The applicability date for the long-awaited, much-debated Fiduciary Rule (see prior Jackson Lewis coverage here) is now upon us. So what does it mean?
The Secretary of the Department of Labor Alexander Acosta recently said in a Wall Street Journal piece that the Fiduciary Rule “may not align” with the President’s goals and that the Department will “seek additional public input on the entire Fiduciary Rule.” At the same time, Secretary Acosta wrote that the Department has “no legal basis to change the June 9 [applicability] date.” It is important to keep in mind, however, that June 9 is the start of a “transition period” which ends January 1, 2018.
The Temporary Enforcement Policy—really a non-enforcement policy—reflects the Department’s “general approach to implementation” consisting of “assisting…plans, plan fiduciaries, [and] financial institutions” rather than “citing violations and imposing penalties on” them. Therefore, the Department has said it will “not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions” during the transition period. This approach should offer some reassurance to those not quite ready to implement the Rule’s full requirements but are making sincere efforts towards those ends.
The FAQs remind us that as of June 9 investment advice providers to retirement savers become fiduciaries and “the impartial conduct standards” become requirements of the different available exemptions (for example the Best Interest Contract Exemption (prior JL coverage here), or PTE 84-24).
The impartial conduct standards require advisers and financial institutions to:
• Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
o Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
o Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm;
• Charge no more than reasonable compensation; and
• Make no misleading statements about investment transactions, compensation, and conflicts of interest.”
So, as the applicability date comes and goes, it’s worth noting that while Department of Labor enforcement may be scarce during the transition period, the rules still apply and the impartial conduct standards must be met. Some believe that the Department will extend the transition period beyond January or that perhaps Congress will step in to overrule the regulation. But absent further action, the transition period will end this coming January, and full compliance with all of the rule exemption conditions will be required for firms and advisers.