The Secretary of Labor, John Acosta, announced recently that no further delays will apply to the Department of Labor’s new Fiduciary Rule on investment advice conflicts of interest and related prohibited transaction exemptions. The effective date of the Rule is June 9, 2017, with an enforcement date of January 1, 2018. The final Fiduciary Rule significantly expands the circumstances in which broker-dealers, investment advisers, insurance agents, plan consultants and other intermediaries are treated as fiduciaries to ERISA plans and individual retirement accounts (IRAs). When treated as fiduciaries, these individuals are precluded from receiving compensation that varies with the investment choices made or from recommending proprietary investment products, absent an applicable exemption.
Generally, the Fiduciary Rule provides that individuals providing fiduciary investment advice may not receive payments that pose a conflict of interest, unless a prohibited transaction exemption (PTE) applies. The Rule recognizes several new PTEs, including
1) “Best Interest Contract Exemption” (BIC Exemption): Under the BIC Exemption, an advisor and firm may receive commissions and revenue sharing so long as the adviser and firm enters into a contract with its clients that:
- Commits the firm and adviser to providing advice in the client’s best interest.
- Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest.
- Clearly and prominently discloses any conflicts of interest that may prevent the adviser from providing advice in the client’s best interests.
2) Principal Transactions Exemption: Under this new PTE, an adviser may recommend fixed income securities and sell them from the adviser’s own inventory as long as the adviser adheres to the exemption’s consumer-protection conditions ensuring adherence to fiduciary norms and basic standards of fair dealing.
Financial institutions are advised to adopt policies and procedures ensuring that advisers comply with the Rule’s impartial conduct standards. However, during the transition period (until January 1, 2018), there is no requirement to give investors any warranty of their adoption, and those standards will not necessarily be violated if certain conflicts of interest exist. Sponsors of ERISA-governed plans, as plan fiduciaries, are advised to clearly identify circumstances where their plan’s record keepers and advisors are acting as fiduciaries, and which services or actions are permitted under the rule’s carve-outs.
Finally, while we recommend complying with the Fiduciary Rule as soon as possible following the June 9th effective date, we note that there exists some uncertainty with the Fiduciary Rule as the DOL (i) continues to evaluate public comments, and (ii) under direction of the Trump Administration, is charged with reexamining the Fiduciary Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.