The Labor Department finalized an amended version of its fiduciary rule, providing wealth management firms a lengthier timeline for implementation as well as more relaxed requirements for the best interest contract exemption.

The changes — set to be formally announced today — suggest that Obama administration officials want to assuage industry concerns about the workability of the rule and potentially avert court fights, while still enacting a higher standard of duty to clients.

"With the finalization of this rule, we are putting in place a fundamental principle of consumer protection, that a consumer's best interest must come before a financial advisors' best interest," Secretary of Labor Thomas Perez says.

The timeline to implement the rule was extended to one year from eight months in the amended version. Firms will need to be in full compliance by Jan. 1, 2018. Industry trade groups such as SIFMA had been arguing that the original eight month timeline for implementation was unreasonable because complying with the rule would be a "massive undertaking."

The best interest contract exemption has been changed significantly. The Labor Department now says clients will have to sign such a contract when they open accounts, not when they first meet a broker or advisor. The exemption was the subject of intense industry scrutiny, with CEOs and industry trade groups sharply criticizing it, saying it would be unworkable in practice.

Perez says the department made these and other changes after receiving feedback from industry groups and consumer groups. "We listened, we learned and we adjusted," he says.

The final version of the rule also does not penalize proprietary products, such as complex annuities.

"Proprietary products are certainly permissible products that have an important place in the market. The key is … you have an obligation to put your clients' best interests first," Perez says.

Also of core importance to wealth management firms: They'll be able to notify existing clients of the changes in the firm's obligations via email, Perez says. 


The amended version is scheduled to be published today, ending several years of contentious debate that included intense industry lobbying and several failed attempts by Republicans in Congress to derail the effort to craft a new standard governing retirement advice.

The fierce back-and-forth between opponents and advocates was due in no small part to the dramatic effects the rule could have on those whose income depends on advising Americans on their retirement assets — more than $22 trillion, according to Cerulli Associates.

Privately, executives have said the complexity of the rule will make it difficult to develop new compliance policies and procedures, particularly for larger firms that have more than 10,000 advisors. And while changes made by the Labor Department may go a long way to easing the industry's acceptance of the rule, all wealth managers, financial advisors and financial planners will now be held to a new, higher standard when providing retirement advice.

Until now, advisors have been operating "in a structurally flawed system. The interest of the consumer is all too often not aligned with that of the firm and the advisor," Perez says.

For example, firms' marketing materials, often tout that the client comes first. "With this rule," Perez says, "we are making sure that that is no longer is just a marketing slogan. It's now the law."


When the White House announced its latest proposal for a fiduciary standard last year (its first initiative was rolled out in 2010, then shelved amid the firestorm of opposition), it pointed to a study suggesting that Americans retirement savings were at risk due to bad advice; Americans lose about $17 billion in retirement savings per year due to conflicted advice, according to the White House Council of Economic Advisors. Insiders say that the Obama administration sees the rule as a key part of the president's legacy.

The Labor Department has regulatory oversight of retirement advice under ERISA, passed in 1974 at a time when pensions accounted for a much larger portion of Americans' retirement assets and 401(k) plans did not yet exist.

But even some supporters for a higher standard called into question whether it was ideal to have the Labor Department lead on this matter, noting the limits to their regulatory powers. Other kinds of financial advice would not be covered by this rule.


The Labor Department's efforts have stood in contrast to that of the SEC, which has been authorized to craft a fiduciary rule since the Dodd-Frank Act passed in 2010.  SEC Chairwoman Mary Jo White has repeatedly said such a rule was a top priority for the commission, but that it was a complicated undertaking. Critics, pointing to years of inaction, accused the SEC of dragging its feet.

Much of the debate at the hearings about the Labor Department proposal centered on commissions, and whether or how brokers' incentives could be at odds with their clients' best interests. While critics said that the rule would effectively and unfairly ban commissions, officials said that was not their focus.

The agency received more than 3,000 letters during two comment periods. At several points in the past year, members of Congress floated bills that would have stymied the efforts to craft the rule. Some Washington insiders, however, saw this as a mere posturing because the bills had little chance of passing both chambers of Congress and would have faced a likely veto from the president. In addition, while opponents claimed investors with minimal savings would be unable to get retirement advice, many major firms have substantial minimum account requirements.

The debate appeared to reach a fever pitch last August during several days of public hearings, during which the Labor Department took testimony from a wide range of participants. CEOs, industry lobbying groups, attorneys, investor advocates and even a fraud inspector either cheered or decried the government's proposal.

"It is hard enough to save for retirement. Conflicted investment advice should not be one of the barriers millions of Americans face as they work to save for their retirement," David Certner, legislative policy counsel for AARP, said on the first day of the hearings.

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