Advisors and agents do not have to worry about the Department of Labor investment advice rule for now, but should be focused on being in compliance by the end of 2021.
And there is a lot of work to be done, said Fred Reish, a partner with the law firm Faegre Drinker Biddle & Reath. The DOL rule took effect Tuesday, but the department and the Internal Revenue Service are both deferring compliance with the new rules until Dec. 20 as long as the "impartial conduct standards" are met.
That means the recommendation is made to a best interest standard, it has no materially misleading statements and reasonable compensation.
"Nobody anywhere has the processes in place to satisfy these these conditions, and they are burdensome," Reish said during a webinar Thursday. "It is going to take between now and December 20 for broker-dealers, banks and trust companies, insurance companies, investment advisors, to get all these policies and procedures in place."
In particular, firms will need to figure out ways of measuring the reasonable compensation, Reish explained, and the ways to mitigate compensation if a conflict exists. It's going to be "a heavy lift" to get those policies and procedures in place by Dec. 20, Reish said.
While the industry expected President Joe Biden to withdraw the rule -- an incoming administration can rescind "midnight regulations" published during the final 60 days of a presidential term -- the administration surprised everyone by letting it stand.
The Trump administration 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. In particular, it expands the fiduciary duty for advisors handling retirement plan rollovers, a transaction historically treated as a one-time, nonfiduciary service.
'So Far Reaching'
For those counting at home, that's two unexpected twists, said Brad Campbell, also a partner at Faegre Drinker Biddle & Reath. For starters, nobody expected the Trump administration to put out a rule that is "so far reaching" that it subjects many more rollover recommendations to a fiduciary standard, he explained.
On the other hand, "I don't think anybody really thought the Biden administration was going to let the new class exemption that would permit some conflicted compensation for investment advice fiduciaries, non-discretionary investment advice fiduciaries, stand," Campbell added.
While the DOL specifically pointed to impending new guidance that will reveal the Biden administration's interpretation of the rule, Campbell doesn't expect that to happen anytime soon.
Marty Walsh, Biden's secretary of labor nominee, still needs to be confirmed by the Senate, Campbell noted, and he needs to appoint undersecretaries and get a full staff together. The key appointment will be the assistant secretary and head of the Employee Benefits Security Administration, a position Campbell held under President George W. Bush.
"My guess is that things will probably sit as they lie for a while, while the new administration decides how to proceed," Campbell said. "Whether to do a new rule changing the 1975 regulation for what defines fiduciary advice, or changing or eliminating the five steps. So there's still other shoes to drop down the road potentially, but we probably are entering a period where there's some stability in the position the government's taking."
During a Tuesday webinar, Campbell 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."
Always Have 84-24
Insurance agents who are selling annuities can always utilize the existing prohibited transaction 84-24 exemption, Reish and Campbell said. PTE 84-24 permits agents and brokers, among others, to receive compensation, including variable compensation and commissions, in connection with transactions with plans and IRAs involving insurance contracts, fixed-rate annuities, and investment company securities.
"The bottom line is we have several different paths for compliance for exemptions that would permit compensation related to rollover recommendations," Campbell said.
The analysts again stressed the importance of whether an annuity transaction is a one-time sale, or something more.
"There's a lot of complexity now, particularly on these insurance transactions, which ... largely had not been viewed as fiduciary advice, but many of which may now be," Campbell said.
Firms and producers three primary choices in an insurance situation, he added. Until December, there's the non-enforcement policy, or there's the new exemption included in the investment advice rule package. Finally, there's PTE 84-24.
"And which of those makes the most sense is something a lot of people are analyzing, and it's not the same question necessarily, from carrier to carrier, from producer, producer, because there's just so many different variables as to whether it's fiduciary in the first place," Campbell said.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at firstname.lastname@example.org. Follow him on Twitter @INNJohnH.
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