The Department of Labor (DOL) filed a notice with the Office of Management and Budget (OMB) regarding the delay of the Fiduciary Rule's Exemptions' Transition Period. The notice is titled “18-Month Extension of Transition Period and Delay of Applicability Dates; Best Interest Contract Exemption; Class Exemption for Principal Transactions; PTE 84-24”.
The text of the rule will not be available until the final rule is published in the Federal Register. The stage also remains as a “Notice” and not a “Final Rule”, so it is not clear if this is the final rule on the extension. If it is approved by the OMB, the DOL can then publish it in the Federal Register. After approval is received there will be a 15-day comment period before it becomes effective.
What Happens Next?
If this rule is approved and becomes effective, the applicability date of the Prohibited Transaction Exemptions, Best Interest Contract Exemption (BICE) and PTE 84-24 is extended until July 1, 2019.
The DOL stated in their Conflict of Interest FAQ:
During the transition period, financial institutions and advisers must comply with the “impartial conduct standards” which are consumer protection standards that ensure that advisers adhere to fiduciary norms and basic standards of fair dealing. The standards specifically require advisers and financial institutions to:
• Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
o Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
o Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm;
• Charge no more than reasonable compensation; and
• Make no misleading statements about investment transactions, compensation, and conflicts of interest.
The DOL also states:
During the transition period, the Department expects financial institutions to adopt such policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the impartial conduct standards. During that period, however, the Department does not require firms and advisers to give their customers a warranty regarding their adoption of specific best interest policies and procedures, nor does it insist that they adhere to all of the specific provisions 6 of Section IV of the BIC Exemption as a condition of compliance.4 Instead, financial institutions retain flexibility to choose precisely how to safeguard compliance with the impartial conduct standards, whether by tamping down conflicts of interest associated with adviser compensation, increased monitoring and surveillance of investment recommendations, or other approaches or combinations of approaches.
ERISA and this rule define "financial institutions" as banks, insurance companies, broker-dealers and RIAs. If you are licensed as a broker or registered rep, your "financial institution" is your BD or RIA. The insurance-only agents, producers, and advisors can't rely on their appointed insurance carrier to be their "financial institution" to help and guide them with being compliant with Impartial Conduct Standards. Most carriers have informed agents and advisors that the carriers are not acting as a "financial institution" and require agents and advisors to sign an attestation that they are in full compliance with Impartial Conduct Standards.
How Do Insurance-Only Agents Comply?
There are four main ways insurance-only agents have to comply:
- Follow a repeatable practice of assessing client’s current situation, needs, time horizon and risk tolerance;
- Make recommendations that best meet those needs and provide more than one solution to show your client and potential regulators you are impartial to the final choice;
- Use a confirmed, compliant disclosure for compensation and material conflicts of interest:
- Document the customer’s acknowledgment that:
The information obtained is accurate
The recommendation meets their needs, risk tolerance and time horizon
The product selection is suitable and meets their best interest
The first step of best interest process is to decide what information that is “relevant” to making a recommendation. You should take into account:
- The needs, objectives, risk tolerance and financial circumstances of the IRA owner.
- The fees, benefits and expenses in the current IRA.
- The fees, benefits and expenses available in the recommended IRA.
- Other considerations of health (i.e., medical expenses), longevity, personal preferences.
AMZ Financial provides access to a proven software solution that first determines the gaps in a financial plan. Then the software analyzes the client's risk tolerance and justifies a diversified plan using insurance products. The software compares product recommendations and clearly demonstrates reasonable compensation. Finally the software documents the product selection process and provides a Client Assessment & Recommendation Report ... all in a cloud-based, cyber-secured software.
Since the delay is still uncertain, it is best to take action to prepare your business. There are many components to being in compliance with the rule, and at AMZ Financial, we can provide you with the tools you need to complete your role as a fiduciary. Visit our website to see all of the tools our advisors and agents have access to when they log into our website.