The Department of Labor fiduciary rule might be history, but many financial professionals will continue to feel the effects of its rules for some time to come.
They will feel that impact in two ways: from the changing norms fueled by the three-year interaction with the DOL rule; and from lingering department guidance that lives on.
Let’s tackle the lingering guidance first. Field Assistance Bulletin 2018-02 was issued May 7 to clear up confusion among agents and advisors. At that point, the DOL rule remained in effect with no clear resolution.
The FAB policy states that prohibited transaction claims will not be brought against advisors who “are working diligently and in good faith” to satisfy the impartial conduct standards set forth in the DOL rule exemptions.
This guidance remains in effect until new guidance is issued countermanding it, said Drinker Biddle & Reath, a law firm specializing in regulatory and fiduciary issues.
A DOL spokesman had no news about new guidance, but pointed to the FAB language, which states that “the Department is evaluating the need for other temporary or permanent prohibited transaction relief.”
The DOL rule was tossed out March 15 by the Fifth Circuit Court of Appeals.
Because the FAB is still in place, the impartial conduct standards essentially remain in place, said Kim O’Brien, CEO of AssessBEST, a compliance software company.
The impartial conduct standards require advisors to act in the best interest of their clients, make no misleading statements and accept only reasonable compensation.
Insurance carriers are not releasing agents from these compliance standards, O’Brien said.
This might amount to erring on the side of caution, but also how the industry has come to operate in recent years. The next DOL bulletin could come any day, but until then, many compliance departments are advising sales teams to act as though the impartial conduct standards are the law.
A New Understanding
A second impact from the departed DOL rule is how it changed perceptions and interpretations of existing rules.
In particular, Drinker Biddle addressed broker-dealers who were previously not generally considered fiduciaries under the ERISA “five-part test” standard.
“We do not believe this presumption can be sustained going forward,” the law firm said in a blog post. “The Fiduciary Rule and the developments that came along with it have caused investors and regulators to scrutinize these issues and re-examine previous understandings.
“Going forward, broker-dealers should expect to be held to the “letter” of the Five-Part Test.”
The now-reinstated 1975 five-part test (part of the Employee Retirement Income Security Act, ERISA) considers advice to meet the “fiduciary” standard if it is:
- Regarding the value of securities or other property, or as to the advisability of investing in, purchasing or selling securities or other property.
- Provided on a regular basis.
- Provided pursuant to a mutual agreement or understanding, written or otherwise.
- A primary basis for investment decisions.
- Individualized, based on the particular needs of the investor.
While not as strict as the fiduciary definition set out in the Investment Advisors Act of 1940, the five-part test is still a tough standard on ERISA fiduciaries.
However, it has long been generally understood that brokers do not fall within this standard when selling investment or insurance products. Most of their transactions fail to meet one or more of the five parts.
DOL rule debate fallout from the past three years is likely to lead to different interpretations of the five-part language, according to Joshua Waldbeser and Brad Campbell, lawyers with Drinker Biddle.
“Consider a broker who has a longstanding relationship with a 401(k) plan sponsor, offering regular recommendations on plan investment options,” they write. “If the advice has been followed by the plan fiduciaries (as is typically the case), it will be increasingly difficult to argue that there is no ‘mutual understanding’ that the advice is ‘a primary basis’ for investment decisions.”
In short, the application of the 1975 rules will most certainly be broader than in the past, Drinker Biddle said.
“While we await further rulemaking from the DOL, broker-dealers find themselves at somewhat of a crossroads; that is, ‘old’ rules viewed through the lens of a new day,” the firm noted. “We recommend that firms assess carefully when, and under what circumstances, their representatives’ recommendations may constitute fiduciary advice.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at firstname.lastname@example.org.
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