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Softer fiduciary rule eliminates exemption asset list, includes phase-in


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Softer fiduciary rule eliminates exemption asset list, includes phase-in

The finalizedversion of the U.S. Department of Labor's new fiduciary standard rule provides somerelief for financial services and insurance companies compared to previous iterations,but the bulk of the regulation appears to have remained intact.

The Departmentof Labor on April 6 announced the long-awaited final rule to fanfare, with SecretaryThomas Perez lauding it in a press conference as a "huge win for the middleclass." Perez said the societal bargain related to retirement for working andmiddle class individuals has "frayed" over the years.

"Therules all too frequently no longer work for working people," he said.

The newfiduciary standard will serve to ensure that the oft-written pledge to "putclients first" is not just a marketing slogan, Perez said. The Labor Secretarystressed that the majority of advisers are doing their best to look out for theircustomers and blamed a "structurally flawed system" for causing the twosides of the adviser and customer relationship to be misaligned. Perez also highlightedareas where the regulator "streamlined, simplified and clarified our rule"after receiving industry feedback while still remaining true to its goal of protectingconsumers.

Sell-sideanalysts covering multiple parts of the finance industry generally agreed that thefinal rule was a bit less onerous than the original proposal. Perhaps the most surprisingdifference from the proposed rule was the removal of the Best Interest Contractexemption asset list, according to Compass Point's Isaac Boltansky. The originalproposal allowed for so-called conflicted compensation if a series of requirementswere met, but only in certain asset classes. The final rule, however, strikes thatlist and will allow advice related to all asset types to be covered by the exemptions.

Removingthe exemption list is good news for companies such as NorthStar Asset Management Group Inc. and that offerinvestments in non-traded REITs, Boltansky said in a report, calling the final rule"far kinder" to that asset class than anticipated.

UBS'Brennan Hawken said in a note to clients that the softening of the best interestcontract exemption and including grandfathering and negative consent provisionsfor existing books of business should reduce the rule's tail risk. Hawken pointedout that the adoption timeline has been extended with a phase-in starting in April2017 and full implementation going into effect Jan. 1, 2018.

"Whilethe thrust of the rule remains unchanged and we still see longer-term headwinds,we believe the rule's softening could provide a relief rally in many of the mostimpacted stocks including asset managers, life insurers and [independent broker/dealers],"he wrote.

Evenwith the asset list being removed, the best interest contract exemption provisionstill leaves companies and advisers exposed to legal risk and disclosure requirementsthat will lead to certain incremental costs, Nomura analyst Steven Chubak said.Chubak called LPL Financial a "clear winner" from the softening of thefinal rule. Shares of the broker/dealer climbed more than 6% through midday trading.

LPL Financialsaid in a statement that it was pleased with apparent positive changes to the ruleand with the DOL's willingness to listen to concerns. The final rule provides greaterclarity, the company said, adding that it can now start implementing solutions toallow investors to retain access to the financial guidance they need.

A potential loser from the new rule was American Equity Investment Life Holding Co. as fixed-indexannuities were added to the Best Interest Contract provision along with variableannuities. Fixed-index annuities were previously covered by an exemption that allowedagents to get relief from compensation restrictions. Variable annuity and mutualfund sales to IRAs were also covered by Prohibited Transaction Exemption 84-24,but earlier iterations of the fiduciary rule proposed to move them to the Best InterestContract provision. Fixed-index annuities were then added in the final rule.

Industry players did not expect that, according to KBW analysts,who said sales of indexed annuities will likely be negatively impacted. About 95%of American Equity Investment Life's earnings come from indexed annuities, KBW pointedout in a note.

Shares of American Equity Investment Life were down more than16% through midday trading.

A consumeradvocacy group hailed the final rule as a "historic win" for workers andretirees. The rule closes loopholes that allowed financial professions to "evadetheir obligation" to serve their clients' best interests, Micah Hauptman, financialservices counsel for the Consumer Federation of America, said in a statement releasedahead of the rollout. Hauptman said the new rule will be able to rein in compensationpractices that reward financial professionals for working against the best interestsof their customers.

"This rule will lead to better outcomesfor retirement savers and bring them one step closer to a secure and dignified retirement,"he added.

The FinancialServices Institute, which advocates on behalf of independent financial advisersand companies, sounded a negative but somewhat guarded tone ahead of the DOL pressconference. President and CEO Dale Brown in a statement blasted the DOL's earlierproposals as "complex and unworkable" and said the government failed tomake the case for a uniform fiduciary standard. But Brown provided no criticismof the final rule, saying only that the organization will analyze it over the comingdays.