DOL Investment Advice Rule Takes Effect — What Does That Mean?

The Department of Labor's investment advice rule takes effect today, but that does not entirely clear up the mystery of what future annuity sales rules will look like.

There are still plenty of options on the table for the Biden administration to reshape the rule -- a holdover from the Trump administration. The investment advice rule itself was a replacement for the unpopular fiduciary rule published by the Obama administration.

The good news for the industry is that the constant shifting of rulemaking from one administration to the next could be coming to an end.

The next big step is for the Department of Labor to explain its interpretations of the rule, which is expected any day now in a guidance document.

Tough Enough?

There had been wide speculation that President Joe Biden would withdraw the rule -- an incoming administration can rescind "midnight regulations" published during the final 60 days of a presidential term.

The Trump administration replacement rule has two main parts: a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" from 1975 to determine what constitutes investment advice.

The rule surprised some in the industry as a tougher regulation than anticipated from the Trump administration. For example, it expands the fiduciary duty for advisors handling retirement plan rollovers, a transaction historically treated as a one-time, nonfiduciary service.

The Biden administration appeared to acknowledge that the rule has real teeth to it.

“This exemption allows for important investor protections, including a stringent ‘best interest’ standard of care for fiduciary recommendations of rollovers from ERISA-protected retirement accounts,” said Ali Khawar, deputy assistant secretary of labor for the Employee Benefits Security Administration.

Speaking during a webinar today, Brad Campbell, a partner at Faegre Drinker Biddle & Reath, said advising on rollovers will continue to be a tricky area -- at least until the DOL clarifies it further. As it stands, the key aspect is whether there is any, even vague, thought of meeting the client again in the future to follow up on the rollover advice or transaction.

"If the answer is yes, we both intend to meet in the future, the DOL views it as an anticipated ongoing relationship," Campbell explained. "In other words, the beginning of an advice relationship that is fiduciary from the initial advice."

Campbell also noted that some firms might be scrambling to have compliance practices in place since everyone expected the Biden administration to at least pause the rule.

"No one actually thought this exemption was going to go into effect today," Campbell said. "The anticipation was that a Biden administration would delay it by an additional 60 days and review it."

Ironically, Khawar cited the opposite reasoning as part of the decision to allow the rule to stand.

“We recognize that investment advice providers have been preparing for the exemption, and this step will allow them to implement important system changes," he said in a news release. "That said, we will continue our stakeholder outreach to determine how we might improve this exemption, the rule defining who is an investment advice fiduciary, and related exemptions to build on this approach.”

'Better Than Nothing'

A common perception is that allowing the rule to stand is a win for industry. But Barbara Roper, director of investor protection for the Consumer Federation of America, is not ready to concede that narrative.

"I don’t expect this to be the Department’s last work on this topic, as their release suggested. I expect them to issue guidance in the short term that could help to give more substance to the best interest standard and the requirement to mitigate conflicts," she said. "I expect further rulemaking in the future to close remaining loopholes in the definition of fiduciary investment advice, so that all rollover recommendations are included."

Likewise, Roper expects to see the prohibited transaction exemption retooled by the new DOL administration.

The exemption allows investment advice fiduciaries to offer a wide array of investment advice services in compliance with Impartial Conduct Standards. Impartial Conduct Standards are a best interest standard, a reasonable compensation standard, and a requirement to make no materially misleading statements.

"I think they made the judgment that the rule, imperfect as it is, is better than nothing while they work on making those changes," Roper said. "It wasn’t necessarily what I was expecting, but I definitely see the logic of this approach."

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

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