FinancialAdvisor IQ (April 7, 2016) -- The Department of Labor’s new fiduciary rule will let FAs advising on retirement investments continue to earn commissions on certain sales as long as they provide full disclosure to investors.

Released yesterday after much anticipation and years of horse-trading with the wealth management industry, the DOL’s final version of its so-called fiduciary rule for retirement advice is markedly different from what was originally proposed last April and delivers a number of concessions to industry opposition.

The DOL’s fiduciary rule attempts to mitigate conflicts of interest in providing investment advice and products to retirement account owners by placing a fiduciary standard on advisors, instead of the arguably lower suitability standard, to which many advisors were previously held.

While it places stricter demands on how financial advisors must deliver retirement products and services, Labor Secretary Tom Perez said that in response to industry feedback the end result was a regulation which was simplified, streamlined and clarified.

The final draft lets advisors continue to collect remuneration from commissions, but it has clarified when commission-based advisors must sign a so-called “best interest contract” — a document that legally obliges the advisor to act in the investor’s best interests.

Potential investors no longer have to sign a best-interest contract if they are only inquiring about a firm. However, a contract must be signed before a prospect opens an account.

Advisors must also make available more detailed disclosures on fees and costs.

During the fiduciary rule comment period, says Bonnie Treichel, an attorney with theRetirement Law Group in Redondo Beach, Calif., best interest contract exemptions were the most contested topic, and she described it to be “unworkable” in the old proposal.
 
In the final version, Treichel says at first glance it appears that there were significant changes to the best interest contract exemptions. For example, there were changes to both the requirements for when a contract must be signed, as well as the number of parties required to sign.

“From a practical standpoint, this makes best interest contract exemptions much more workable,” she says. “Under the final rule, best interest contract exemptions don’t have to be presented the moment the interaction begins, but rather in the case of an IRA rollover.”
For example, best interest contract exemptions can be signed at account opening with other paperwork. “This would be much more natural in the sales and account opening workflow,” she says.

Treichel says because it’s no longer required for a three-party contract – the firm, the advisor and the client – the logistics of best interest contract exemptions are more natural and workable.

Relatedly, another modification to the final rule involves what type of firms can sell proprietary products.

IRA providers can recommend in-house products, including mutual funds and variable annuities, without having to sign contracts with investors.

But recommended products should be able to satisfy the requirements of the rule’s best interest standard.
Treichel says the rolling compliance date will aid advisors as firms seek assistance in laying out new programs, tools and training to comply.The updated rule will take effect in April 2017, but the industry will have an additional eight months after the effective date to comply, pushing the final compliance date to January 1, 2018.

Another major change to what had been expected was a lowering of the threshold for what constitutes a sophisticated investor. In the final version of the rule, the size of a 401(k) or other defined contribution plan that qualifies an investor as a “sophisticated investor” was scaled down to $50 million in plan assets from $100 million.

The final draft rule has also removed transaction disclosures for one-year, five-year and 10-year projections of account fees and returns.

"The DOL received something like 3,000 comment letters on this proposal, with most expressing significant opposition,” William Nelson, a securities attorney in Colorado Springs, Colo., with law firm Lewis Roca Rothgerber told FA-IQ on Wednesday. “The unveiling today should make the regulation more palatable to the industry.”
 
The White House seems to agree.

“Since DOL issued its first proposal in 2010 and its second proposal last April, the Administration has received extensive feedback from industry, advocates, Congress, federal and state regulators, and others,” it says in a bulletin on the new DOL rule at Whitehouse.gov. “The rule being released today reflects this input and is better for it. DOL has streamlined the rule and exemptions to reduce the compliance burden and ensure continued access to advice, while maintaining an enforceable best interest standard that protects consumers.”

The Public Investors Arbitration Bar Association, a group of lawyers who represent investors in arbitration against brokers, agrees the DOL rule is better for the criticism it has received.

“Clearly they paid attention to what all the stakeholders had to say,” says Hugh Berkson, a securities lawyer with McCarthy Lebit Crystal & Liffman in Cleveland and a member of Piaba.

One source of opposition to the DOL rule is the Equity Dealers of America, a lobby group for “middle market” securities firms such as Raymond James, Stifel and Baird.

In calling for Congress to review the Obama administration’s new fiduciary rule, EDA head Chris Iacovella says the DOL has failed to show a need for the innovation.

“Instead, it has put forth a rule that reduces access to financial advice for millions of low-income Americans and retirees, damaging their ability to save for and live in comfortable retirement,” he says in a press statement released Wednesday.

Iacovella adds the EDA will “evaluate all of our options, including legal action” to blunt the DOL’s new fiduciary rule.