As we crawl ever closer to the effective date of the DOL Fiduciary Rule in April, I think we’re due for an update on the latest news as it relates to the rule. As you may well know, the DOL Fiduciary Rule applies to all qualified funds which include qualified plans, IRAs, and other types of ERISA plans. The stated purpose of the rule is to protect consumers from unfair sales practices and expenses.
With all the change in Washington, there are several potential outcomes:
- Status Quo – no change to the DOL Rule, and implementation begins as planned on April 10th. No matter what the future is, this is what everyone is planning for – until further notice, this is happening.
- Repeal – it is definitely possible that President Trump decides to kill the DOL rule, however doing so outright is a difficult and arduous task due to procedural issues surrounding existing regulations. Some might interpret such a move as ill-will toward the American public given that the rule’s supposed purpose is to protect the best interest of the consumer. A repeal of the rule without a replacement might be seen as putting financial institutions first, instead of the people.
- Delay of Applicability – most pundits believe a delay of 6-12 months is highly likely. It serves the purpose of buying time and could force the DOL to reopen the rule for comments. Also, two of the three lawsuits against the rule have been dismissed (appeals have been filed), and one is still pending an initial ruling. And the judge on the pending suit asked many questions prior to adjourning which seemed to indicate she could side with the plaintiff. Nothing is certain, but having this unsettled lawsuit hanging over the DOL’s head might be reason enough to delay.
Regardless of the outcome, most would agree that the “horse is out of the barn.” Most institutions and interested parties have already spent significant resources to accommodate the DOL Fiduciary Rule as it applies to the Best Interest Contract Exemption (BICE). In short, the BICE obligates a financial institution to a fiduciary role. Delay or repeal of the rule, would likely do nothing to change the way they operate. Insurance carriers are already feeling the pinch from broker-dealers to standardize compensation for their registered representatives to ensure a complete strategy is implemented for the consumer. Registered investment advisory firms and their affiliated investment advisory representatives already being fiduciaries will face similar internal oversight. The independent insurance producer would obviously benefit from repeal or delay, as they could continue to make recommendations regarding qualified funds without institutional oversight or a Prohibited Transaction Exemption 84-24, which only applies to non-risk assets such as fixed annuities.
As I’ve said, we’re all operating under the premise of status quo, the rule stays. In that event, there is one point of interest to those offering life insurance solutions. In the second set of FAQs from the DOL, FAQ #4 is one to make sure you keep tabs on. It says that recommending the use of an RMD to fund any form of life insurance makes you a fiduciary. If you make this recommendation and take compensation on the transaction without utilizing a BICE, you have entered into a prohibited transaction. For the most part, up until now, we’ve been discussing the DOL fiduciary rule as it relates to fixed and fixed index annuities. This FAQ expands the scope and I felt it was worth pointing out to you.
All that said, until we hear otherwise, the rule is the rule and the countdown to the effective date continues. I also believe a delay is likely and would not be surprised to eventually see the rule repealed or vacated. In such a case, you can be sure the SEC would step right in with their own rule or guideline to fill the void. We will continue to monitor the situation closely and keep you updated when there is news of value.