Sometimes in a career you might sit back and think—wow—I get paid to do this! That is exactly how I felt sitting in the Cesar Chavez Auditorium at the Department of Labor (DOL) on a recent hot and muggy August day in Washington, D.C. Okay, I am not only joking but in the back of mind I was really thinking I would rather be sailing. That said, my reason for being at the DOL, to attend the public hearings on the conflict of interest proposed rule, turned out to be both interesting and informative.
As background, in April 2015 the DOL issued a re-proposed rule that gave a new definition of advice and who is a fiduciary for Employment Retirement Income Security Act of 1974 (ERISA) plans and Individual Retirement Accounts (IRAs). The DOL proposed a similar rule back in 2010 but the uproar from financial industry caused the rule to be pulled back and rethought. These hearings provided the opportunity for interested parties to give their feedback on the rule and to answer questions from the DOL.
The hearings clearly illustrated the sharp divide between the financial industry and the DOL over the proposed rule, with major disconnects over the scope, impact, and cost of the proposal. The DOL referred to the proposal as “light touch” regulation, while representatives from the industry stated that it would effectively outlaw the brokerage model for IRA accounts and cost millions to implement.
The industry argument was advanced by several major industry groups as well as by executives from several financial institutions, who advocated for a coordinated regulatory approach that aligned the DOL, the Securities and Exchange Commission, and the Financial Industry Regulatory Authority (FINRA) on a “best Interest” standard rather than the ERISA fiduciary standard that applies only to institutional retirement and IRA accounts.
Conversely, several consumer protection organizations and academics testified in favor of the regulations. Additionally, DOL panelists were openly skeptical of many of the industry’s arguments and stated that they believe the industry to be overplaying the impact of the rule in order to defeat it.
Based on the hearings and other research, here is where the rule now stands:
The industry consensus is that a final ruling is likely. This was reinforced when DOL Secretary Thomas Perez publically stated last week that the DOL is moving toward a final rule rather than a re-proposal and new comment period. The rule is expected by the first quarter 2016
Industry representatives frequently commented on the timeline and asked for significantly more time than the eight months proposed by the DOL. The feeling is that the DOL may give some relief on this issue, but is unlikely to give the full relief commenters requested
The DOL asked repeatedly about adopting FINRA’s definition of a “recommendation” and many attendees believe that this will happen. This will help clarify what is considered marketing, education, and guidance versus fiduciary advice
Changes are expected to the Best Interest Contract Exemption (BIC), such as when a contract needs to be in place and on the format and timing of disclosures, which should make compliance easier. Industry representatives testified that as it stands, the BIC is virtually unworkable. Whether the changes will make the BIC palatable to the industry remains to be seen
Insurance companies gave ample testimony regarding the impact on annuities and the challenges the rule posed for these firms. The DOL did not give a clear indication of how it would respond
Several other issues that generated comment included the role of call centers, valuation, and the impact on requests for proposals (RFPs). Clarification in several of these areas is likely
My overall take is that the advice regulation will have a very significant impact if it is finalized as expected. That impact is likely to extend far beyond regulatory compliance issues and delve into the overall customer experience, drive some deep technology discussions, and perhaps even cause firms to consider exiting certain lines of business.