May 24, 2017

May 24, 2017

Subscribe to Latest Legal News and Analysis

May 23, 2017

Subscribe to Latest Legal News and Analysis

May 22, 2017

Subscribe to Latest Legal News and Analysis

“Real” Requirements of Fiduciary Rule: Interesting Angles on DOL’s Fiduciary Rule #47

This is my 47th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

I have seen articles and heard comments about the fiduciary rule and exemptions that are misleading. The purpose of this article is to clarify the requirements of the fiduciary rule and the related exemptions.

In order to discuss the “fiduciary package” of guidance, we need to divide it into two categories. The first is the transition rule, for the period from June 9 to December 31, 2017. The second category is the final set of the regulation and exemptions, which are scheduled to become applicable on January 1, 2018, and which are being reviewed by the DOL for changes.

The Transition Rules

The transition rules require, in essence, that advisers, and their supervisory entities, “adhere to” the following:

  • The Best Interest Standard of Care. The Best Interest standard of care is a combination of ERISA’s prudent man rule and duty of loyalty. The consequence is that advisers and their supervisory entities need to engage in a prudent process to develop their investment and insurance recommendations to plans, participants and IRA owners.

  • Reasonable compensation. “Reasonable compensation” is a market-based standard. In other words, what would a transparent and competitive market pay for the services of the adviser and his or her supervisory entity?

  • Misleading statements. The adviser cannot make materially misleading statements about the investments, fees, material conflicts of interest or other matters that would be material to the investment decision.

I used the phrase “adhere to” (as the guidance does) to emphasize that there is no contract or disclosure requirement. In other words, it is a conducted-based standard.

Think about it. Beginning on June 9, an adviser’s recommendations to plans, participants and IRAs has to be prudent and loyal; the adviser cannot mislead the retirement investor; and the adviser and supervisory entity’s compensation must be reasonable. The question is, are these reasonable requirements?

However, on January 1, 2018, the full Best Interest Contract Exemption (BICE) will apply. As currently written, it is disruptive of existing practices, and would be expensive to comply with. That is obviously a problem. However, it will likely be revised. Unfortunately, we don’t know what the changes will be. Hopefully, though, they will reduce the compliance burden while maintaining investor protections.

Notice, though, that I referenced needed changes to the Best Interest Contract Exemption, but not to the fiduciary rule. That’s not to say that the fiduciary rule cannot be improved . . . because it can. However, most of the objections are to the Best Interest Contract Exemption and not to the rule. Unfortunately, people put a label on the package of guidance and, when objecting to the fiduciary rule, their complaints are usually about the Best Interest Contract Exemption. That adds to the confusion about the fiduciary standard of care and its requirements, as opposed to the concerns about the conditions in the exemptions.

While there are some concerns about the fiduciary rule itself, for example, some broker-dealers argue that the Securities and Exchange Commission should write a single fiduciary rule for all investment accounts, including both qualified and non-qualified accounts. That raises the issue of whether there is, or should be, a distinction between accounts that are designed for producing retirement income and those that are intended for personal investing. If the answer is “yes,” then investment advice will be different for the two types of accounts, regardless of which agency writes the rules.

To further complicate matters, the main issue is the prohibited transaction rules, which are statutory, rather than regulatory. Neither the SEC, nor FINRA nor the DOL, can issue regulations that conflict with a statute. As a result, even if the standard of care is changed, the prohibited transaction exemptions will continue to be written by the Department of Labor. In other words, the SEC does not have the statutory authority to create exemptions from the prohibited transaction rules.

As concluding thoughts, while the fiduciary regulation and the transition rules for the exemptions will require changes in practices (for example, fiduciary training and documentation), those rules should not be overly burdensome or expensive to comply with. However, that changes on January 1, 2018 when the final exemptions will apply. Fortunately, the DOL will be reviewing the requirements of those exemptions and, hopefully, the requirements will be modified to be more reasonable in terms of the cost and burden of compliance.


Part 1- Interesting Angles on DOL’s Fiduciary Rule #1

Part 2 - Best Interest Standard of Care: Interesting Angles on the DOL’s Fiduciary Rule #2 

Part 3 - Hidden Preamble Observations: Interesting Angles on the DOL’s Fiduciary Rule #3

Part 4 - TV Stock Tips and Fiduciary Advice: Interesting Angles #4

Part 5 - Level Fee Fiduciary Exemption: Interesting Angles on DOL’s Fiduciary Rule #5

Part 6 - Fiduciary Regulation And The Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #6

Part 7 - Fiduciary Regulations And The Exemptions : Interesting Angles on the DOL’s Fiduciary Rule #7

Part 8 - Designated Investment Alternatives: Interesting Angles on the DOL’s Fiduciary Rule #8

Part 9 - Best Interest Standard and the Prudent Man Rule: Interesting Angles on the DOL’s Fiduciary Rule #9

Part 10 - FINRA Regulatory Notice: Interesting Angles on the DOL’s Fiduciary Rule #10

