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The Summer of Fiduciary

The summer of 2015 will long be remembered as the “Summer of Fiduciary.” The hot humid air has returned to Washington, D.C., and along with it, a growing heated policy debate around fiduciary standards for qualified plans and IRAs.

Since April, the retirement financial services sector has been engulfed by a fiduciary tsunami via a proposed rule by the Department of Labor (DOL). Many observers believe that this proposal is a solution in search of a problem, but the President and the DOL contend that consumers are being misled by advisors, resulting in billions of dollars of wealth stripped every year. While well-intended, if finalized in current form, the proposal would have the effect of paralyzing many retirement professionals, leaving assistance mostly for the wealthy.

The massive proposal consists of a base proposed rule that would amend the fiduciary definitions in Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code regarding the “investment advice” triggers, and it includes new and updated Prohibited Transaction Exemptions (PTEs), which allow for certain compensation and business models, subject to onerous and, in some cases, unworkable conditions. Essentially, as drafted, all retirement professionals, including insurance agents, will be considered fiduciaries. Additionally, the DOL limits a seller’s exception to large plans (100+ employees), and it restricts education materials such that the mere mention of any specific investment products or specific plan or IRA alternatives or the value of any property or securities would be deemed “investment advice,” thus triggering fiduciary obligations.

Fundamental to the proposal is adherence to a new “best interest standard,” which requires an advisor to “act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercise based on the investment objectives, risk tolerance, financial circumstances and needs of the retirement investor, without regard to the financial or other interests of the [fiduciary]… any affiliate, related entity, or other party.” Furthermore, the advisor must provide a “range of products,” which impacts proprietary sales and advisors who are only registered to sell certain products, and the advisor must disclose conflicts of interests, make no misleading statements, and all compensation must be “reasonable.” Thus, while DOL’s intent to craft a “best interest standard” is laudable, substantive changes are needed to prevent significant adverse consequences for middle-class consumers.

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A copy of NAFA’s robust comment letter to the DOL can be found at AnnuityOutlookmagazine.com.

After extensive analysis of the DOL proposals by NAFA’s Fiduciary Working Group, a robust comment letter was submitted on July 21. Among other items, NAFA urged that the investment advice trigger “should require a mutual understanding that the advice is individualized to the consumer and will serve as a primary basis for the investment decision.” Also, NAFA requested that the DOL consider a practical seller’s exception for needs-based insurance sales transactions that are covered by rigorous state suitability requirements and that a functional definition of educational materials is included.

Lastly, NAFA focused on proposed changes to PTE 84-24, which permits fiduciary advisors providing annuities to receive commissions subject to numerous conditions. In particular, definitions of “best interest” and “reasonable compensation” were a core focus.

In conjunction with the comment letter, NAFA conducted a high-level meeting with DOL officials prior to the comment period closing. This meeting was productive for educating the DOL about fixed annuities and for explaining key changes to prevent negative unintended consequences. Next, the DOL will hold public hearings the week of August 10, followed by a second public comment period that will close by the middle of September. NAFA, along with many stakeholders, will likely use this second comment period to address any remaining concerns in final comment letters.

Lastly, while there have been bipartisan calls from a number of House and Senate members for the DOL to re-propose the rule, most D.C. insiders believe a final rule will be published by February 2016. Accordingly, we anticipate more action in Congress. Indeed, there have been several recent hearings, and the drum beat for legislation is picking up. Currently, there is pending appropriations language in the House and Senate to defund implementation of a final rule, and Rep. Wagner (R-MO) has introduced a bill that would prevent the DOL from implementing a fiduciary rule until 60 days after the SEC issues a final fiduciary rule.

More hearings are anticipated this fall. At this point, NAFA has taken no position on legislation as NAFA is focused on working with the DOL to ensure that the final rule protects access to the annuity marketplace.

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