Update on the Department of Labor's fiduciary proposal
What's happened, what's next, and what can you do now?
Deloitte has been actively involved in understanding the rule's impacts to the industry and monitoring the rule making process.
- Department of Labor hearings
- The reports
- Key themes from the SIFMA study
- Key themes from the IRI study
On April 20, 2015, the Department of Labor (DOL) issued a re-proposed rule1 that would expand the definition of “fiduciary” under the Employee Retirement Income Security Act by requiring retirement investment advisers, including broker-dealers and insurance agents, to abide by a fiduciary standard, as well as six proposed prohibited transaction exemptions (“rule proposal”). From the DOL’s perspective, the amended rules are designed to provide further protection to the public from “questionable retirement investment advice” by requiring retirement advisers to follow strict “fiduciary” standards as well as prohibiting certain types of compensation arrangements unless exemption requirements are met. However, in the view of many industry participants, as exhibited in several of the more than 2,600 comment letters received by the DOL, the rule proposal poses potential operational, compliance and businesses challenges. Accordingly, commenters have suggested that the DOL revise, clarify, re-propose, or altogether rescind the rule proposal to address these challenges.
1 Federal Register Vol. 80, No. 75 - Proposed Rules–Employee Benefits Security Administration (4/20/2015)
Department of Labor hearings
After the initial comment period closed on July 21st, the DOL held public hearings in Washington, DC from August 10–13, which may offer some insight into how the DOL will (or will not) seek to address the concerns raised in the comment letters and testimony. Deloitte attended the hearings and noted that there was robust discussion between industry participants and the DOL about the wisdom of many operational aspects of the rule. Though we did not see indications that the DOL would likely re-propose or rescind the rule, there were instances that may suggest the DOL is, at the very least, willing to engage with industry participants to understand their concerns and may seek to address some of the concerns in the final rule proposal, which is expected to be released before the end of March 2016. We noted several instances where the DOL questioned panelists about alternative approaches and whether those alternatives would address some of the concerns that have been raised in comment letters.
Deloitte's reports on behalf of the industry
Many of the operational implications and impacts specific to broker-dealers and insurance companies were highlighted in two reports that were produced by Deloitte and appended to the comment letters of the Securities Industry and Financial Markets Association (SIFMA) and the Insured Retirement Institute (IRI), respectively. Additionally, during the hearings, DOL staff indicated that they had read both reports and found the analysis and illustrations helpful in identifying and illustrating the various operational processes that will most likely be impacted by the rule proposal.
The reports were the result of two separate Deloitte engagements by SIFMA and IRI to work with the organizations’ respective membership to study the potential impacts of the rule proposal on their members’ operations that support the customer lifecycle. To develop the understanding of the potential impacts as well as changes required to comply with the rule proposal from the perspective of industry participants, the studies engaged over 40 broker-dealers from SIFMA’s membership and 15 insurance companies from IRI’s membership.
The reports included:
- Analyses of the requirements of the rule proposal across the customer lifecycle to identify technology and operational enhancements needed to align existing processes with new obligations
- Detailed process flow diagrams illustrating potential requirements and necessary process augmentations for operationalization of the rule proposal from the point of view of the financial service firms, investment professionals, and customers
- Identification of technology and operational enhancements needed to align existing processes with new obligations under the rule proposal
- A high-level cost survey of the SIFMA working group to quantify how the rule proposal might impact operational expenses associated with implementing and maintaining the required changes to operating processes and systems for broker-dealers
Each of the reports produced key themes, supported by examples, to highlight the impacts from the perspective of the working groups who participated in the studies.
Key themes from the SIFMA study
- It will be unfeasible or impossible to operationalize certain rule proposal requirements
- Significant personnel, process, and technology changes and investments to operations and lines of business will be required to comply with the rule proposal
- Rule proposal requirements will create disruptions to business operations and customer experience
- Rule proposal requirements may conflict with existing regulatory obligations
- The rule proposal is ambiguous and broad in certain areas, which challenges the operationalization of the rule proposal’s requirements
Key themes from the IRI study
- The expanded definition of who is considered a “fiduciary” creates operational risk considerations and obligations that may cause insurers to restrict or end certain types of communications, products and services
- Current customer service models—such as call centers and wholesalers—that provide information, education, and guidance to consumers might become unfeasible under the new requirements
- For many insurers, significant and lengthy updates, changes and bifurcations to systems, processes, and oversight functions across organizations will be required to comply with the rule proposal
- The rule proposal is unclear and ambiguous about the requirements and responsibilities for insurers with non-captive distribution channels
- The different exemption requirements for fixed annuities and variable annuities will lead to further system bifurcations, oversight processes and standards, which may result in insurers no longer offering both products because of the operational complexities
What can you do now?
Deloitte continues to monitor the DOL's rule-making process and actively engage with industry participants to understand and share perspectives to assist with readiness for the final rule.
However, organizations who will likely be impacted by the proposed rule should begin planning now rather than waiting until the rule is finalized to prepare for implementation. Now is the time for firms to begin identifying how and where their organizations will be impacted as well as the changes they will be required to make to be compliant and the budget considerations for making these changes. Equally important is for organizations to assess their options for complying with the rule proposal and how those options align with their broader business strategy. In some instances, the extent of the impact of the rule package on an organization may drive many strategic business decisions. Additionally, organizations that wait until the rule is finalized to begin planning could find the budget requirements and compliance, operations, technology and process changes overwhelming to meet under an implementation timeline that many industry participants find to be short.
For more information on Department of Labor's fiduciary proposal, please contact any of the following Deloitte professionals:
Susan Levey, director, Deloitte Advisory
Robert Walley, principal, Deloitte Advisory
Josh Uhl, senior manager, Deloitte Advisory
Scott Parker, principal, Deloitte Consulting LLP
Daniel Rosshirt, principal, Deloitte Consulting LLP
Sean Cunniff, senior manager, Deloitte Services LLP