ARA Crafts New Levelized Fee Exemption in RFI Response
ARLINGTON, VA – In response to the Labor Department’s request for information (RFI) on its fiduciary regulation, the American Retirement Association (ARA) has requested an extension of the applicability date – and recommended a streamlined levelized fee exemption.
The ARA had authored – and championed – the notion of a “Level-to-Level” Exemption in its July 20, 2015, and September 23, 2015, comment letters on the proposed fiduciary rule. In its RFI response the ARA noted that, “while the Level Fee Fiduciary rules addressed a number of concerns, there are a number of concerns that continue to be a challenge for Financial Institutions and Retirement Investors,” particularly regarding the Best Interest Contract Exemption (BIC):
The alternative levelized fee exemption proposed by the ARA has four components;
- It incorporates the Impartial Conduct Standards already embraced in the new fiduciary regulation.
- Calls for a definition of Level Fee that is either based on a fixed percentage of the value of the assets or a set fee that does not vary on the basis of a particular investment recommended and which may be achieved through offsets, rebates and similar structures.
- Suggests that the determination of level be made within specific investment categories.
- Recommends that with respect to plans subject to ERISA, the Levelized Fee Exemption’s disclosure requirements would be deemed satisfied if a Retirement Investor is provided the disclosures already required by ERISA section 408(b)(2), with similar rules applying to non-ERISA accounts.
The ARA response also outlines special rules for investments such as self-directed brokerage arrangements, cash or money market funds, and company stock, where there are no improper incentives that would encourage an adviser to use those investments, and where there is no revenue-sharing or significant fees to incent their recommendation, and includes proposed exemption language consistent with its recommendations.
While the applicability date for much of the Best Interest Contract Exemption (“BICE”) was delayed until January 1, 2018, in its comment letter, the ARA recommends that the 2018 Applicability Date for the full BICE be extended until the later of 6 months after the Delayed Guidance finally becomes applicable in its entirety or 6 months after the date that any supplemental prohibited transaction guidance issued by the Department becomes applicable.
“Retirement investors deserve the protections of a best interest standard, and we have long supported that standard,” noted Brian Graff, CEO of the American Retirement Association. “However, a standard that relies on class action lawsuits for enforcement only serves to benefit trial lawyers. By eliminating conflicts through a level compensation requirement and by leveraging existing regulatory enforcement mechanisms, this new proposal will not only protect the interests of investors, but does so without imposing unnecessary and potentially unreasonable litigation costs, and in a manner that makes it more economically viable for advisors and advisory firms to continue to work with investors with smaller amounts in their IRA.”
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