After months of delays, many in the industry have been watching to see how the Department of Labor’s Fiduciary Rule was going to land and in what form. Secretary of Labor Alexander Acosta’s op-ed in the Wall Street Journal on May 22, has brought some clarity, albeit perhaps temporary, to this administration’s plans.
Let’s step back – what is the Fiduciary Rule?
The rule essentially expands the definition of financial advisers with fiduciary duty under ERISA and imposes stricter regulations on their advisory relationships as they relate to retirees and retirement accounts. The definition of a fiduciary now includes any individuals receiving compensation for making investment recommendations to a retirement plan participant or owner of an IRA.
Some in the industry are unsure of whether the rule will achieve it’s intended goals. Acosta writes, “the rule’s critics say it would limit choice of investment advice, limit freedom of contract, and enforce these limits through new legal remedies that would likely be a boon to trial attorneys at the expense of investors.” Proponents of the rule say that “if Secretary Acosta truly respects the will of the people, he will stand up to the industry lobbyists who want a fiduciary standard in name only, and he will proceed with implementation of a rule that puts real teeth into the best interest standard by making it legally enforceable and by reining in practices that encourage and reward advice that is not in customers’ best interests. That is what Americans saving for retirement expect and deserve.”
As the different perspectives above might suggest, there has been a long history of stop and go with this regulation. After being actively worked on under the Obama administration, President Trump wanted his agencies to take a closer look; he signed a Presidential Memorandum directing the DOL to re-examine the rule shortly after he took office in February 2017. Following that, implementation of the rule was postponed from April 10 to June 9, 2017. The guidance recently issued by DOL clarifies that while some aspects of the rule (namely the Impartial Conduct Standards) will be applicable on June 9, there will be a transition period through December 31, 2017, after which firms will be expected to come into full compliance with the other aspects of the rule (including the full requirements of any Prohibited Transaction Exceptions).
What are the main elements of the rule?
All firms must comply with the Impartial Conduct Standards as of June 9, 2017. These are basically consumer protection standards which require applicable advisers to:
- Act in the client’s best interest
- Receive no more than reasonable compensation
- Refrain from making misleading statements
During the transition period, June 10 – December 31, 2017, firms should be working to come into compliance with the other components of the rule. Regulators have indicated they will not recommend enforcement to any firm who is making a good faith effort to comply.
Complying with the rule may mean making specific written disclosures and representations of fiduciary compliance in communication with investors. Much of this regulation is premised on the goal to reduce or eliminate (or at least make crystal clear to investors) where conflicts of interest exist with regards to adviser compensation for investment decisions in a retirement account. Generally the rule will prohibit an adviser making variable commissions, so they shouldn’t be able to make more or less money depending on which products the client agrees to buy.
There are three major exceptions to the standards of the Rule on which firms may be relying:
- Best Interest Contract Exemption: Relief for an adviser to still accept variable commissions
- Class Exemption for Principal Transactions: Relief for an investment adviser or broker dealer to still engage in a riskless principal or principal transaction (explained well by Mintz Levin here)
- PTE 84-24 (on Annuities): Relief for an adviser to still accept 3rd party payments for insurance products
All of the above are dependent on the adviser following the impartial conduct standards, making appropriate disclosures and maintaining proper documentation. Read more on exceptions from Davis Polk here. Barring any material changes to the rule, the requirements for these exceptions will be in effect January 1, 2018.
What does this mean?
On a practical level, this means you may want to:
- Look at your policies and procedures and ensure the impartial conduct standards are covered (and think about how you will evidence compliance with those standards)
- Begin documenting analysis supporting recommendations concerning IRA rollovers, which is a primary example of advisory recommendations not previously covered by the DOL fiduciary standard
- Think about training and communications to your staff to ensure they understand their responsibilities
- Make sure you are prepared to devote time in the later half of 2017 to DOL readiness activities, as updates to additional policies will likely be considered best practice even for fee level advisers
How can we help?
Ascendant Consulting Services
- Ascendant consultants can partner with firms to implement necessary policies and procedures for compliance with the DOL Fiduciary Rule
- Use ACM to update your risk matrix and controls
- Update your policies and procedures
- Distribute policies and training material to your employees and capture their attestation that they understand and will comply (we’re happy to help you create something)