• Fiduciary rule review could result in softened requirements on IRAs
• Possible change to best-interest-contract exemption
• Rule proponents don't want change to class action waiver ban
The requirements individual retirement account advisers must satisfy under the fiduciary rule could change after the Labor Department finishes re-examining the rule.
Changes may come in the form of softening of the requirements on IRAs under the best-interest-contract exemption, but don't expect those accounts to be taken out of the rule entirely, Erin K. Cho, a principal at Groom Law Group in Washington, told Bloomberg BNA. This exemption provides conditional relief that would allow advisers and financial institutions to keep receiving compensation related to providing retirement investors with advice.
The only authority the Department of Labor has over IRAs is the ability to issue prohibited transaction exemptions and the courts have indicated that the best-interest-contract exemption is an “appropriate exercise of the DOL's authority,” Erin M. Sweeney, an employee benefits attorney and of counsel with Miller & Chevalier in Washington, told Bloomberg BNA.
The Employee Retirement Income Security Act doesn't normally cover IRAs, but the DOL said in the rule finalized in April 2016 that certain intersections between ERISA and the tax code that relate to retirement plans allow the agency some leeway in this area. The DOL took the position in the final rule that relevant provisions of the tax code apply to ERISA-covered plans, even if they aren't subject to the tax code, and relevant provisions of ERISA apply to tax-qualified retirement plans, including IRAs, even if those plans aren't subject to ERISA.
Several of the lawsuits against the DOL have claimed that the DOL doesn't have authority
over IRAs and that it is trying to regulate IRAs through “the back-door.”
Tweaks to the contract requirement in the exemption would be the most direct way to soften the conditions on advisers offering IRAs, George Michael Gerstein, counsel with Stradley Ronon in Washington, told Bloomberg BNA.
Under the rule in its current state, financial advisers won't enjoy the benefits of the exemption if they include an arbitration agreement in their contracts that prevents investors from participating in class action litigation. The DOL recently said in a brief that it would no longer defend the rule's anti-arbitration condition.
Eliminating class action litigation as the primary enforcement mechanism under the best-interest-contract-exemption could also alleviate some pressure on advisers, Cho said.
If the DOL removed the contract requirement, it would narrow the potential causes of action that investors would have if they alleged malfeasance. The key to whether that happens may be whether the DOL “can get comfortable that the IRA can still be protected without the ability to sue a financial institution for breach of contract,” Gerstein said.
The agency June 29 asked for public feedback on several areas of the Obama-era rule on financial adviser conflicts-of-interest, including what the impact would be on compliance incentives if the DOL “eliminated or substantially altered the contract requirement for IRAs.” The agency also asked whether recommendations to make or increase contributions to a plan or IRA should be excluded from the definition of investment advice. July 21 is the final day to submit comments on whether the Jan. 1, 2018, applicability date should be extended. Comments on the rest of the questions asked in the request for information are due by Aug. 7.
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