Final DOL Fiduciary Rule Sent to OMBFebruary 10, 2016
On Jan. 28, the U.S. Department of Labor (DOL) sent the final version of its Fiduciary Rule to the White House Office of Management and Budget (OMB) for review. The OMB review could take up to 90 days, but it is expected to be expedited and finished within four-to-six weeks. Once OMB has approved the rule, it would be sent back to DOL, which would then publicly release the final rule in the spring—some time between mid-March and mid-April.
Introduced as a proposal rule last April, the measure would require financial advisers to act in the best interests of their clients in 401(k) and individual retirement accounts. It also mandates many fee disclosures.
The proposed regulation includes new prohibited transaction exemptions (PTEs) and modifications to other PTEs. DOL rules do not allow investment advice fiduciaries to have conflicts of interest, including receipt of third party compensation that differs depending upon the recommended investment. However, current rules do allow broker-dealers and their registered representatives to receive third party compensation (such as commissions and revenue sharing) if the conflict is disclosed and if the broker-dealer satisfies a five-prong test.
Under the proposed regulation and the new “Best Interest Contract” Exemption (the BIC exemption) advisors covered under the PTE would be able to receive commissions, revenue sharing, 12(b)1 fees and some other forms of “conflicted compensation” only under very stringent conditions. The BIC exemption requires a contract between the advisor, the financial institution and the client in which the financial institution and the advisor commit to a best interests standard requiring that the advisor act with the care, skill, prudence and diligence that a prudent person would exercise.
Meanwhile, on Feb. 2, the House Education and the Workforce Committee approved legislation that would require DOL to receive congressional approval before implementing a final Fiduciary Rule.
The committee voted 22-14 in favor of a bill entitled the Affordable Retirement Advice Protection Act (ARAP Act / H.R. 4293) introduced by Rep. Phil Roe (R-Tenn.) amending the Employee Retirement Income Security Act and for another bill, the Strengthening Access to Valuable Education and Retirement Support Act (SAVERS Act / H.R. 4294) from Rep. Peter Roskam (R-Ill.) that amends the Internal Revenue Code. Both bills outline an alternative Fiduciary Rule to the Labor Department’s, which opponents—including NSBA—argue would limit access to retirement advice and hurt small businesses.
Essentially, both bills would require Congress to approve the DOL rule before it goes into effect. If Congress does not approve the rule, it would be replaced by a fiduciary standard drawn up in the legislation, which requires advisers to act in the best interests of their clients in retirement accounts and disclose conflicts, compensation and fees.
Senate Republicans—Mark Kirk (R-Ill.), Johnny Isakson (R-Ga.), Roy Blunt (R-Mo.), Kelly Ayote (R-N.H.) and Tom Cotton (R-Ark.)—introduced companion legislation to Rep. Roskam’s bill that would that would require the DOL receive congressional approval before implementing a final Fiduciary Rule. The bills face an uncertain future in the Senate, and the administration considers this a legacy issue and would most likely veto any legislation related to its Fiduciary Rule.
This rule would significantly increase liability risk and regulatory costs for brokers. NSBA has said that it would make giving and receiving advice much more expensive, potentially ending access to advice for people with modest accounts. The costs to firms and advisors of implementing such a complex rule will result in higher costs and reduced access to advice, service and products for retirement savers. This will likely result in fewer plans, fewer participants and lower overall retirement savings.