More Exemptions May Ease Pain of DOL Rule

The fiduciary rule is to financial advisors what Mt. Everest is to high altitude climbers: a massive hurdle – but still scalable if you have help threading your way through.

On Thursday, the Department of Labor indicated it was prepared to help advisors with their uphill climb by possibly carving out new exemptions and amending existing ones — the equivalent of securing fixed ropes to help climbers on their way.

Recent innovations in the financial services industry are helping to create more streamlined exemptions and compliance mechanisms, the DOL said in a 13-page request for information (RFI) published in the Federal Register.

Innovations include new mutual fund share classes, fee-based annuities and new advisory reporting and data analytics programs.

“It makes sense for the (fiduciary rule) regulation to be adaptable to the reality of what’s happening,” said Aaron Szapiro, director of policy research for mutual fund tracker Morningstar.

President Donald J. Trump has made no secret of his willingness to loosen regulatory straightjackets across agencies.

But with the new Labor Secretary Alexander Acosta this week backing the rule and courts often siding with the DOL over the past year, the fiduciary rule bedrock seems here to stay in one form or another. That leaves the exemptions as the most efficient way to blast through and amend a rule designed to reduce conflicts of interest among financial advisors.

"It's easier to create another exemptive class than to get rid of the existing ones," Szapiro said.

Other policy analysts were more circumspect of the DOL’s latest efforts to gather still more information to be used to fine-tune a policy hundreds of pages long and generally unpopular with many – though not all – financial advisors.

“One more prohibited transaction exemption (PTE) for mutual fund shares isn’t going to make much of a difference to anybody, I don’t think,” said Judi Carsrud, government affairs director for the National Association of Insurance and Financial Advisors in Falls Church, Va.

New Paths, Amending Existing Paths

Possible exemption pathways include a new class of mutual fund shares called "T-shares" that will help advisors maintain traditional commission-based revenue models. Another new mutual fund class known as "clean shares," anchored in the level-fee model, may reduce conflicted advice.

Fee-based annuities would also seem to “mitigate or even eliminate” potential conflicts of interest, the DOL said.

Then there are the existing exemptions already contained in the rule that regulators want to study more carefully.

In the case of the Best Interest Contract Exemption and the Principal Transactions Exemption, regulators have even hinted that contractual and warranty requirements may disappear entirely. Those requirements have raised concerns over advisor liability.

The BICE, for example, requires significant disclosures and documentation, as well as a signed contract between advisor/agent and client. The documentation and contract form the basis for a potential lawsuit down the line.

At the very least, existing exemptions are ripe for simplification and streamlining, the regulators appear to suggest.

Seen in that context, the DOL’s request for information does contain some possible good news, Carsrud said.

A Rule Delay?

There’s nothing in the DOL’s information request that indicates the changes regulators are hinting at are too high a hurdle to overcome, though perhaps not by Jan. 1, 2018, when the fiduciary is scheduled to be implemented in its entirety, Szapiro said.

But even so, regulators appear open to a rule delay to allow the industry more time to implement new systems and procedures.

"If commenters believe more time would be necessary to build the necessary distribution and compliance structures for such innovations, the Department is interested in information related to the amount of time expected to be required," the DOL said.

The assistant secretary spot in charge of the Employee Benefits Security Administration (EBSA), the DOL agency responsible for drafting the fiduciary rule, remains unfilled. Advisor advocacy groups remain hopeful that a new set of eyes will mean a more favorable look at the fiduciary rule exemptions.

No matter who ultimately takes over at EBSA, it’s a good bet that the DOL can expect still more comments flooding in over the next 30 days, the length of the comment period.

“There’s going to be a lot of comment letters,” Szapiro said. “If you commented on the last one, then you would want to comment on this one.”

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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