The White House recently announced the Department of Labor’s (DOL) highly anticipated final fiduciary/conflict of interest rule and exemptions intended to ensure that retirement savers get investment advice in their best interest.
Following its initial proposal in April 2015, which was roundly criticized by the securities industry, the DOL conducted a comment period lasting over five months and received extensive feedback through four days of public hearings, receiving thousands of comment letters, and conducting more than 100 meetings. Upon considering this input, the DOL today issued its final rule, which is intended to alleviate certain of the industry’s concerns, while at the same time protecting the best interests of retirement savers.
The DOL’s conflict of interest final rule and related exemptions is intended to protect investors by requiring all who provide retirement investment advice to retirement plans and IRAs to abide by a “fiduciary” standard – putting their clients’ best interest before their own profit.
The initial proposal included a very short eight-month implementation period. The final rule will begin to take effect in part by April 2017, with full implementation due in January 2018.
The initial proposed rule has been widely covered and will not be rehashed here. Some of the most important changes from the proposed rule to the final rule and exemptions include:
- Clarifying the standard for determining whether a person has made a “recommendation” covered by the final rule
- Clarifying that marketing activities without making an investment recommendation does not constitute fiduciary investment advice
- Removing appraisals from the rule and reserving them for a separate rulemaking project
- Subject to certain conditions, allowing asset allocation models and interactive materials to identify specific investment products or alternatives for ERISA and other plans (but not IRAs) without being considered fiduciary investment advice
- Providing an expanded seller’s exception for recommendations to independent fiduciaries of plans and IRAs with financial expertise and plan fiduciaries with at least $50 million in assets under management
Best Interest Contract Exemption (BICE)
- Eliminating the limited asset list from the BICE
- Expanding the coverage of the BICE to include advice provided to sponsors of small 401(k) plans
- Eliminating the contract requirement for ERISA plans and participants
- Not requiring contract execution prior to advisers’ recommendations
- Specifically allowing for the required contract terms to be incorporated in account-opening documents
- Providing a negative consent process for existing clients to avoid having to get new signatures from those clients
- Simplifying execution of the contract by requiring the financial institution to execute the contract rather than each individual adviser
- Clarifying how a financial institution that limits its offerings to proprietary products can satisfy the best interest standard
- Streamlining compliance for fiduciaries so that a rollover from a plan to an IRA or moving from a commission-based account or moving from one IRA to another will receive only level fees
- Eliminating most of the proposed data collection requirements and some of the more detailed proposed disclosure requirements
- Requiring the most detailed disclosures envisioned by the BICE to be made available only upon request
- Providing a mechanism to correct good faith violations of the disclosure conditions without losing the benefit of the exemption
SIFMA, the Securities Industry and Financial Management Association, issued the following statement from Kenneth E. Bentsen, Jr., SIFMA President and CEO, in reaction to the DOL’s issuance of its final fiduciary rule:
“As with the prior proposal, this final rule is voluminous and every word matters. It will take time to review the rule to determine its impact on investors and their ability to save for retirement. SIFMA has long supported a best interest standard for all advisors, yet we remain concerned that the DOL’s rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement, at a time when we all agree that more can and should be done. While we continue to believe the Department’s methodology is greatly flawed and lacking sufficient empirical basis, a poorly drafted rule could result in unnecessarily raising costs for investors while limiting their choice, a concern shared by many commentators and other regulators.”
The following chart propounded by the DOL discusses the most frequently raised issues and the DOL’s position on how it attempted to address them in the final rule:
Click here to view table.