DOL Notice. The advisor would also need to notify
the DOL of its intent to utilize the Best Interest Contract
Exemption. It is contemplated that such notice would be
sent electronically or by mail.
Principal
Transactions
Exemption..
The DOL proposal also includes a new “Principal
Transactions Exemption” that would give a financial
institution the ability to recommend certain fixed income
securities and sell them from the firm’s own inventory.
Potential
Low-Fee
Exemption.
In connection with its proposal, the DOL is asking for
comments on whether it should establish a “Low-Fee
Exemption” with fewer requirements than the Best
Interest Contract Exemption, permitting advisors to earn
variable compensation when recommending the lowestfee product in a given product class.
Anticipated
Impact on
Retirement
Industry.
The DOL proposal would effectively create a uniform
fiduciary standard for all retirement advisors, including
brokers and insurance agents. It would impose on
substantially all retirement advisors the same type of
disclosure and compliance policy requirements that are
already imposed on registered investment advisers under
securities law.
Impact on Brokers and Insurance Agents. Under the
existing 408(b)(2) fee disclosure rules, there is no obligation
requiring advisors to disclose their conflicts of interest.
Thus, the DOL proposal would require conflicts-related
disclosures from many advisors who are not currently
subject to this requirement, and it would also put pressure
on broker-dealers and insurance firms to more closely
monitor and limit the levels of variable compensation
earned by their registered representatives and agents.
If adopted, the DOL proposal may significantly increase
compliance costs for these firms and their retirement
businesses.
14 | Summer 2015
Controversy of Compliance Policy Requirement.
The Best Interest Contract Exemption is designed to
be “principles-based” (i.e., based on general principles
rather than “rules-based” with detailed requirements),
giving firms the flexibility to adopt their own customized
compliance policies and adapt them over time. However,
short of legalizing the firm’s payout to its individual
advisors, it may be difficult for firms to determine if they
have adequately mitigated the conflicts arising from the
payment of differential compensation to their individual
advisors (which varies with the particular investment
product sold to retirement clients). We can expect heavy
comments to be submitted to the DOL with regard to this
aspect of the exemption.
Impact on Advisor’s Service Models. If the DOL
proposal is adopted, some individual advisors may decide
to become RIAs (or investment adviser representative
of RIAs), on the grounds that they would be subject to
the same fiduciary standard anyway. Those who switch
to a RIA service model would, of course, have to forfeit
their right to receive any commissions. In light of the
newly proposed requirements, other commission-based
advisors may elect to give up on advising plan clients and
going after rollover assets altogether.
What’s
Next?
The public may now submit comments on the DOL
proposal during the current 90-day notice and comment
period that will end on July 6. After the close of this
period, a public hearing will be scheduled and the public
record will be reopened for comments. The DOL intends
to finalize its rulemaking at the conclusion of this process.
Web Link. The DOL’s full fiduciary proposal is available
online at:
http://www.dol.gov/ebsa/regs/conflictsofinterest.html