On April 6, 2016, the Department of Labor’s (“DOL”) proposed rule expanding the definition of the term “fiduciary” and addressing certain conflicts of interest was adopted and published (the “DOL Conflicts Rule”). While the final rule is not as extensive as the one proposed in April 2015, this new rule has requirements that will deeply effect financial institutions, including but not limited to broker-dealers (“BDs”) and registered investment advisers (“RIA”).
Some Notable Provisions of the Rule
Individual Retirement Accounts: The DOL Conflicts Rule includes Individual Retirement Accounts (“IRAs”) in their scope of types of retirement plans for purposes of fiduciary considerations. Historically, under most circumstances, IRAs had not been considered ERISA covered accounts.
Fiduciary: ERISA’s definition of a fiduciary is functional, meaning certain acts are deemed to be fiduciary acts and one becomes an ERISA fiduciary by performing one or more of these acts. The DOL Conflicts Rule greatly expands the scope of fiduciary acts and financial firms that had NOT previously fallen under the fiduciary definition, may now be deemed ERISA fiduciaries.
Covered Investment Advice: The DOL stated the following in their Fact Sheet that was issued with the new rule:
“Under the final rule, the fundamental threshold element in establishing the existence of fiduciary investment advice is whether a “recommendation” occurred. A “recommendation” is a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. The more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation.”
Another component of covered investment advice is the receipt of compensation for a recommendation, which includes both direct and indirect payments. An example of an indirect payment would be where an RIA does not charge a fee for the investment advice but one of their investment adviser representatives would receive 12B-1 fees if the recommendation is acted upon.
Non-Covered Investment Advice: The DOL’s Fact Sheet also outlines certain activity that would not be considered “fiduciary investment advice”, which includes but not limited to certain education services, general communications, and services provided by platform sponsors, just to name a few.
The Best Interest Contract Exemption (“BICE”)
ERISA regulations prohibit a financial institution from receiving compensation in conflict of interest situations (as further defined in the DOL’s FAQ release found here), unless the financial institution follows an ERISA prohibited transaction exemption. Under the DOL Conflicts Rule, financial institutions now have a new prohibited exemption they can follow. The requirements under BICE include but are not limited to:
- Adherence to standards of impartial conduct
- Giving only prudent advice in the best interest of clients
- Having written policies and procedures on conflict mitigation
- Providing disclosures on conflicts and other required information
- Maintaining a website with specific information on business services, compensation arrangements, and policies and procedures on mitigating conflicts
- Entering into a contract with an IRA client committing to performing the protective conditions
- Documenting the reasons reflecting why recommending certain transactions and/or account changes are in the best interest of the client.
The DOL is issuing additional exemptions pertaining to the new rule, which currently include the “Principal Transactions Exemption” and amendments to a current prohibited transaction exemption (PTE 84-24).
The DOL Conflicts Rule will become effective 60 days from the date of publication in the federal register and be applicable on April 10, 2017. The exemptions are slated to be available on April 10, 2017, with the exception of the BICE and Principal Transactions Exemption. Both have “phase in” components that cover a transition period of April 2017 to January 1, 2018, so financial institutions have time to comply with the more onerous requirements.
Core Compliance Can Help
For more information about the DOL Conflicts Rule and assistance in determining how the requirements are applicable to your firm, please contact us at (619) 278-0020.