Now comes the scrutiny for the DOL Fiduciary final rule

The Rule is out. Now comes the dissection.

After the Department of Labor’s (DOL) final fiduciary rule published Wednesday, those impacted or potentially impacted are finally able to begin figuring out how to adapt to and deal with the new rule.

The DOL first proposed a new rule in 2010 but withdrew it in 2011 after widespread criticism from both the insurance and financial services industries and many members of Congress as well. A modified version was released in April 2015, leading to more criticism and another comment period before the further revised rule was released yesterday – in time to allow the final rule to begin to go into effect (in phases) by about the time rule proponent President Obama leaves office.

A White House Fact Sheet regarding the final rule said based on the extensive input (more than 3,000 comments in a 5-month comment period, four days of public hearings and more than 100 meetings), the DOL “streamlined and simplified the rule to minimize the compliance burden and ensure ongoing access to advice, while maintaining an enforceable best interest standard that protects savers.”

National Association of Insurance and Financial Advisors (NAIFA) President Jules Gaudreau said the organization appreciates that the DOL has accepted many of NAIFA’s suggestions and reworked some portions of the rule to address concerns raised during the review process.

“We remain cautious, and it remains to be seen how the practical application of the rule will affect middle-market consumers who need retirement planning advice and services,” Gaudreau said. “But we are pleased to see, for example, that DOL has incorporated our suggestions on the effective date of the rule, grandfathering of existing clients, and timing of when signatures are required on best interest contracts.”

NAIFA is now in the process of completing an in-depth analysis of the rule and says it will continue to provide training and education to help members deal with the rule’s new requirements and restrictions.

At the LIMRA Life Insurance Conference this week in Las Vegas, one of the breakout sessions – scheduled well before it became known that the final rule would be released to the public on April 6 – centered on what insurance companies are or at least should have been doing to prepare for the rule.

“We will all be waiting with baited breath,” speaker Mark Smith of Sutherland told the crowded room of insurance professionals, adding that he probably wouldn’t sleep much that night in anticipation of the release on Wednesday, knowing he would be closely reading every word of it to begin to interpret its true reach.

Truth is, a lot of companies probably didn’t do too much before the revised rule was released, even though Smith noted that a lot of progress had been made in the form of cooperation between product developers and distribution in just the past two months. Companies could only do so much in advance of the rule without knowing exactly what was in it.

Speaker Jill Peckingham of EY said some companies have made moves to divest themselves of some blocks of business they expected to be impacted by the rule, and Smith said he was cautiously optimistic that the rule would provide for traditional grandfathering relating to existing arrangements currently on the books.

Now that the rule is out and actively being scrutinized, companies are beginning to seek out opportunities and how they might capitalize. One such opportunity might be targeting smaller accounts that other firms may be dropping as a result of increased compliance requirements while others are starting to work with technology vendors to create solutions to meet new requirements. Understandably, vendors by and large didn’t put many resources into creating a DOL final rule client solution without knowing the exact language of the rule.

Smith also told Insurance Forums that while he expects the final rule may indeed spur legal challenges from the industry, he noted it wouldn’t be prudent for companies to sit back and rely on a challenge – which could be tied up in litigation for two or three years – to prevent them from preparing to become compliant by the time the rule takes effect in early 2017.

Key provisions

Here are some key provisions of the final rule, according to the White House fact sheet:

• The rule defines fiduciary investment advice, while the accompanying exemptions allow advisers and their firms to continue to receive most common forms of compensation if they put their clients’ best interest first. The rulemaking package also includes a regulatory impact analysis outlining the monetary harm caused to retirement investors from conflicted advice and the expected economic impacts of the rule.

• The rule clarifies what does and does not constitute fiduciary advice. The rule includes examples of communication that would not rise to the level of a recommendation and thus would not be considered advice. It specifies that education is not included in the definition of retirement investment advice so advisers and plan sponsors can continue to provide general education on retirement saving without triggering fiduciary duties.

• The exemptions will allow firms to accept common types of compensation – like commissions and revenue sharing payments – if they commit to putting their client’s best interest first. Under the best interest contract (BIC) exemption, firms (and their individual advisers) can continue to receive most common forms of compensation for advice to retail customers and small plan sponsors to invest in any asset so long as the firms:

–       Commit the firm and adviser to providing advice in the client’s best interest, charge only reasonable compensation, and avoid misleading statements about fees and conflicts of interest.

–       Adopt policies and proceduresdesigned to ensure that advisers provide best interest advice, and prohibiting financial incentives for advisers to act contrary to the client’s best interest.

–       Disclose conflicts of interest. The firm must direct the customer to a webpage disclosing the firm’s compensation arrangements and make customers aware of their right to complete information on the fees charged.

• The final package also revises existing exemptions, including limiting the so-called “insurance exemption” to recommendations of “fixed rate annuity contracts.” To sell other insurance products like variable and indexed annuities, firms can use the BIC exemption. 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.

• To give firms more time to adapt to changes, the rule will be implemented in phases. In April 2017, the broader definition of fiduciary will take effect, but to take advantage of the BIC exemption, firms will only be required to comply with more limited conditions, including acknowledging their fiduciary status, adhering to the best interest standard, and making basic disclosures of conflicts of interest. Full compliance is required on Jan. 1, 2018.

Industry reaction

Here are some links to statements released by industry associations:

• NAFA: National Association for Fixed Annuities responds to DOL Fiduciary Rule

• ACLI: Access to retirement solutions to be focus of ACLI review of new labor department regulation

• NAIFA: Statement From NAIFA President Jules Gaudreau on the DOL Fiduciary Rule

• Insured Retirement Institute: IRI Carefully Examining Rule to Determine if Concerns Were Addressed

• LIMRA: LIMRA LOMA Secure Retirement Institute Creates Resources to Help Members Respond to New DOL Fiduciary Rule

• The Wall Street Journal: Reactions to the Labor Department’s Fiduciary Rule