Ex-DOL Official: ‘Legitimate Grounds’ for Fiduciary Litigation

The Office of Management and Budget held its final meeting Friday on the Department of Labor’s fiduciary rule.

That means “theoretically, the regulation could come out as soon as next week,” said Bradford Campbell, former assistant secretary of labor for employee benefits. “I think in reality it’ll be closer to the end of the month.”

Washington, D.C. counsel for Drinker, Biddle & Reath, Campbell spoke during the firm’s “Inside the Beltway” audiocast Thursday.

When the fiduciary rule is published in the Federal Register, there are a couple things advisors need to know right away, Campbell noted. For one, when advisors need to comply with the new rules. Also, whether the rule will permit “grandfathering” of existing accounts.

“How do we get from A to B?” he said. “And what do we do with old business?”

The DOL proposed new fiduciary rules in April, which cover advice provided regarding qualified retirement employer-sponsored plans and individual retirement accounts. The OMB is reviewing the final rule.

DOL officials and public interest groups say the proposed rules, which would impose a fiduciary standard of care on financial advisors dealing with retirement accounts, are necessary to protect retirement investors from high commissions.

While the rule is going to be published, that doesn’t mean it is going into effect, Campbell said. Legislative action isn’t likely to work, he added, but grounds for successful litigation exist.

“Personally, I think there’s some legitimate grounds to go after DOL on this,” Campbell said. “They have done some things that I think they lack the authority to do and maybe some of their decisions have been arbitrary and capricious.”

Opponents were helped recently when it leaked that the DOL disputed and rejected opinions from the Securities and Exchange Commission, Campbell added. Emails came to light revealing friction between the department and the SEC.

Barring a successful lawsuit, the rule is expected to apply to advisors by the end of 2016. President Barack Obama considers the rule a cornerstone of his agenda, Campbell noted, and wants it "on the books" before he leaves office.

A BIC Question

Assuming the final rule comes out with very little changes, advisors selling variable annuities will feel a big impact. The rule permits the sale of VAs on a commission basis if the advisor adheres to the Best Interest Contract exemption. The BIC requires significant disclosures of compensation and any conflicts, and also a contract to be signed with the client.

Even then, commissions must be “reasonable,” the rule states. During the public feedback period, industry opponents asked DOL to eliminate the BIC. Campbell does not think that will happen.

“I don’t see them trying to come up with a new rationale for (VAs),” he said. “They probably don’t want to rock the boat on things they don’t see as crucial.”

It’s likely that the final rule will give advisors more leeway on when the BIC contract must be signed, and DOL will allow the signed contract to apply retroactively to the start of client contact, Campbell said.

Otherwise, advisors say they need additional information on the BIC to decide whether to continue with commission-based VA sales, he added.

“To BIC or not to BIC, that is the question,” he joked.

‘Extraordinarily disruptive’

The fiduciary rule impact on retirement plan sales and advice might not be too great, said Fred Reish, a partner at Drinker Biddle & Reath in Los Angeles. However, the impact on advice and sales to IRAs will be substantial.

Similarly, the “capturing” of IRA rollovers, through recommendations to participants to take distributions, will be dramatically affected, Reish said.

The rule prohibits advisors from receiving a payment from a third party, such as an insurance company, for the sale of an insurance product recommended to the plan, participant or IRA.

“On the IRA side it’s going to be extraordinarily disruptive,” Reish 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 [email protected].

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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.