WASHINGTON – The Labor Department’s proposed rule would impose the fiduciary standard on anyone getting paid for advice related to a retirement investment decision, including insurance agents, according to a version vetted by the Office of Management and Budget.
“The fiduciary can be a broker, registered investment advisor, insurance agent, or other type of advisor (together referred to as ‘advisors’ here),” according to details released on Tuesday.
The rule will be published for a 75-day comment period, followed by a public hearing within a month, issuance of a transcript of the hearing, followed by another comment period, and, then presumably, by a final rule. Labor Secretary Thomas E. Perez would not commit himself to a target date for issuance of a final rule, although it is expected to be before President Obama leaves office in 2017.
Marcia Wagner, founder of the Wagner law firm, based in Boston, said the proposal is a "game-changer" and one of its key provisions is the definition of a fiduciary.
"The DOL has effectively created a uniform fiduciary standard for all retirement advisors, including brokers and insurance agents," Wagner said. "They will now effectively be subject to the same disclosure and compliance policy requirements that registered investment advisors are already subject to under securities law."
If adopted, she said, the proposed DOL rule would put pressure on broker/dealers and insurance firms to closely monitor and limit the levels of variable compensation earned by their registered representatives and agents.
Wagner said it may cause some advisors to become registered investment advisors "on the grounds that they would be subject to the same fiduciary standard anyway, but then they would have to forfeit their right to receive any commissions."
Of course, she said, "certain advisors may give up on advising plan clients and going after rollover assets altogether."
At the same time, Wagner said, while the DOL proposal is a game-changer, "it does closely follow what the White House has been saying about it for the last few months."
Perez and Jeffrey Zients, a member of the Council of Economic Advisers (CEA), said that the proposal will contain a “robust” economic justification. Perez noted that the first proposal, unveiled in 2010, did not contain an economic analysis that is a key part of the notice-and-comment federal government regulatory process.
They said the DOL’s regulatory impact analysis estimates that the rule and related exemptions would save investors more than $40 billion over 10 years.
The proposal will seek to preserve access to retirement education, according to an accompanying fact sheet. The proposal “carefully carves out education from the definition of retirement investment advice so that advisors and plan sponsors can continue to provide general education on retirement saving across employment-based plans and IRAs without triggering fiduciary duties.”
As an example, education could consist of general information about the mix of assets (e.g., stocks and bonds) an average person should have based on their age, income and other circumstances, while avoiding suggesting specific stocks, bonds or funds that should constitute that mix. This carve-out is similar to previously issued guidance to minimize the compliance burden on firms, but clarifies that references to specific investments would constitute advice subject to a fiduciary duty, the proposal will says.
“Being a fiduciary simply means that the advisor must provide impartial advice in their client’s best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer is adequately protected,” under the proposed definition.
The proposal seeks to distinguish “order-taking” as a non-fiduciary activity. As under the current rules, when a customer calls a broker and tells the broker exactly what to buy or sell without asking for advice, that transaction does not constitute investment advice. In such circumstances, the broker has no fiduciary responsibility to the client, the proposal will say.
It also carves out sales pitches to plan fiduciaries with financial expertise.
“Many large employer-based plans are managed by financial experts who are themselves fiduciaries and work with brokers or other advisors to purchase assets or construct a portfolio of investments that the plan offers to plan participants,” the proposal will say.
In such circumstances, “the plan fiduciary is under a duty to look out for the participants’ best interest, and understands that if a broker promotes a product, the broker may be trying to sell them something rather than provide advice in their best interest,” the fact sheet says. “Accordingly, the proposed rule does not consider such transactions fiduciary investment advice if certain conditions are met.”
InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].
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