The DOL's Conflict of Interest Rules - Summarized and lots of links!

Last week, the Department of Labor (DOL) unveiled its long awaited Conflict of Interest rules (regulation, not law).  Here is a link to the DOL's fact sheet,  http://www.dol.gov/protectyoursavings/FactSheetCOI.pdf.  The regulation itself is hundreds of pages.

So, at first blush I think that the proposal is slightly less onerous than I thought it would be, but it does some things that are going to be a big deal.

1   1.)    It broadens the definition of who is and who is not a fiduciary and takes away the loophole on what is and isn’t advice.  Essentially, my read is that if you are a financial advisor/adviser, agent, registered rep, broker, Investment Consultant, etc. who recommends anything to a retirement plan, plan sponsor or participant, you will be considered a fiduciary, even if it is singular advice.  My take is that it will be virtually impossible to be a rep on a 401(k) plan and not be a fiduciary.

 

2.) IRAs are pulled in as part of the jurisdiction here.  That includes recommendations about IRA rollovers and in advising IRA holders on underlying investments, holding IRA advice givers accountable to similar standards more/less as they would be on ERISA plans.
 

      3.) There will be a Best Interest Contract Prohibited Transaction Exemption (BIC PTE) – This is going to get a TON of comments during the comment period as it seems pretty significant in the amount of required detail and submission including sending a copy to the DOL, thus requiring an investment consultant to be highly visible to the DOL for regulation purposes.  This is the way the DOL is saying an advice giver can be conflicted, I (along w. others in the industry I've spoken to) are highly skeptical of this process.

      

      4.) Enforcement of the new rules seems to be an issue since while the DOL has the power to write the rules, only the IRS has the power to enforce and, as of this writing, they aren’t staffed to enforce ERISA-like standards on IRAs.

For this proposal to become rule, these are the next steps:

1. Comment Period – 75 days, ending on/about 07/6
2. Public Hearing – within 30 days after Comment Period 
3.  Preparation of Final Rule – This will take some time as DOL will need to absorb the public comments and make changes.  Then sent to the Office of Management and Budget (OMB) to review. 
4. Effective Date – The rule becomes effective 60 days after publication in the Federal Register once back from OMB 
5. Applicability Date – 8 months later

Assuming this goes through with no further opposition (Congressional, SEC, industry, etc.), the industry will need to be ready to function under these new rules sometime in late 2016, figure Q3.

My thoughts, I’m still of the opinion that this can get derailed.  I believe that even written as is, that if any delay in efficiency of the above process from here were to occur that causes it to push into Q4 of 2016 or later will effectively kill it, or will at least be likely to because of the Presidential election.  

It is common for incoming president's to halt any unfinished business from the previous administration, this is often what occurs even when the new President is in the same party as the previous president.  So, while the DOL did a good job in getting this out with enough time to actually get it through, they really did wait until the last minute.  They should have put this out last year. 

That said, the DOL and the industry knows about this timeline concern.  On April 21st, a letter (The letter) was sent to the DOL from an association of 20 industry trade groups  asking for the Comment Period to be extended from 75 to 120 days.  On April 23, Labor Secretary, Thomas Perez indicated that the DOL has no intentions of delaying this indicating that they want this 'fast-tracked' and not impacted by the next presidential election, 'DOL Not Budging'.  

Also, of interest, according to Bloomberg several democratic Senators have actually pushed back against the DOL's proposal despite presidential backing, see article Dems Pushback

citing significant problems with the bill potentially leading to reductions in consumer services.  Seemingly, the fight here is still ongoing and, more opposition is expected. 

UPDATE: As an update to this delay strategy, a group of democratic congressman, 18 of them, have also joined the voices asking for more time, attached here;  Democratic Reps Want Longer Comment Period.

UPDATE 2: More requests for delay, this time from three dozen republican senators, pressure is mounting!  The senate letter here; Senate Letter asking for delay

A number of groups have put out summaries of the regulations, estimates on impact and some general thoughts as to where the problems are initial visible.  I'm sure more will come on this issue.  Below for links to the summaries.

Happy Reading!

http://napa-net.org/Portals/1/Game-Changer.pdf

http://wagnerlawgroup.com/DOLFiduciaryRuleAlert.htm

http://www.fi360.com/news/detail/executive-summary-of-the-dol-fiduciary-rule-proposal

http://www.ballardspahr.com/alertspublications/legalalerts/2015-04-15-department-of-labor-proposes-new-regulations-on-fiduciary-advice.aspx

http://www.jdsupra.com/legalnews/dol-proposes-sweeping-expansion-of-fiduc-87619/

http://www.jdsupra.com/legalnews/dol-reproposes-expanded-erisa-fiduciary-98660/
http://www.sutherland.com/NewsCommentary/Legal-Alerts/172823/Legal-Alert-DOL-Reproposes-Expanded-ERISA-Fiduciary-Definition-and-Revised-Complex-of-Exemptions

- Jason Grantz