Wealth Management – Department of Labor Fiduciary Rule Summary

The Department of Labor published their final Fiduciary Rule (“Definition of the Term ‘Fiduciary’; Conflict of Interest Rule – Retirement Investment Advice) in April, 2016 with an original applicability date of April, 2017 which was subsequently extended until June, 2017. This included a phased implementation period for the Best Interest Contract (BIC) Exemption and the Principal Transactions Exemption ending January 1, 2018. As of August, 2017 securities brokerage companies now have until July 1, 2019 for full compliance with the rule.

This rule is an update of the 1974 ERISA rule for the five test rule used to determine fiduciary status. An update was needed due to the significant changes in the market related to retirement products offered as well as evolving forms of investment advice. At this point any company that provides analysis, recommendations of investments, and education should have reviewed the rules to ensure compliance and/or developed their plan for compliance.

The new rule requires that advisors overseeing retirement accounts to put their clients’ interest ahead of their own. The effect of this rule is to expand the scope of those who qualify as fiduciary for companies of all sizes. In addition, under the new rule, financial investments of any type may be used including variable annuities, nontraded REITS, and listed options using the application of the “Best Interest Contract” exemption. As long as the contract is in the best interest of the client, the advisor is allowed to collect commissions and compensation from revenue sharing arrangements as long as the advisor collects a “reasonable” compensation and avoids misleading statements about fees and conflicts of interest. The rule clarifies that the Department has no bias against proprietary products and it provides advisors selling those products with clear steps for compliance with the best interest contract exemption.

The rule also provides clarification for what types of communication qualify as educational materials, and therefore not covered under the fiduciary rule, versus those that can form a fiduciary relationship covered by the rule. The Department of Labor has allowed for a transition period on the exemption for selected components by applying impartial conduct standards. The three areas impacted by the transition period are (1) Best Interest Contracts, (2) Class exemption for principal transactions in certain assets between investment advice fiduciaries and benefit plans and IRAs, and (3) Prohibited transactions.

The Department has determined that temporary enforcement relief is appropriate and in the interest of plans, fiduciaries, participants, beneficiaries, and owners of the products for companies working diligently and in good faith rather than citing violations and imposing penalties (See Field Assistance Bulletin No 2017-02). As of August, 2017, the transition period has been extended through June, 2019. This extended date applies to phase 2 of the rule addressing exemptions, which regulate the sale of annuities sold with retirement funds regarding the Best Interest Contract Exemption that requires a financial institution to accept liability for each contract as well as gives clients the right to sue over investment advice.

Some consumer groups feel that the extension is a “death by delay” and that the rule will never be fully implemented or enforced.