Industry interests are anxious to see what products the Department of Labor will restrict from IRAs in its final fiduciary rule.

A broad swath of products sold by commissioned brokers didn’t make the DOL’s so-called “approved list” in the latest version of the proposed rule.

Banned products include direct-participation programs, private securities (including hedge funds), options, over-the-counter stocks, futures, foreign securities and currencies and structured products.

Bank of America Merrill Lynch says brokered CDs, preferred stocks and new issues of equity and debt also won’t be allowed because a proposed DOL exemption for principle trading doesn’t include these assets. 

Variable annuities made the list, but sales could be impacted if compensation to the advisor and firm were judged to be unreasonably high.

The product restrictions are incorporated into a proposed exemption for commissioned brokers, known as the Best Interests Contract Exemption (BICE).

The BICE applies to investments recommended by brokers who would be fiduciaries under the plan whenever they recommend products to IRA owners. Such investments would otherwise be prohibited transactions under the proposal.

Fee-based advisors whose compensation doesn’t vary by the products they recommend would generally not be impacted by the proposal and could continue to recommend a wider variety of investments. 

The DOL’s approved list would restrict IRA investments to liquid and transparent products, including U.S.-listed stocks, many bonds, mutual funds, ETFs, variable annuities, bank accounts and CDs.

“Limiting the exemption in this manner ensures that the investments needed to build a basic diversified portfolio are available,” the DOL’s proposal said, “while limiting the exemption to those investments that are relatively transparent and liquid.” 

The industry has blasted that reasoning, however.

“For the first time, the Department [of Labor] is proposing to create a ‘legal list’ that substitutes its judgment for that of the plan fiduciary, IRA owner or plan participant,” said the Securities Industry and Financial Markets Association in a comment letter. 

“We question whether the Department has the legal authority to specify what retirement accounts can invest in,” Sifma added, and “given the impartial conduct standard required by the [BICE], there should be no limit on the types of assets covered.”

The approved assets are heavily regulated and relatively secure, said Frederick Reish, a partner at Drinker Biddle & Reath LLP in Los Angeles, who heads the firm’s ERISA team.

“It appears that the Department of Labor is concerned that the average retiree may not be able to independently evaluate those excluded investments,” Reish said in an e-mail. 

The DOL is expected to amend its plan in response to feedback. The department is taking a final round of comments until September 24.

Observers expect the final rule to be unveiled in the first half of next year. The DOL has proposed an effective date eight months after the rule is published in the Federal Register.

Until then, industry interests are praying for changes to the BICE.

The Investment Program Association, which represents direct-participation programs, wants the DOL to drop the idea of an approved list altogether, or add DPPs to the list.

Likewise, the Managed Funds Association, which represents hedge funds, wants the BICE to include privately offered funds. Many hedge funds sell to small retirement plans (which would be covered under the rule) and to individuals through commissioned placement agents.

Leaving options off the approved list was a “glaring exclusion,” TD Ameritrade told the DOL. The firm believes the guidance it gives do-it-yourself investors could cause its branch and service personnel to become fiduciaries under the rule. (The DOL says that providing information and materials that constitute investment or retirement education will not trigger fiduciary status.)

This month, TD Ameritrade urged its retail clients to write to the DOL and complain about the government determining “that I am not smart enough to make my own informed investment decisions.”

Variable annuities, although on the approved list, could be problematic under a “reasonable compensation” standard that advisors would be held to.

“Reasonable compensation is defined in the BICE as relative to the value of specific services provided, [but only] services provided by the financial advisor, not the fees for the [product’s] guarantees,” said Lee Covington, general counsel at the Insured Retirement Institute (IRI), which represents variable annuity sponsors.

Proprietary annuities will look especially bad because the fees earned by the captive insurer will be included in the total compensation amount.

“We’ve heard the DOL may be willing to change the BICE” to conform more to an existing exemption that takes into account the fees for annuity guarantees, Covington said in an interview.

That existing exemption, with some proposed modifications, will apply to fixed annuities under the DOL plan and allow insurance agents to sell the products to IRA owners.

Reish expects the DOL will make a “significant number of changes to the fiduciary package, and particularly to the BICE” that will make the proposal more workable.

But as far as dropping the approved list completely, forget about it, said Grace Vogel, a managing director at PwC’s financial services advisory practice and a former top regulatory official at Finra.

Vogel expects the DOL to keep the list “pretty close to where it is today.”

It’s a "very broad and extensive [list],” argued Micah Hauptman, financial services counsel at the Consumer Federation of America, which supports the DOL’s rule making. 

The approved-product list “could use a little tweaking,” Hauptman allowed, “but that doesn’t mean we should throw out the baby with the bath water.”