The Department of Labor is expected to release its revised best-interest rules in the coming weeks and the financial services industry should be pleased, said Joshua Waldeser, partner at Drinker Biddle & Reath.
Revised rules are needed after an appeals court tossed out the DOL fiduciary rule one year ago. However, part of the rule had already taken effect, which left a vacuum for regulators to address.
Motivation is high to craft rules that harmonize as much as possible across the financial services’ landscape, Waldbeser told a LIMRA audience during a Thursday webinar. In particular, harmonize with the Securities and Exchange Commission’s Regulation Best Interest.
“I would be surprised if we got to Thanksgiving without something from the DOL,” Waldbeser said. “I think it is in a sense being fast tracked.”
In last fall’s calendar, the DOL targeted September 2019 for release of the new rules. That changed to December 2019 when this spring’s calendar came out.
Citing “good, credible rumors,” Waldbeser said the DOL is likely to return to rules set out in the 1975 “five-part test” to determine whether financial advice to plans and participants meets a fiduciary standard.
“But there will be some changes around the fringes and probably the most likely candidate is changes to rollover recommendations,” he explained. “What we know for sure though is they’re going to have to come out with some new exemptions to replace (the best interest contract exemption) and so on because we can’t live under the transition relief forever.”
The best interest contract exemption was part of the DOL fiduciary rule and attached heavy liability to the sales of products such as variable annuities.
New rules are expected to be a return to the past, Waldbeser said, and allow commissions and conflicted compensation. Rollovers are an area creating “a lot of confusion” at the moment and could end up a place of “enforcement emphasis” with new rules, he added.
“Regardless of what type of financial institution is involved, regardless of product, regardless of whether it’s brokerage or advisory or fees and so on, it’s one of those rare examples of a conflict of interest that you can’t eliminate,” Waldbeser noted. “You get the rollover and you get paid or you don’t get the rollover and don’t get paid. It’s that simple.”
The DOL effort will likely harmonize nicely with the SEC Reg BI approved in June. The four-part package is led by Reg BI, which sets a new standard of conduct for brokers, as well as an interpretation of the fiduciary duty that applies to registered investment advisors.
“It’s not perfectly harmonized because the DOL rule might apply to a fixed annuity in some situations where Reg BI might not,” Waldbeser explained. “But the standards are pretty close.”
The SEC is still accepting comments and its rules are set to take effect in June 2020. But there is no expectation that SEC examiners will be waiting to fine rule breakers the week the rules are in effect, Waldbeser said. But how examiners interpret the rules over the long term is worth watching, he added.
“There’s very little in Reg BI that is an absolutely specific, objective requirement,” he said. “It’s designed to be flexible. It’s designed to accommodate different product structures and different compensation models and so on.”
Some consumer advocates say that Reg BI is worse than no rule at all. They claim it is not any different from suitability standards, but worse because it allows broker-dealers to hold themselves out as giving advice in the best interest of a customer in a way that the consumer might misunderstand.
Waldbeser disagreed, noting that Reg BI requires firms to mitigate any conflicts.
“I think Reg BI certainly enhances consumer protections,” he said. “I just think it’s really an exaggeration (to say) it’s not an improvement. There’s got to be value in the additional disclosures.
“It is controversial but I certainly think it’s a step in the right direction.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at email@example.com. Follow him on Twitter @INNJohnH.
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