Following yesterday's release of the final version of the Labor Department's new trust rule, critics and advocates are poring over the 466-page text for changes from last fall's proposed rule.
A securities attorney tried to reassure those advisers who work with retail investors that little would change for them, since they have long fallen below the standards of the previous rules.
Some found a departure from the proposal clarifying that robo-advice should be treated like any other financial advice, while one longtime critic argued that the DOL was waging an “ideological crusade” and that he would advise his board to take the department to court. . .
DOL Final Rule will take effect on September 24. Acting Labor Secretary Julie Su said the regulations will protect retirement savers from “inappropriate investment recommendations and harmful conflicts of interest.”
President Joe Biden unveiled the proposed rule last October as part of his administration's larger fight against so-called “junk payments” in multiple industries. The DOL held a 60-day comment period, along with a two-day public hearing held remotely in December.
The rule follows previous administrations' attempts at their own fiduciary rules, including a Trump administration version that was dead on arrival for the Biden White House and an Obama-era version that was vacated in 2018 by the Court of Appeals. of the Fifth District.
Small change for RIA
Under current law, advice providers are judged against a five-part test to determine whether they are investment adviser fiduciaries under ERISA's mandates.
However, most investment advisers who provide advice to retail clients on an ongoing basis for compensation have historically met that test, according to Max Schatzow, a co-founder of RIA Lawyers. The new rule likely won't affect these advisors
“They were probably already believers in investment advice,” he said. “The kind of people to whom the old rule did not apply were many broker/dealers and insurance agents who basically took the position that their advice did not meet the five-part test for one reason or another.”
The Department of Labor's jurisdiction extends only to retirement income insurance with no specific federal rules regarding insurance agents or even brokers/dealers and their standard of conduct beyond the Best Interest Regulation. Therefore, if something falls outside the scope of Reg BI, it may have fallen outside the scope of federal regulation before, Schatzow said.
Trade groups threaten legal action
However, said Marc Cadin, CEO of professional financial services trade group Finseca WealthManagement.com the rule stemmed from a “deeply flawed” process; while the DOL had made some “cosmetic changes” from the proposal, the root issues remained.
“This is an ideological crusade by the DOL; they're not interested in doing it right,” he said. “They believe they know what's right and they're going to impose it on the industry and ultimately the American people.”
Finseca, along with the Financial Services Institute, the US Chamber of Commerce and others, have criticized the DOL rule (and the rulemaking process) since the proposal was released. Cadin testified before a hearing of the US House Capital Markets Subcommittee in January and met with the DOL and the White House Office of Management and Budget on multiple occasions in the run-up to the proposal and final rule.
He also testified during the DOL's two-day public hearing in December. Cadin said he received no questions or comments at these meetings or hearings, which he felt signaled the DOL's lack of interest in hearing from those he represented.
“We have real-world expertise based on the work that financial security professionals do every day,” he said. “Don't you have a single question? This is outrageous.”
Cadin believes the new rule came in a different regulatory world than the Obama administration in 2016. In the meantime, the SEC adopted the Best Interest Rule and the National Association of Insurance Commissioners created a model rule for pension protection. approved in more than 40 countries.
What changed from last fall's proposal?
Supporters, including the CFP Board, AARP and the Consumer Federation of America (CFA), celebrated the final rule, arguing that it would “close legal loopholes that allowed some advisers to recommend investments with excessive fees and unnecessary risks,” such as AARP EVP and Chief Advocacy and Engagement Nancy LeaMond said.
CFA Director of Investor Protection Micah Hauptman noted differences between the proposal and the final rule that could make it more palatable to its critics, including changes that address concerns about “overbreadth.”
These changes included clarification that fiduciary status is an objective standard and that such status would occur when the client and provider “reasonably understand” that the investor would rely on the recommendation for investment decisions.
In the proposal, the DOL intended to use how advisers market and name themselves to decide whether to assign fiduciary status, but the final rule clarified that titles, credentials, and marketing slogans would be “an important consideration, but will not be generally determinative” to the DOL.
According to Hauptman, the final rule also includes a paragraph confirming that sales campaigns and investment education can occur without attaching ERISA fiduciary status.
Advisers use Prohibited Transaction Exemption (PTE) 2020-02 to benefit from compensation if they put clients' best interests first. According to Hauptman, the proposal excluded robo-advice generated through an interactive website from this possibility, but the final rule removed that exception.
The proposal also required disclosure on websites as a condition for the exemption, but the final rule removed that, with the disclosure requirements now “more consistent” with Reg BI, he said.
Hauptman's reading largely echoed that of the Investment Advisers Association (IAA), which supported the rule and was pleased by several changes, including how the DOL eased the “documentation burden for certain change recommendations” and that advisors robos would be treated like other financial advice. according to IAA General Counsel Gail Bernstein.
But Hauptman acknowledged that the lawsuit was probably the next front in the fight.
“We expect that industry opponents who are unwilling or unable to compete for customers based on the cost and quality of their services will try to defeat these landmark rules in both Congress and the courts, as they did last time The DOL tried to strengthen protections for retirement savers,” he said. “This time, however, the efforts of industry opponents will not be successful.”
What is expected next?
Financial Services Institute (FSI) CEO Dale Brown said in January that the group would likely sue the DOL to loosen the rule unless it withdraws or “substantially” improves the rule (FSI would not comment on future moves as of yesterday. with a spokesperson who said they were continuing to analyze the final rule).
Cadin said Finseca is in a coalition with like-minded groups, including the American Council of Life Insurers (ACLI), the Insured Retirement Institute (IRI) and the North American Association of Insurance and Financial Advisors (NAIFA). The coalition will not take any legal steps until each group's board weighs its options and votes.
“I can't talk about what other organizations will do, because everyone will go through their own process. What I can tell you is what I will recommend to the board as CEO of Finseca based on our analysis,” Cadin said. “And that is that we have to face trial.”