Download The final version of the Department of Labor`s fiduciary rule was

The final version of the Department of Labor’s fiduciary rule was released on April 6, 2016. According
to Labor Secretary Thomas Perez, the final version of the 1,028-page rule was streamlined. Though the
final version of the fiduciary rule was revised in response to industry concerns, it is still likely to have a
dramatic impact on Registered Investment Advisers (“RIAs”), broker-dealers, insurance agents, and
financial institutions.
The final rule extended the initial implementation period from eight months to one year from the date
of its publication in the Federal Register. Full compliance will not be required until January 1, 2018. Firms
will have more time to comply with the Best Interest Contract Exemption (“BICE”) and the Principal
Transaction Exemption.
Best Interest Contract Exemption (“BICE”)
The fiduciary rule devotes 317 pages to the BICE, which is a new prohibited transaction exemption. The
BICE is intended to align the fiduciary adviser’s interests with those of the plan or IRA customer. The
BICE permits firms to continue using certain compensation arrangements that might otherwise be
forbidden if they:
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Act in their client’s best interest;
Adopt anti-conflict of interest policies and procedures, which include avoiding certain incentive
practices; and
Disclose any conflict of interest that might affect their best judgment as a fiduciary rendering
advice.
If all conditions of the exemption are satisfied, the BICE permits common forms of compensation, such
as commissions, revenue sharing and 12b-1 fees. This compensation may be paid by the client or a third
party, such as a mutual fund, assuming the conditions of the exemption are met. This exemption is
available to advisers that advise IRA investors, individual plan participants, and small plans.
The BICE requires the financial institution to acknowledge fiduciary status for itself and its advisers. The
financial institution and its advisers must abide by basic standards of impartial conduct including:
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Giving prudent advice that is in the customer’s best interest;
Avoiding statements that are misleading; and
Receiving compensation that is reasonable.
The financial institution must implement policies and procedures designed to mitigate the harmful
consequences arising from conflicts of interest. They must disclose basic information about their
conflicts of interest, as well as the cost of their advice.
To qualify for the BICE, the company and the adviser providing retirement investment advice must enter
into a contract with clients that:
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Commits the firm and the adviser to providing advice in the client’s best interest;
Warrants that the firm has adopted policies and procedures intended to mitigate conflicts of
interest; and
Clearly and prominently discloses any conflicts of interest, such as hidden fees.
The final version of the fiduciary rule clarifies that the BICE need not be signed until an account is
opened. Firms do not need to have existing customers sign a Best Interest Contract. Unlike the
proposed rule, firms are allowed to send a notice to existing clients to inform them that they have
assumed new obligations resulting from the new fiduciary standard. Existing customers may be alerted
to these change with an email or letter.
There is good news for investment advisory firms that charge a level fee to provide advice to clients
regarding rollovers from employer-sponsored retirement accounts into IRAs. They do not need to have
clients sign a Best Interest Contract, provided they can demonstrate that the rollover is in the client’s
best interest. Level-fee fiduciaries receive the same compensation regardless of the client’s choice of
investments, such as a percentage of assets under management, and they are not compensated based on
commissions or transaction fees.
The final rule also eliminated the list of approved investment products for retirement accounts.
Therefore, advice regarding all asset classes, such as non-traded REITs, is covered by the BICE. In
addition, there is no bias against the use of proprietary products.
The BICE permits clients to hold fiduciary advisers accountable if advice is not in their best interest. If
an adviser does not put their clients’ interests first, the client can bring a private action for breach of
contract.
Principal Transaction Exemption
The final fiduciary rule also includes a new exemption for principal transactions. The exemption permits
fiduciary advisers to recommend investments, such as certain debt securities, and sell them to the
customer directly from the firm’s inventory. They are also permitted to buy investment property from
the customer, as long as the adviser adheres to the consumer-protection conditions embedded in the
exemption.
As with the BICE, the Principal Transaction Exemption requires that advisers adhere to certain impartial
conduct standards including:
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Acting in customers’ best interest;
Avoiding misleading statements; and
Seeking to obtain the best execution reasonably available under the circumstances for the
transaction.
Definition of Fiduciary Investment Advice
The fiduciary rule does not apply to all communications with advisers. To fall within the definition of
fiduciary investment advice, the financial professional must make a recommendation. A recommendation
is a communication that in view of its content, context, and presentation, would reasonably be viewed as
a suggestion that the advice recipient engage in or refrain from engaging in a particular course of action.
Communication that is individually tailored to a specific advice recipient or recipients is more likely to
be viewed as a recommendation.
In general, the fiduciary rule does not apply to:
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Educational activities dealing with retirement savings, as well as general financial and investment
guidance;
General communications such as newsletters, commentary on talk shows, and market data that
is general in nature;
Service providers such as record-keepers and third-party administrators;
Transactions with independent plan fiduciaries possessing financial expertise;
Certain communications and activities made by advisers to ERISA-covered employee benefit
plans in swap or security-based swap transactions; and
Employees of plan sponsors, affiliates, employee benefit plans, employee organizations or plan
fiduciaries.
“Hire me” communications are not viewed as fiduciary investment advice.
More Fiduciary Rule Guidance Is On the Way
Regulatory Compliance LLC and its sister company, National Compliance Services, Inc., are allocating
considerable resources to analyze the fiduciary rule and its impact on clients. More guidance is
forthcoming in the form of webinars and publications.
Aside from analyzing the 1,000 plus pages of the fiduciary rule, we will monitor related rulemaking.
Valuation and appraisal requirements were removed from the rule and will be addressed during separate
rulemaking. In addition, the Department of Labor is finalizing an amendment to PTE 84-24, an existing
exemption which provides relief for insurance agents and brokers, as well as insurance companies.
Although the revised PTE 84-24 contains increased protection for retirement investors, it will facilitate
access by plans and IRAs to fixed rate annuity contracts. Complex products, such as variable and fixed
indexed annuities, can be recommended if there is compliance with the BICE.
While financial institutions and fiduciary advisers may feel overwhelmed by the new rule, it is clear that
the Department of Labor responded to comments and criticism of its proposed rule. The changes made
from the proposed fiduciary rule can be found at http://www.dol.gov/ebsa/pdf/conflict-of-interestchart.pdf.