Other parts of this series:
In just seven months, financial services institutions (FSIs) and other investment advisors must comply with the U.S. Dept. of Labor’s new fiduciary duty rule. Despite some late changes designed to make the rule less onerous, it still greatly expands FSIs’ fiduciary duties to participants in retirement plans governed by the Employee Retirement Security Act of 1974 (ERISA) and to clients with individual retirement accounts.
FSIs do not have a lot of time left to respond and come into compliance with this new, transformational rule.
Even before the rule effectively goes into force on April 10, 2017, it will have both significantly changed how FSIs operate in the investment advice space and increased their cost of operations. It also is expected to squeeze revenues. For example, since the new rule unexpectedly was also applied to fixed-index as well as variable annuities, insurer rating agency Fitch Ratings has stated that it anticipates several challenges for insurers. Fitch expects the rule “to drive changes in product offerings over time, to lead to changes in distribution strategies and compensation structures and to increase litigation risks and operational costs for companies.”
Unable to persuade the DOL to modify its rule to retirement investment advisors’ satisfaction, five parties, including the National Assn. for Fixed Annuities and the U.S. Chamber of Commerce, have filed court challenges. Those cases have been consolidated into three in federal courts in the District of Columbia, Texas and Kansas, and preliminary hearings or oral arguments in all three were scheduled between late August and mid-November. The courts are being asked to consider several arguments against the rule. Among them are:
- It creates a private right of action, which only Congress can authorize.
- The DOL exceeded its statutory authority.
- The DOL’s decision to include fixed indexed annuities under the Best Interest Contract Exemption (BICE), rather than under the “less onerous” Prohibited Transaction Exemption (PTE) 84-24, as originally proposed, without offering insurers any opportunity for meaningful debate “was arbitrary and capricious.” Under the rule, sellers and advisors are eligible for BICE if clients are informed about all the compensation and fees sellers and advisors receive related to their advice, and the sellers and advisors declare they will act only in their clients’ best interests. Under PTE 84-24, agents have been exempted from compensation restrictions.
Paraphrasing legendary baseball philosopher Yogi Berra, making predictions—especially about future court decisions—is tough. Predicting whether any or all three of the cases will be decided by next April and whether all three courts will rule uniformly for investment advisors or the DOL would be pure folly.
Then there is the matter of potential appeals, how long that process would take and what impact, if any, all of that that litigation might have on the rule’s effective date. A court-ordered stay of the rule’s effective date would be helpful, but counting on one would be an incredibly risk gamble.
In addition, a transition period that the DOL has provided investment advisors and annuity sellers seems to offer little actual help. That period, which extends from the rule’s effective date to Jan. 1, 2018, ostensibly gives the industry time to comply with many client contract, disclosure and other BICE mandates. However, the DOL did not provide a similar transition period for implementing the exemption’s Impartial Conduct Standards, which will require those opting for this exemption to change some business practices and how they compensate representatives who directly advise and sell to clients.
Next time: Taking different paths to compliance.