ISSUE

What critics said about the proposal

What the Department did in the final rule

Education

The Department should establish a clear line between education and investment advice and avoid a result in which service providers refrain from providing essential information and education to participants and investors due to concerns about triggering fiduciary status. In addition, when using asset allocation models to educate participants and investors, service providers should be able to identify specific investment options.

The final rule clearly describes the types of information and activities that constitute non-fiduciary investment education – including plan information and general financial, investment and retirement information.

The Department also revised the final rule to allow asset allocation models and interactive investment materials to identify specific investment alternatives under ERISA-covered and other plans if certain conditions are met.

However, in the IRA context there is no independent plan fiduciary to review and select investment options so references to specific investment alternatives are not treated as education under the education provision in the final rule.

Coverage of health and welfare arrangements

The proposal could be read to apply to group health, dental and disability insurance policies. The Department should explicitly exclude these policies, which do not raise the concerns the Department appears to be addressing with respect to advice regarding investment property.

The Department clarified that advice regarding “investment property” does not include health, disability, and term life insurance policies and other assets that do not contain an investment component.

Appraisals

All appraisals and valuations, not just for ESOPs, should be excluded from the rule and addressed separately.

The Department has reserved all appraisal issues, not just those involving ESOPs, for a separate, future rulemaking.

“Hire Me”

An advisor should be able to recommend that the customer hire the advisor for a reasonable fee without that recommendation to “hire me” being treated as a fiduciary recommendation.

The Department has made clear in the final rule that a person or firm can recommend that the customer hire the advisor (or its affiliate) for advisory or asset management services without the recommendation counting as a fiduciary recommendation.

However, the advisor’s investment recommendations, such as the recommendations to roll money out of a plan or invest in a particular investment, are fiduciary recommendations.

Small Business

By excluding small plans from the proposed “seller’s carve-out,” the Department will deprive small businesses of essential advice, because the BICE did not provide relief to sponsors of participant-directed plans.

The Department has made the BICE available to small plans of all types.

Further, the proposed “seller’s carve-out” has been substantially revised and is now available to any plan or IRA that is represented by an independent fiduciary with financial expertise that satisfies specified criteria or has $50M in assets.

Asset List in BICE

By listing only certain asset classes to be covered by the BICE, the proposal limits investor choice.

The Department has eliminated the list so that advice to invest in all asset classes is covered by the BICE.

Timing of the Contract

The contract requirements are unwieldly, call for the signatures of too many parties, and must be executed too early in the process – before the customer even knows he or she will make an investment.

The contract requirement was eliminated for ERISA plans; it only applies to IRAs and other non-ERISA plans.

The Department also adjusted the contract requirement to make it clear that it can be incorporated into other account-opening documents and can be entered into before or at the same time as the recommended transaction is executed. Any advice given before the contract was signed must be covered by the contract.

The exemption provides a special “negative consent” procedure for existing clients to obtain the new protections. In other words, the firm can send out a notification to its client informing them of proposed contract amendments. If the client does not terminate the amended contract within 30 days, the amended contract is effective.

There is also a provision for advisors who provide advice in accordance with the conditions of the exemption, but due to circumstances beyond their control, the contract was not executed.

Call centers and required contract parties

There is a lot of uncertainty about the role and ability of call centers to interact with customers under the new regime. In particular, since the contract requirement requires signatures of the firm, the adviser, and the client, will a new contract need to be signed every time the client speaks to another employee of the same firm (such as a different call center representative)?

The Department modified the contract requirement so that the contract is between the firm and the client, and a new contract will not be required for each interaction with a different employee of the same firm.

Disclosure

The disclosure requirements of the BICE are overly cumbersome. In particular, the one, five, and 10 year projections are nearly impossible to execute.

The Department significantly streamlined the disclosure requirements in the final BICE. In particular, requirements to include projections, as well as the annual disclosure requirement, have been entirely eliminated.

Web Disclosure

The web disclosure requirements are too burdensome for firms and could be read to require disclosure of individual adviser compensation and salaries.

The Department has streamlined this provision and clarified that individual information about advisers is not required.

Data Retention

The data retention requirements which called for the retention of detailed information on inflows and outflows are too burdensome.

The Department has removed those requirements. Just as they would in other situations, firms only have to retain the records that show they complied with the law (in this case, the TICE or other exemption).

Proprietary Products

The requirement to recommend the product that is in the client’s best interest will force advisers to recommend another company’s products instead of their own (because their financial interest in their own products means they could never say it was solely in the client’s best interest).

The Department has included language in BICE to make clear that advisers may continue to sell proprietary products and provided specific guidance on how proprietary product providers can satisfy the best interest standard.

Lifetime Income Products

The focus on fee transparency in the proposal disadvantages lifetime income options and other insurance products, whose value—particularly the guaranteed lifetime income—may not be as easily understandable by consumers.

The Department has included language in the BICE to make clear that advisers may recommend insurance products and revised the disclosure provisions to better reflect how insurance products are sold.

In addition, the final amendment to PTE 84-24 provides a streamlined exemption for recommendations of “fixed-rate annuity contracts,” which are less complex lifetime income products.

Recommendations to move into a level fee arrangement

Advisers would be discouraged from making recommendations to plan participants to move into an investment advisor arrangement with a level fee (i.e. rollover recommendations). Plan advisers who receive level compensation from a retirement plan, and would receive level compensation for advice provided to an IRA rollover from a retirement plan, would be discouraged from working with plan participants on rollovers. The Department should address this so that advisers are treated the same regardless of whether they have a relationship to the plan, and regardless of the fee structure they use.

The Department added a special provision for level fee fiduciaries in the final BICE. Essentially, it requires that documentation be kept to show why a recommendation to roll over from a plan or IRA to a level fee arrangement or to switch from a commission to a level fee arrangement was in the customer’s best interest.

Conversions to fee-based accounts

The proposal will effectively prohibit commissions.

The Department clarified this issue by, among other changes, providing examples of policies and procedures that are compatible with commission-based models. In addition, the Department notes that if moving a customer into a fee-based model is not in that customer’s best interest, the firm/adviser would have engaged in a non-exempt prohibited transaction.

Inappropriate bias towards low fee products

The proposal favors low-fee and low-cost products over all else, ignoring returns, quality and other factors that may be important to consumers.

The Department did not adopt the low-fee, streamlined option considered in the proposal, and clarified in the preamble that the adviser is not required to recommend the lowest fee option if another product is better for the client.

Grandfather relief

The Department should treat existing arrangements and investments differently than new transactions.

The Department included a grandfathering provision that allows for additional compensation based on investments that were made prior to the Applicability Date.

It includes compensation from recommendations to hold, as well as systematic purchase agreements, but requires that post-Applicability Date, additional advice must satisfy basic best interest and reasonable compensation requirements.

Implementation Concerns

Eight months is far too short a time period to implement such an expansive overhaul. The Department should consider phased implementation and/or an implementation safe harbor.

The Department extended the first phase of implementation to one year after publication of the final rule. In addition, the Department adopted a “phased” implementation approach for the BICE and the Principal Transaction Exemption so that firms will have more time to come into full compliance. In particular, the full disclosure provisions, the policies and procedures requirements, and the contract requirement only go into full effect on January 1, 2018. Finally the Department made it clear that it intends to provide compliance assistance to firms that have implementation questions to the greatest extent possible.