While the devil is in the details, the Department of Labor’s (DOL) final fiduciary rule includes some improvements in the best interest contract (BIC) exemption from the previous proposal.
Variable compensation is, as it was in the original proposal, allowed under a BIC exemption. The BIC is subject — as it was in the previous proposal — to a commitment by the firm and the advisor to:
Insurance Exemption Refined
The final package also revises existing exemptions, including limiting the so-called “insurance exemption” to recommendations of “fixed rate annuity contracts.” The DOL notes that to sell other insurance products like variable and indexed annuities, firms can use the BIC exemption. The big change here is that the Fixed Indexed Annuities will be treated the same as Variable Annuities under the new rule and will be subject to the BIC if a commission is paid.
Perhaps acknowledging that benefits and guarantees are important, new preamble language emphasizing that fees are not the only factor in making investment decisions and giving firms more flexibility on how to comply with disclosure provisions should also make it easier for insurance firms to recommend their products.
As was proposed in the previous version of the rule, the firm must direct the customer to a web page disclosing the firm’s compensation arrangements and make customers aware of their right to complete information on the fees charged. However, the final rule revises existing exemptions, including limiting the so-called “insurance exemption” to recommendations of “fixed rate annuity contracts.”
Transaction Disclosures
Under the final exemption, the transaction disclosure has been simplified, and the requirement of one-, five-, and 10-year projections has been eliminated, as has the requirement of an annual disclosure. Instead, the DOL says that clients can also request more detailed disclosures on costs and fees; that way, they can get the information they need at less cost to firms.
In response to concerns that firms would be required to retain detailed data on inflows, outflows, holdings, and returns for retirement investors, the new proposal says that firms have to retain only the records that show they complied with the law (in this case, the BIC exemption), as they would in other situations.
IRA Advice Contracts
As for advice to IRA holders, the final BIC exemption makes clear that the contract can be signed at the same time as other account opening documents. However, any advice given before the contract was signed must be covered by the contract and also meet a best interest standard. The exemption also permits existing clients to agree to the new contractual protections by “negative consent.”
Proprietary Sales
The BIC exemption contains special provisions clarifying how it can be used for recommendation of proprietary products, including a requirement that firms determine that the limitations are not so severe that the advisor will generally be unable to satisfy the exemption’s best interest standard and other requirements. That said, in a Wall Street Journal report, Secretary of Labor Thomas Perez cited as an example a situation in which someone representing Met Life would not have to suggest a competitors products so long as they had a “reasonable basis” for believing that their own products were in their clients’ best interest. What that ‘reasonable’ standard is, and how it would be monitored, is not yet clear.
Grandfathering
The BIC exemption includes a grandfathering provision that allows for additional compensation from previously acquired assets. The grandfather provision includes recommendations to hold, as well as systematic purchase agreements, but requires that additional advice satisfy basic best interest and reasonable compensation requirements.
Stay tuned.
Resources
See also “It’s Official: DOL Unveils Revised Fiduciary Proposal” and “Fiduciary Regulation Incorporates ARA’s Level-to-Level Comp Recommendation.”
The final version of the regulation is available here.
Variable compensation is, as it was in the original proposal, allowed under a BIC exemption. The BIC is subject — as it was in the previous proposal — to a commitment by the firm and the advisor to:
- provide advice in the client’s best interest;
- charge only reasonable compensation;
- avoid misleading statements about fees and conflicts of interest;
- adopt policies and procedures designed to ensure that advisors provide best interest advice; and
- prohibit financial incentives for advisors to act contrary to the client’s best interest.
Insurance Exemption Refined
The final package also revises existing exemptions, including limiting the so-called “insurance exemption” to recommendations of “fixed rate annuity contracts.” The DOL notes that to sell other insurance products like variable and indexed annuities, firms can use the BIC exemption. The big change here is that the Fixed Indexed Annuities will be treated the same as Variable Annuities under the new rule and will be subject to the BIC if a commission is paid.
Perhaps acknowledging that benefits and guarantees are important, new preamble language emphasizing that fees are not the only factor in making investment decisions and giving firms more flexibility on how to comply with disclosure provisions should also make it easier for insurance firms to recommend their products.
As was proposed in the previous version of the rule, the firm must direct the customer to a web page disclosing the firm’s compensation arrangements and make customers aware of their right to complete information on the fees charged. However, the final rule revises existing exemptions, including limiting the so-called “insurance exemption” to recommendations of “fixed rate annuity contracts.”
Transaction Disclosures
Under the final exemption, the transaction disclosure has been simplified, and the requirement of one-, five-, and 10-year projections has been eliminated, as has the requirement of an annual disclosure. Instead, the DOL says that clients can also request more detailed disclosures on costs and fees; that way, they can get the information they need at less cost to firms.
In response to concerns that firms would be required to retain detailed data on inflows, outflows, holdings, and returns for retirement investors, the new proposal says that firms have to retain only the records that show they complied with the law (in this case, the BIC exemption), as they would in other situations.
IRA Advice Contracts
As for advice to IRA holders, the final BIC exemption makes clear that the contract can be signed at the same time as other account opening documents. However, any advice given before the contract was signed must be covered by the contract and also meet a best interest standard. The exemption also permits existing clients to agree to the new contractual protections by “negative consent.”
Proprietary Sales
The BIC exemption contains special provisions clarifying how it can be used for recommendation of proprietary products, including a requirement that firms determine that the limitations are not so severe that the advisor will generally be unable to satisfy the exemption’s best interest standard and other requirements. That said, in a Wall Street Journal report, Secretary of Labor Thomas Perez cited as an example a situation in which someone representing Met Life would not have to suggest a competitors products so long as they had a “reasonable basis” for believing that their own products were in their clients’ best interest. What that ‘reasonable’ standard is, and how it would be monitored, is not yet clear.
Grandfathering
The BIC exemption includes a grandfathering provision that allows for additional compensation from previously acquired assets. The grandfather provision includes recommendations to hold, as well as systematic purchase agreements, but requires that additional advice satisfy basic best interest and reasonable compensation requirements.
Stay tuned.
Resources
See also “It’s Official: DOL Unveils Revised Fiduciary Proposal” and “Fiduciary Regulation Incorporates ARA’s Level-to-Level Comp Recommendation.”
The final version of the regulation is available here.
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