Part 11-ERISA and the Internal Revenue Code: Interesting Angles on the DOL’s Fiduciary Rule #11

Part 12- Potential Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #12

Part 13-Investment Policies: Interesting Angles on the DOL’s Fiduciary Rule #13

Part 14- Investment Suggestions: Interesting Angles on the DOL’s Fiduciary Rule #14

Part 15- Best Interest Contract Exemption: Interesting Angles on the DOL’s Fiduciary Rule #15

Part 16 - Adviser Recommendations: Interesting Angles on DOL’s Fiduciary Rule #16

Part 17 - Level Fee Fiduciary: Interesting Angles on DOL’s Fiduciary Rule #17

Part 18- Best Interest Contract Exemption and IRA Advisor Compensation: Interesting Angles on the DOL’s Fiduciary Rule #18

Part 19- Interesting Angles on the DOL’s Fiduciary Rule #19: Advisors' Use of "Hire Me" Practices.

Part 20- Three Parts of "Best Interest Standard of Care": Interesting Angles on the DOL’s Fiduciary Rule #20

Part 21- Retirement Plan Documentation and Prudent Recommendation: Interesting Angles on the DOL’s Fiduciary Rule #21

Part 22-Banks and Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #22

Part 23-Prohibited Transactions: IRA and RIA Qualified Money: Interesting Angles on the DOL’s Fiduciary Rule #23

Part 24 - Differential Compensation Based on Neutral Factors

Part 25-Reasonable Compensation Versus Neutral Factors: Interesting Angles on the DOL’s Fiduciary Rule #25

Part 26- Interesting Angles on the DOL’s Fiduciary Rule #26- Reasonable Compensation for IRAs: When and How Long?

Part 27 - Definition of Compensation

Part 28 - What About Rollovers that Aren’t Recommended?: Interesting Angles on the DOL’s Fiduciary Rule #28

Part 29- Interesting Angles on the DOL’s Fiduciary Rule #29- Capturing Rollovers: What Information is Needed?

Part 30- Three Kinds of Level Fee Fiduciaries . . . and What’s A “Level Fee?”: Interesting Angles on the DOL’s Fiduciary Rule #30

Part 31 - Interesting Angles on the DOL’s Fiduciary Rule #31: “Un-levelizing” Level Fee Fiduciaries

Part 32 - What “Level Fee Fiduciary” Means for Rollover Advice: Interesting Angles on the DOL’s Fiduciary Rule #32

Part 33- Discretionary Management, Rollovers and BICE: Interesting Angles on the DOL’s Fiduciary Rule #33

Part 34- Seminar Can Be Fiduciary Act: Interesting Angles on DOL’s Fiduciary Rule #34

Part 35- Presidential Memorandum on Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #35

Part 36 -Retirement Advice and the SEC: Interesting Angles on the DOL’s Fiduciary Rule #36

Part 37 - SEC Retirement-Targeted Examinations: Interesting Angles on the DOL’s Fiduciary Rule #37

Part 38- SEC Examinations of RIAs and Broker-Dealers under the ReTIRE Initiative: Interesting Angles on the DOL’s Fiduciary Rule #38

Part 39- FINRA Regulatory Notice 13-45: Guidance on Distributions and Rollovers: Interesting Angles on the DOL’s Fiduciary Rule #39

Part 40 - New Rule, Old Rule - What Should Advisers Do Now?: Interesting Angles on the DOL’s Fiduciary Rule #40

Part 41 - While We Wait: The Current Fiduciary Rule and Annuities: Interesting Angles on DOL’s Fiduciary Rule #41

Part 42 - Rollovers under DOL’s Final Rule: Interesting Angles on DOL’s Fiduciary Rule #42

Part 43 - BICE Transition: More Than the Eye Can See - Interesting Angles on DOL’s Fiduciary Rule #43

Part 44 - Basic Structure of Fiduciary Package (June 9): Interesting Angles on DOL’s Fiduciary Rule #44

Part 45 - DOL Fiduciary “Package”: Basics on the Prohibited Transaction Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #45

Part 46 - How Does an Adviser Know How to Satisfy the Best Interest Standard?: Interesting Angles on the DOL’s Fiduciary Rule #46

©2017 Drinker Biddle & Reath LLP. All Rights Reserved

TRENDING LEGAL ANALYSIS


About this Author

Fred Reish, Partner, Drinker Biddle,  Employee Benefits & Executive Compensation
Partner

C. Frederick Reish is a partner in the firm's Employee Benefits & Executive Compensation Practice Group, Chair of the Financial Services ERISA Team and Chair of the Retirement Income Team.  His practice focuses on fiduciary issues, prohibited transactions, tax-qualification and DOL, SEC and FINRA examinations of retirement plans and IRA issues.

Fred's experience includes advising insurance companies and investment managers of the development of products and services that are consistent with ERISA's...

(310) 203-4047