal under consideration by the Department of Labor.”

“These bipartisan bills present a commonsense approach to implementing the broad consensus in support of a new, consumer-focused best-interest standard—in stark contrast with the flawed approach that the DOL has pursued throughout this process,” Stevens argues. “Provisions in these bills would protect the individual savers who would be harmed by the fiduciary rule currently proposed by the DOL.”

Text of the SAVERS Act is here and text of the ARAP Act is here. 

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