On March 2, 2017, the DOL extended the applicability date of the Conflict of Interest Rule (the “Fiduciary Rule”) from April 10, 2017 to June 9, 2017. This week, with the extension drawing to a close, Secretary of Labor Alexander Acosta has reported that the DOL “found no principled legal basis” to delay the applicability date beyond June 9. It is now a near-certainty that the Fiduciary Rule will “go live” on that date.
Despite DOL statements about a “transition period” and a “phased approach to implementation,” the heart of the Fiduciary Rule will be effective in just two weeks. Most importantly, “investment advice providers to retirement savers will become fiduciaries.” As fiduciaries, they must provide impartial advice in the customer’s best interest and cannot accept payments creating conflicts of interest (i.e., commissions and 12b-1 fees) unless they qualify for an exemption. Among exemptions, the Best Interest Contract Exemption is especially enticing before more stringent requirements for its use go into effect on January 1, 2018. Until January 1, 2018, the only conditions for the BIC Exemption are: (i) investment advice is in the “best interest” of the retirement investor, meaning that it is both prudent and the advice is based on the interest of the investor rather than the adviser; (ii) no more than reasonable compensation is charged; and (iii) no misleading statements are made about the transaction, compensation or conflicts of interest. After January 1, 2018, an actual contract with particular terms will be required.
For many investment advisers (as opposed to broker-dealers and their registered representatives), the impending applicability of the Fiduciary Rule is not a significant concern The DOL has stated that a fee based on assets under management (i.e., flat asset based fees or traditional wrap fee arrangements) would typically not raise any issues under the Fiduciary Rule. However, for investment advisers not currently employing such fee arrangements, the Fiduciary Rule likely will require changes.
In an effort to calm would-be fiduciaries that will not be able to meet the June 9th deadline for compliance with the Fiduciary Rule, the DOL issued a temporary enforcement policy on May 22nd stating that it would not take any enforcement action against “fiduciaries who are working diligently and in good faith to comply with the new rule and exemptions” until January 1, 2018. The DOL also promised an enforcement approach prior to January 1, 2018 “marked by an emphasis on compliance assistance (rather than citing violations and imposing penalties).” This policy only applies to the DOL enforcement actions. Investors may still bring private actions against those who breach their fiduciary duties and the IRS may still impose excise taxes or seek civil penalties.
With applicability of the Fiduciary Rule just two weeks away, all investment advisers should assess its applicability to them and prepare accordingly. At a minimum, this means working with compliance staff and legal counsel to determine whether all advice given to retirement investors is: (i) in the client’s best interest (which investment advisers, as fiduciaries should already be doing), (ii) is impartial, and (iii) does not generate payments to the investment adviser giving rise to a conflict of interest.