DOL Fiduciary Rule Implementation Finally In SightJune 10, 2017
This original article was written by Brian Menickella for Forbes.
Brokers offering advice on retirement savings accounts are required to put clients’ interests first as of June 9, 2017. The requirement, also known as the Department of Labor (DOL) fiduciary rule, will officially take effect then, after delays and considerable angst.
The DOL has said it will not enforce the rule until after January 1, 2018, when the requirements about disclosures and new contracts are set to take effect. However, that too could change. If the current administration has its way, the fiduciary requirement could be amended in the future.
Shifting Political Sands and Questions About the Need
The new DOL rule expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA) to ensure that advisors act in the best interests of their clients, and to put clients’ interests above their own. It requires that fees and commissions be clearly disclosed to clients, and it expands the reach of the law to a wider range of financial professionals. Previously only Registered Investment Advisors (RIA’s) and their representatives were considered to be fiduciaries for advisory & consulting services. They are paid a fee based on an hourly basis or based on a percentage of a client’s holdings and this compensation method helps ensure they are acting in their client’s best interest. The new rule applies the requirement to anyone making a recommendation or solicitation of any kind of retirement account.
The DOL regulation was controversial when it was created under the Obama administration. The Obama Labor department believed the change to be needed to address biased financial advice that was significantly costing unwitting investors. However, to give the industry time to make changes, enactment was set for April 2017, during the next president’s term.
President Donald Trump wasted no time trying to halt the fiduciary rule implementation. Two weeks into his presidency, he signed an executive orderdelaying it. His order included instructions for the DOL to conduct an “economic and legal analysis” on the fiduciary rule’s potential impact. Some in the industry hoped Mr. Trump’s move would lead to changes or the outright elimination of the regulation. However, Labor Secretary Alexander Acosta indicated on May 22 that the DOL’s analysis found no “principled legal basis” to postpone the rule’s effective date further.
Acosta wrote an opinion piece in the Wall Street Journal announcing that “respect for the rule of law leads us to the conclusion that this date cannot be postponed.” He noted that the Labor Department has to “keep in mind two core principles: respect for the individual and respect for the rule of law.”
While the secretary acknowledged the importance of ensuring that savers and retirees receive prudent investment advice, he added that the fiduciary rule does not align with Mr. Trump’s deregulatory goals. In other words, stay tuned for future efforts to overturn or modify the DOL rule before the January 2018 implementation date.
The Transition Period
Starting June 9, the changes will be primarily be product and fee related. Additionally, in some companies, the types of products that can be presented by some types of advisors (i.e. securities licensed versus insurance brokers) will change. There will also be more use of independent, web-based advisory tools.
Additionally, the DOL issued a Field Assistance Bulletin outlining their plans for the phased implementation. The bulletin acknowledged that the department would not “pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions.” Clients and their lawyers, however, are not likely to view any non-compliant advisors in as lenient a light.
Advisors who assumed the DOL rule would never be implemented should get in line as quickly as possible. They will find themselves out of business or facing lawsuits for not being compliant and showing no good faith effort to comply.
The Conflict Of Interest FAQs on the DOL website spell out the exemption provisions for items delayed until next January. The new definition of fiduciary advice goes into effect on June 9, 2017. At that time, the details on Best Interest Contract (BIC) and Principal Transactions Exemptions will be available to fiduciary advisors. From the outset, however, advisors and financial institutions must comply with the “impartial conduct standards” that advisors adhere to fiduciary norms and fair dealing. The standards specifically require the industry to give advice that is in the “best interest” of investors, charge reasonable compensation for services, and make no misleading statements.