The Department of Labor’s final fiduciary rule could be released before the next presidential inauguration in January 2017.

Brad Campbell, counsel at Drinker Biddle in Washington, says that because the final comment period closes on Sept. 24, the DOL will have to publish its final regulation next spring, in either March or April 2016, to put the rule in effect eight months after the final rule is published and before President Obama leaves office.

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“They will spend Sept. 24 through whatever period it takes to get the final rule written and a new economic analysis done for budget review in that time frame,” Campbell says. “It is a very ambitious time frame. It raises a question about how they can do it in that time frame.”

The proposed rule said that the date the rule goes into effect must be eight months after the final rule is published, so the clock is ticking.

Fred Reish, chair of the financial services team at Drinker Biddle, predicts the fiduciary rule will go into effect by Dec. 31, 2016.

“The DOL is committed to a broad definition of fiduciary,” Reish says. “I get the sense that part of the reason for that is a concern by the DOL that if they draft a narrower definition, people will find a way around it.”

He used the DOL’s fee disclosure rules as an example of how industry has gotten around the 408(b)2 regulations, which were very narrow.

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As far as what will be in the final fiduciary rules, Reish says he believes there will be a broad definition of fiduciary advice in the final regulation with two exceptions: carve-outs and prohibited transactions.

Under the prohibited transactions rule, fiduciaries “can’t give investment advice that would cause them to get payment from a third party,” he says. The second would be that advisers can’t give fiduciary investment advice where they could increase their compensation by virtue of that advice.

The DOL was receptive to comments regarding an education carve-out.

“If you give education the right way, you are not giving fiduciary advice,” Campbell says.

He believes the DOL will include a provision in the final regulation that provides a distinction between education and advice.

“An adviser can give a participant a model asset allocation portfolio,” he says. Under the current standard, they could also provide examples from the plan menu of which investments match each asset class in the model portfolio.

“The DOL has said you can do model portfolios but not mention asset classes,” Campbell says.

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Reish adds that one way advisers can get away from doing that is to offer a very limited investment menu to begin with. That way, when participants go to populate the model portfolio with the right mix of asset classes, there are only one or two to choose from.

Campbell says this idea would work well within a 401(k) or other employer-sponsored retirement plan but not in an IRA, which typically has thousands of investment options available.

Some argue that plan fiduciaries have already vetted the investments within the plan so giving examples of what to include in a model portfolio shouldn’t be construed as fiduciary investment advice.

“I think it is easier within a plan if they have one in each asset class, then they don’t have to educate them,” Reish says. “Depending on how the DOL is to address other funds in the plan, it could look fairly complicated to participants. The average plan has 20 investment options and the trend is [moving] downward [toward] fewer investment options, not more.”

Advisers have time to “simplify the lineup to make it easier to deal with the DOL rule,” he adds.

One of the most controversial parts of the proposed fiduciary rule was the large plan carve-out, which says that large plans could have non-fiduciary activity as long as they have more than 100 participants or more than $100 million in assets.

Most commenters during the hearings advocated for a broad sellers’ exemption, “which is akin to what the DOL had in its proposal in 2010,” Campbell says. “The DOL officials are pushing back against a seller’s exemption.”

Campbell believes it is rollovers from a workplace ERISA retirement plan into an unregulated IRA that sparked fiduciary discussions in the first place.

“They are looking at the flows and all of the ERISA money ending up in IRAs and it is something we want to focus in on. They want to make sure advice at the time of the rollover is being well regulated,” Campbell says.

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The proposed rule would broaden the definition of fiduciary, meaning a person who sells, advises or recommends insurance products to plans or IRAs would be a fiduciary subject to the Best Interest Contract Exemption. The person making the recommendation of a group annuity contract or a traditional annuity to the plan or IRA would have to act in the best interest of the investor and would have to engage in a prudent process to vet the insurance company and the terms of the annuity contract, Reish says.

Also, the compensation and costs must be reasonable. Current prohibited transaction rule 84-24 protects agents from compensation restrictions and ERISA plan fiduciaries are still protected under this rule for all insurance and annuity contracts, mutual fund shares and the receipt of commissions allowable under that exemption.

But those who advise IRAs would only be allowed to receive commissions for insurance and annuity contracts and they would be subject to the Department of Labor’s Best Interest Contract Exemption.

That means that fiduciaries to IRAs wouldn’t be able to receive compensation for sales involving variable annuity or mutual fund sales under the proposed rule.

The insurance industry and broker-dealers responded to the proposal saying that the disclosure for variable annuities should be treated the same as fixed index or traditional annuities.

“Hopefully folks can convince the DOL to include variable annuities or look at other conditions to address concerns to put it in advice. You are going to end up with fundamentally different disclosures and how people get compensated,” Campbell says.

Paula Aven Gladych is a freelance writer based in Denver.

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