The New Fiduciary Rule’s Important Take Aways

June 02, 2017

On April 7, 2017, just three days before the original set applicability date, the Department of Labor announced they will be postponing the applicability dates originally stated in the Fiduciary Rule from April 10, 2017 to June 9, 2017, and certain provisions in the exemptions will be further delayed until January 1, 2018.

Under this new rule, any individual who offers investment advice for a fee or any other form of compensation (whether it be direct or indirect) will be considered a fiduciary. They are therefore required to act only in the best interest of the recipient of their advice, with no regard to their own interests. In other words, almost any insurance or investment recommendation to a plan, participant, or IRA will now be a fiduciary act, and is therefore required to work in the best financial interests of a plan and its participants.

As wonderful as this sounds, it will prove to be a big transition for many firms. This is why the Department has allowed for a transition period lasting from June 9, 2017 – January 1, 2018. During this time fiduciaries must simply comply with the Impartial Conduct Standards (ICS) defined by the DOL (outlined below):

The standards specifically require advisers and financial institutions to:

  • Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
    • Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
    • Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm;
  • Charge no more than reasonable compensation
  • Make no misleading statements about investment transactions, compensation, and conflicts of interest. [1]

The applicability of all other 2016 amendments will be delayed until January 1, 2018.

As for the implementation of the Rule during the transition, rather than imposing strict penalties and citing violations, the Department has chosen to take the stance of an assistant. According to the Department, they will not pursue claims against any fiduciary who is “working diligently and in good faith to comply with the fiduciary duty rule and exemptions.” They have also asked the IRS to not apply the §4975 or related reporting obligations to any transaction or agreement where the Labor Department’s temporary enforcement would apply. That said, if the fiduciary fails to make these diligent and good-faith efforts to comply with the Rule, then he/she will lose the benefit of the temporary non-enforcement policy.

Even though the Rule will be put in to action in a week, there is still some potential for further changes to be added during the transition period. According to the Department, the “review of the Fiduciary Rule and exemptions is ongoing…[and] based on the results of the examination…additional changes will be proposed.” In an effort to see what further changes might be necessary, a Request for Information (RFI) will soon be released to ask for public input on ideas for possible new exemptions or regulatory changes.

There is evidence to suggest that the results of the RFI could prompt the Department to not only make further changes to the rule, but also further delay the final implementation date of January 1, 2018. Now, you may be wondering why such a delay would be necessary; well, according to recent market developments, some of the most promising responses to the Fiduciary Rule (such as “clean shares”[2]) are likely to take more time to implement than originally thought when the Department set the January 1, 2018 date for full compliance. So, by allowing additional time firms have the opportunity to create compliance mechanisms that are less costly and more effective than the measures they might resort to if given less time. In other words, the Department wants to give firms enough time to create well-though-out and long-term solutions that will be better for plans and their participants in the long run.

Regardless of what the rule eventually morphs into, the key takeaway for trustees and plan sponsors is this: the Department has established a framework that, in principal, grants further protections if they hire investment fiduciaries. Compared to the suitability standard that dominated the marketplace prior to the DOL’s fiduciary rule, plan sponsors can now, in effect, delegate investment fiduciary duties to their investment advisor. However, the regulations are very clear that fiduciary duties can only be delegated to other fiduciaries. Non-fiduciary service providers who sell only “suitable” investments are not fiduciaries, and therefore cannot be expected to represent the best interest of the plan’s participants or trustees.
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For further reading on this subject, check out:

Impartial Conduct Standard: More Than Meets the Eye – NAPA Net: http://www.napa-net.org/news/managing-a-practice/regulatory-compliance/impartial-conduct-standard-more-than-meets-the-eye/

Steering Clear of Fiduciary Enforcement Troubles – NAPA Net: http://www.napa-net.org/news/managing-a-practice/regulatory-compliance/steering-clear-of-fiduciary-enforcement-troubles/

Conflict of Interest FAQs (Transition Period) – U.S. Department of Labor: https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2

Fiduciary Rule to Go Live June 9, 2017: http://www.truckerhuss.com/2017/05/fiduciary-rule-to-go-live-june-9-2017/

The Department of Labor Confirms June 9th as the Effective Date of the Fiduciary Rule: What Employers Need to Know Now: http://www.dickinson-wright.com/news-alerts/effective-date-of-the-fiduciary-rule

[1] U.S. Department of Labor. Conflicts of Interest FAQs (Transition Period). May 2017. Accessed May 30, 2017.

[2] “Under this approach, the clean shares sold by the broker would not include any form of distribution-related payment to the broker. Instead, the financial institution could set its own commission levels uniformly across the different mutual funds that advisers may recommend, substantially insulating advisers from conflicts of interest among different mutual funds.”  – DOL Conflicts of Interest FAQs (Transition Period)

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