Fiduciary Rule Would Allow Commissions

By Arthur D. Postal
InsuranceNewsNet

WASHINGTON – The proposed new fiduciary standard allays concerns that agents and advisors can still charge commissions on sale of products into retirement accounts, according to officials at the National Association of Insurance and Financial Advisors, as well as an industry lawyer.

The proposal being introduced this week by the Department of Labor (DOL) also expands the definition of fiduciary to include a wider range of advisors and insurance agents if they are paid for advice related to a sale in a tax-advantaged retirement account.

Under the rule, agents and advisors would have to sign an agreement that provides a “best interest contract exemption” by specifically committing the agent to act in the best interest of the client. Before rule was released, many observers in the financial and insurance industry thought the focus on “conflicted” advice and payments might lead to a crackdown on commissions.

“Fiduciaries must provide impartial advice in their clients’ best interests - and cannot accept payments creating a conflict of interest – unless they satisfy one of two, possibly three, exemptions,” said Juli Y. McNeely, NAIFA president.

She said the exemptions are “lengthy and will require careful reading,” but that, in general, the advisor and the client would be required to enter into a written contract that has specific provisions.

These will include that all advice be in the best interests of the client, “that conflicts be clearly disclosed, and that procedures be in place to encourage advisors to make recommendations in the client’s best interests,” McNeely said.

“There are new enforcement provisions that also need analysis to determine if the end result will be that consumers have less access or choice in engaging financial professionals to help them plan for retirement.”

C. Fred Reish, a partner at Drinker Biddle & Reath in Los Angeles, agrees that the best interest contract exemption “is the key” to the proposed rule. Reish said that the definition of fiduciary is broader than the 2011 version of the regulation, meaning that more advisors will be fiduciaries. “The keys will be the exceptions and the exemptions,” Reish said.

As explained by Labor Secretary Thomas E. Perez on Tuesday, the best interest contract exemption will allow firms to continue to set their own compensation practices so long as they, among other things, “commit to putting their client’s best interest first and disclose any conflicts that may prevent them from doing so.”

He characterized the rule as containing “streamlined, flexible ways to comply” with the Obama administration’s goal of “putting their client’s best interest first,” saying the contract provision  allows “advisors to enter into a new and enforceable best interest contract before they can receive any payments that might bias their advice.

“It’s a straightforward agreement so you know you’ll get advice on investing your retirement savings that puts your interests first,” Perez said. 

The proposal also includes a new exemption for principal transactions and asks for comment on a new “low-fee exemption” that would allow firms to accept conflicted payments when recommending the lowest-fee products in a given product class, with even fewer requirements than the best interest contract exemption.

This contract will commit the broker and advisor standard requires the advisor and the company to act with the “care, skill, prudence, and diligence that a prudent person would exercise based on the current circumstances,” according to a fact sheet of the proposal, which will be published for comment within the next few days, Perez said.

In addition, both the firm and the advisor must avoid misleading statements about fees and conflicts of interest, the fact sheet said. “These are well-established standards in the law, simplifying compliance,’ the proposal will say.

Another provision of the proposed rule commits the broker and advisor to adopting policies and procedures designed to mitigate conflicts of interest.

“Specifically, the firm must warrant that it has identified material conflicts of interest and compensation structures that would encourage individual advisors to make recommendations that are not in clients’ best interests and has adopted measures to mitigate any harmful impact on savers from those conflicts of interest,” the proposal says. Under the exemption, advisors will be able to continue receiving common types of compensation.

The enforcement provisions McNeely cited will allow the client to take action to hold an advisor accountable if the client believes the advisor or agent isn’t putting their client’s interest first.

The fact sheet explaining the proposed rule said this consumer protection is “especially important for advice regarding IRA investments because otherwise neither DOL nor the saver who is harmed can hold the advisor accountable for the losses the saver suffered.”

The DOL said the rule will propose that the best interest contract exemption require that individual disputes be handled through arbitration but must give clients the right to bring class action lawsuits in court if a group of people are harmed.

“This feature of the best interest contract exemption is modeled on the rules under the Financial Institutions Regulatory Authority (FINRA),” the fact sheet released by the DOL said.

Moreover, the proposal will say that the Internal Revenue Service can impose an excise tax on transactions based on conflicted advice that is not eligible for one of the many proposed exemptions. The fact sheet says that this is consistent with current law, which gives the IRS the authority to impose an excise tax. Current law can also require correction of such transactions involving plan sponsors, plan participants and beneficiaries, and IRA owners, the fact sheet says.

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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