Tuesday, June 6, 2017

DOL Fiduciary Rule to Apply - June 9, 2017

Following numerous delays, on May 23, 2017, the Labor Secretary finally issued a statement that it would not seek another delay in the implementation of the Department of Labor’s Fiduciary Rule and its Related Prohibited Transactions Exemptions (“Fiduciary Rule”). The final rule, officially titled “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule -- Retirement Investment Advice” went into effect almost a year ago on June 7, 2016, but the compliance effective date of the rule is June 9, 2017 with full compliance required by January 1, 2018. For additional details on the Fiduciary Rule read our blog post and Question and Answer discussion.

Recent History of the Fiduciary Rule

A presidential memorandum directed at the Labor Secretary back in February called for the Department of Labor (“DOL”) to examine the implications of the rule on retirement savers. On March 6, 2017, the DOL proposed a 60-day delay of the Fiduciary Rule. A few days later on March 10, 2017, a temporary enforcement policy relating to its 60-day delay proposal was released. This policy stated that the DOL would not initiate enforcement actions against advisors who did not satisfy the conditions of the rule or the exemptions during the gap period in which the rule becomes applicable but before a delay is implemented. On April 10, 2017, the DOL issued a rule extending the original applicability date from April 10, 2017 to June 9, 2017. After much debate on the legal ramifications of a further delay on the Fiduciary Rule, the DOL issued a statement that it would not seek a delay.

What is the Fiduciary Rule?

The Fiduciary Rule expands the definition of a fiduciary to anyone providing investment advice to a retirement plan or an Individual Retirement Accounts (“IRA”) for compensation (the “Advisor”). The Fiduciary Rule will apply to all retirement accounts, including rollover transactions. This is the case even if the rollover is not specifically accompanied by a recommendation by the Advisor on how to invest the assets following the rollover or if the assets will not be covered by ERISA following the recommendation. There are three ways to comply with the Fiduciary Rule while making recommendations to retirement investors:

  1. Level Fee Fiduciary (a streamlined version of the Best Interest Contract Exemption)
  2. Best Interest Contract Exemption
  3. Principal Transaction Exemption

Level Fee Fiduciary

Advisors that charge a level fee (i.e. provide services only on an “asset under management basis” or “fixed fee” basis that does not vary based on an investment recommended, not based off of commissions or trade based fees) and adheres to the following course of conduct:

  1. Acknowledgment of Fiduciary Status. The Advisor will be required to acknowledge, in writing, that it is a fiduciary. Most Advisors already acknowledge this in their Form ADV Part 2. However, since many clients have been hearing about the Fiduciary Rule in the news it is a best practice for Advisors to proactively remind clients of their fiduciary status through a tailored notice.
  2. Adhere to an impartial conduct standard. This standard does not require Advisors to find the best or lowest cost product, but the Advisor must act in the retirement investor’s best interest, charge no more than reasonable compensation (i.e. relative to factors such as the Advisor’s geographic area, size, complexity of engagement, etc.), and not make misleading statements about investment transactions, compensation, and conflicts of interest.

Best Interest Contract and Principal Transactions Exemptions

The Fiduciary Rule generally prohibits Advisors from receiving payments from third parties and from recommending certain products that increase their own compensation in connection with investment advice rendered on retirement accounts. The prohibited transactions include: (1) a prohibition against self-dealing, i.e. dealing with the assets of a retirement account in the fiduciary’s own interest or for his or her own account, (2) acting in an individual or any other capacity in any transaction involving a retirement account, or representing a party whose interests are adverse to the interests of the retirement account, and (3) receiving any compensation for one’s own account from anyone dealing with the retirement account in connection with transactions involving assets of the plan, i.e. anti-kickback provisions.

In order to address the conflicts that are inherent in these prohibited transactions, the Fiduciary Rule provides relief for compensation arrangements, such as commissions and revenue sharing, that an Advisor might receive in connection with investment advice to retail retirement investors. The Best Interest Contract Exemption requires Advisors to agree in writing with the client to its fiduciary status, adhere to basic standards of impartial conduct by giving prudent advice in the client’s best interest, avoid misleading statements, and receive only reasonable compensation. Additionally, Advisors must adopt policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest, disclose basic information about their conflicts of interest and the cost of their advice. Similarly, the Principal Transactions Exemption permits Advisors to sell or purchase certain debt securities and other investments out of their own inventories to or from plans and IRA owners if the Advisor adheres to Impartial Conduct Standards and discloses any conflicts of interest.

The Department of Labor has also issued a Field Assistance Bulletin 2017-02, A Temporary Enforcement Policy on the Fiduciary Duty Rule, which provides relief to Advisors who are working to come into compliance with the rule from enforcement actions by the Department of Labor beginning on June 9, 2017 and ending on January 1, 2018. The Department of Labor has also provided additional guidance to assist with the implementation of the Fiduciary Rule by issuing another set of FAQs. Please click here to read the FAQs. Among other things, the FAQs provide for grandfathering relief under the BICE for compensation received in connection with investment advice given prior to the applicability date of June 9, 2017. Click here to read the guidance and FAQs.

Contributors:
Brendan Furey
Conor Anderson