The insurance industry and broker-dealers will need to reconstitute how they do business to help, especially independent insurance brokers, meet the DOL's new Retirement Security rule, said ERISA specialist Fred Reish said.
Effective September 23, with a one-year grace period for full compliance, the 476-page rule extends the fiduciary standard to anyone selling investment advice to plan participants and IRA holders, for the first time including insurance agents and brokers.
As a result, broker-dealers and insurance companies will need to ramp up education and provide compliance support for reps and independent producers or risk liability, said Reish, a securities attorney and partner at Faegre Drinker.
The DOL eased up in some areas that are of particular note to the brokerage and insurance industries. For instance, the DOL added language that specifically allows reps and agents to make sales pitches and conduct investor education without triggering the fiduciary rule, according to Reish.
Unlike the proposed rule, the final version also allows for differential compensation, but Reish warned that rule still only allows professionals and firms to charge reasonable compensation.
The rule extended the brokerage and insurance industry’s prohibited transaction exemptions, which allow reps to accept compensation for conflicted advice providing they give advice that is in the best interest of the participant, with reasonable compensation no misleading statements.
For the first time, however, independent producers will need to satisfy the fiduciary level duty of care and duty of loyalty for rollover recommendations, which will require firm-level education and support, Reish warned.
The agency also modified its definition of fiduciary to allow producers to use their judgement when it comes to recommendations, Reish noted. In fact, the DOL rule says that recommendations can "reflect the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances."
The final DOL definition of what triggers application of the fiduciary standard reads as follows:
“The person either directly or indirectly (e.g., through or together with any affiliate) makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation is based on review of the retirement investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.”
Reish said he believes the DOL was using the “trust and confidence standard” to ward off a repeat of the legal decision that led to the demise of the agency’s Obama-era fiduciary rule in 2018. That’s when the Fifth Circuit Court of appeals ruled that the DOL had exceeded its congressional mandate and vacated that rule.
Ali Khawar, deputy assistant secretary for the DOL’s Employee Benefits Security Administration, echoed those sentiments earlier this week at a press briefing, when he said he believes the new rule is different than the previously-vacated rule because it focuses on what the Fifth Circuit wanted to see with regard to “relationships of trust and confidence.”
Gail Bernstein, general counsel at the Investment Adviser Association, said because advisors are already fiduciaries, the rule will have “more limited impact on them.”
But she noted in her preliminary assessment of the final rule that the DOL had made changes that were responsive to IAA’s requests.
“For example, the final rule confirms that investment education is not fiduciary advice, exempts advice to certain institutional investors, lightens the documentation burden for some rollover recommendations, and reduces certain recordkeeping burdens. We are also pleased that the department recognizes that robo-advisers should be treated the same as other fiduciary investment advisors,” Bernstein said.