Insurers will be given greater latitude than initially forecast in selling proprietary products, such as annuities, into investment accounts under the final fiduciary standard, or Best Interest Contract (BIC) regulation published by the Department of Labor today.
However, an expert on retirement income legal issues is reacting with great caution to the revised rule.
C. Fred Reish, a partner in Drinker Biddle's Employee Benefits & Executive Compensation Practice Group, says that while the DOL has made "significant changes" to the proposed rule, its structure is still the same.
Reish, based in Los Angeles, is chair of its Financial Services ERISA Team and chair of the Retirement Income Team. He explains that the foundation of the rule is a very broad definition of fiduciary advice.
"A consequence of that definition is that virtually all common investment and insurance sales to plans, participants and IRAs will be fiduciary acts," Reish said. As a result, the advisors will need to investigate the facts that are "relevant" to the circumstances of the retirement investor and make a prudent recommendation in the best interest of the investor.
In addition, Reish says, if the advisor is paid by commissions or can affect his compensation through his recommendations, the advisor must satisfy the conditions of a prohibited transaction exemption, probably the Best Interest Contract Exemption, or BICE.
"While the conditions have been liberalized, they will require more effort and expense," Reish concludes.
Keefe, Bruyette & Woods analysts pointed out in their initial thoughts on the rule the number of positive concessions and clarifications that were made.
The "one notable negative," KBW analysts said, is that indexed annuities were removed from the PTE 84-24 insurance exemption and moved into the BIC alongside variable annuities.
"We expect indexed annuity sales to be negatively impacted as result," noting that "this is also a modest negative for retail advisors that sell the product."
As for the positives, KBW analysts said this includes the BIC exemption, the 401(k) carveout, the proprietary products provisions and grandfathered compensation rules.
The revised rule
The final rule, however, was modified to provide greater than expected flexibility on implementation, at least in the view of DOL officials. In particular, a special exemption for the sale of fixed annuities "will allow for sale of these products in a more expedited fashion," explained Thomas E. Perez, DOL secretary, in an advanced briefing for reporters.
Moreover, to facilitate the sale of variable annuities, and so-called "lifetime annuities," the final rule adds new preamble language emphasizing that fees are not the only factor in making investment decisions. It also gives firms more flexibility on how to comply with disclosure provisions. These, Perez said, "should also make it easier for insurance firms to recommend their products."
In a move to assuage insurance industry opposition, the final rule says that insurers and agents will be allowed to simply disclose to existing clients that they must comply with the new standard. The DOL says this is acting in the best interest of the client by what it called "negative consent." Clients can accept simply by not responding to the email acknowledging the new standard.
For new customers, a statement that the agent is acting in the best interest of the client will now have to be disclosed only as part of the documentation associated with the sale of the product, not when the agent first talks to the potential client.
Agent compensation
Industry concerns that the proposal would not allow common payment of commissions is also addressed in the new rule, which says the exemptions provided 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 BICE, firms (and their individual advisors) 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 advisor to providing advice in the client's best interest, charge only reasonable compensation, and avoid misleading statements about fees and conflicts of interest," the DOL said.
Firms must also adopt policies and procedures designed to ensure that advisors provide best interest advice. They must prohibit financial incentives for advisors to act contrary to the client's best interest, as well as disclose conflicts of interest. They can do this by directing the customer to a webpage disclosing the firm's compensation arrangements, and making customers aware of their right to complete information on the fees charged.
