At last, the long-awaited fiduciary rule is out. The final version, released April 6, is substantially changed from the proposed rule. The Department of Labor released a fact sheet and chart showing the changes between the proposed and final rule.
The fiduciary rule clarified what constitutes retirement advice, requiring that investment advisers act in the best interest of their clients and disclose any potential conflicts of interest.
Those who advise IRA owners on how to invest their assets and whether to rollover their IRAs can now be fiduciaries. For those who advise employee benefit plans, there are fewer changes, but the extent of them are still unknown. David Cowart, of Dentons US LP, Dallas, told Bloomberg BNA April 8, “It is going to depend in part on the size of the plan. A lot of big plans have been seeing this coming and have expended resources (in many cases, considerable resources) adding protections that make many if not most, of these guidance changes unnecessary. Plans that have not made those protective changes (which anecdotally includes more of the smaller plan universe) are facing some probably significant adjustments now.”
Marcia Wagner of the Wagner Law Group in Boston told Bloomberg BNA April 7, “Plan sponsors now must understand how their providers are affected by the new rules, lest their compensation be a prohibited transaction for which the plan sponsor could be jointly liable. Sponsors need to reach out to their vendors to inquire whether and how the plan's fee structure and amount might be affected as well as their contractual relationship.”
The rule will take effect in April 2017, but advisory firms will only be required to comply with more limited conditions in order to take advantage of the best-interest-contract exemption, including acknowledging their fiduciary status, adhering to the best-interest standard and making basic disclosures of conflicts of interest. The other requirements will go into full effect on Jan. 1, 2018. During the phase-in period, the DOL will focus on compliance assistance.
The key provisions of the rule, which is also known as the conflict-of-interest rule, are:
• Advisers won't act as fiduciaries merely because they recommend that a customer hire them to render advisory or asset management services.
• Investment advice doesn't include communications that a reasonable person wouldn't view as an investment recommendation, such as a newsletter or general market data.
• The Best Interest Contract Exemption (BICE) permits firms to continue to rely on many current compensation and fee practices, as long as they acknowledge the fiduciary status for itself and its advisers; adhere to basic standards of impartial conduct including giving prudent advice that is in the customer's best interest, avoiding misleading statements, and receiving no more than reasonable compensation; have policies and procedures designed to mitigate harmful impacts of conflicts of interest; and disclose basic information about their conflicts of interest and the cost of their advice.
• A “level fee” provision allows advisers and firms that receive only a “level fee” in connection with the advice they provide to rely on the BICE without entering into a contract so long as special attention is paid and documentation is kept to show that certain specific recommendations, including a recommendation to roll over assets from an employer plan to an IRA, are in the customer's best interest.
• The BICE is available for proprietary products and any assets.
• The BICE requirement was eliminated for ERISA plans and their participants and beneficiaries. However, advisory firms must acknowledge in writing that they, and their advisers, are acting as fiduciaries when providing investment advice.
• A contract doesn't have to be signed until any time before, or at the time of, the execution of a new recommended transaction.
• Only the firm and the client must sign the contract. For example, when a client talks to a call center representative, that person is covered by the overall contract and doesn’t need an individual one.
• Data-retention requirements are eliminated. Instead, firms must retain only the records showing that they complied with the rule.
• A new IRA private cause of action has been created by the BICE contract.
Cowart told Bloomberg BNA that an adviser for an individual IRA who becomes an investment advice fiduciary has not become an ERISA fiduciary. ERISA does not apply to most IRAs, he said. However he/she will become a fiduciary under Section 4975 of the Internal Revenue Code, which does not provide for a private right of action to enforce a fiduciary breach. So for IRAs, there will likely not be a private cause of action for a breach of a statutory fiduciary duty. But the BICE contract required for IRA advisers who need the BICE will create a private cause of action against the advisor for breach of the BICE contract. For ERISA-covered plans, there will be ERISA’s normal private cause of action for breach of ERISA fiduciary duties, in addition to the contract right.
Cowart told Bloomberg BNA, “For IRAs, this new guidance, now that it is in final form and compliance target dates are out there, is going to be a watershed moment in IRA history, a moment that transformed how that industry gets investment advice and assistance.”
Cowart also said, “For ERISA-covered plans, this guidance will demand a more nuanced response. Plans that cover fewer participants and have less fiduciary protections already built around them will find these changes the most jarring. At first, confusion is going to be almost overwhelming, while plans sort out who has to do what for whom and by when. It is not going to be a simple or necessarily intuitive task. There will be changes in the market, and some products and services are going to wither away (maybe particularly in the indexed annuity markets, which were unpleasantly surprised) and then a few will rebound, while others will be rejuvenated. Plans will see different and unfamiliar disclosures, probably more of them in the short term.”
“Plans would be well advised to make it an immediate practice to hang on to the new investment-related disclosures they are going to see. If the Department of Labor's investigative practices under Section 408(b)(2) are any indicator, the Department is going to want to see proof that the plan has gotten what it was supposed to get under this new regime. In the meantime, talk with your plan's investment advisors and work with them as they inch towards compliance,” Cowart said.
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