While the devil is in the details, the Labor Department’s final fiduciary rule includes some improvements in the best interest contract (BIC) exemption.
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.
A White House fact sheet released ahead of the final regulation notes that advisors recommending any asset — not just those on an asset list included in the proposal — can take advantage of the BIC exemption, including proprietary products (and things like listed options and non-traded REITs). The Labor Department says it has taken a number of steps to streamline the BIC exemption to lower compliance costs for firms implementing it and to ensure that firms can continue offering commission-based advice to clients for whom it is the best option.
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.”
Under the final exemption, the transaction disclosure has been simplified, and the requirement of 1-, 5-, and 10-year projections has been eliminated, as has the requirement of an annual disclosure. Instead, the Labor Department 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.
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.
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.”
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.
Under the new regulation, firms can use the BIC exemption to sell other insurance products like variable and indexed annuities. Additionally, the new regulation contains new preamble language emphasizing that fees are not the only factor in making investment decisions, while giving firms more flexibility on how to comply with disclosure provisions. The DOL says this should make it easier for insurance firms to recommend their products.
- Labor Secretary Thomas Perez will announce the final rule at 11:30 a.m. EDT April 6, at an event that will be live-streamed here.
- See also, “It’s Official: DOL Unveils Final Fiduciary Rule” and “Level Best: Fiduciary Regulation Incorporates NAPA’s Level-to-Level Comp Recommendation.” Look for our continuing analysis and coverage of the final rule on NAPA Net, and visit our fiduciary rule resource center.
- Final Regulation
- A chart listing the changes made to the 2015 fiduciary proposal is online here.
- A consumer-focused list of FAQs is available here.
- The Labor Department’s fact sheet on the regulation is here.