Secretary of Labor Alexander Acosta stated that he could find “no principled legal basis” to delay the DOL fiduciary rule beyond June 9. Secretary Acosta made this statement in a Wall Street Journal op-ed posted on May 22.
The op-ed ended speculation that the DOL would take action to delay the applicability date past June 9.
As of June 9, broker-dealers, investments advisers, and other “retirement advisers” will be considered fiduciaries to IRAs and other retirement investors, and will be required to meet the Impartial Conduct Standards established by the Fiduciary Rule. These requirements will remain in force from June 9 to January 1 (the “Transition Period”), when all provisions of the Best Interest Contract Exemption become effective.
In a Field Assistance Bulletin issued on May 22, the DOL stated that it “will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions.”
The DOL also released a series of FAQs to help Retirement Advisers better understand their responsibilities during the Transition Period. The FAQs confirmed that the DOL’s review of the Fiduciary Rule to determine if it should retain, amend or withdraw the Fiduciary Rule is continuing.
What does this mean?
Barring an unanticipated ruling in the courts, this means that as of June 9 broker-dealers will be fiduciaries to their Retirement Investor clients. Broker-dealer firms providing services to Retirement Investors can no longer delay their plans to implement the Impartial Conduct Standards. Even if those plans are not fully implemented on June 9, firms must be able to demonstrate that they are “working diligently and in good faith” to act as fiduciaries and to adhere to the Impartial Conduct Standards.
The Impartial Conduct Standards are:
- At the time of the recommendation, the fiduciary firm and its representatives must provide advice in the “Best Interest” of the Retirement Investor. Under this standard, “Best Interest” means that the firm and its representatives must “act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims would exercise based on the investment objectives, risk tolerance, financial circumstances, and the needs of the Retirement Investor without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.”
- The recommended transaction may not cause the firm, its representatives, its affiliates or its related parties to receive, directly or indirectly, more than reasonable compensation.
- The firm and its representatives may not make materially misleading statements to a Retirement Investor. This includes statements about the transaction, fees or compensation, material conflicts of interest, or other relevant matters.
It also means that grandfathering of practices inconsistent with a firm’s fiduciary duties will end on June 9.
While investment advisers typically have policies and procedures that go a long way towards meeting the Impartial Conduct Standards, it is worth remembering that the Impartial Conduct Standards do not include disclosure as a means of meeting the adviser’s fiduciary duty. IAs must be able to demonstrate that their recommendations to Retirement Investors are, in fact, in their clients’ best interest.
What should firms do now?
- Broker-dealers that have not yet developed policies and procedures to determine whether or not a recommendation is in a Retirement Investor’s best interest must rapidly begin developing and implementing those policies and procedures. Our new ComplianceGuardian DOL Module will provide the materials your firm needs to adapt your processes to meet the new regulations.
- Investment Advisers should review their services to verify that, absent disclosure of a conflict of interest, they can demonstrate that their recommendations are consistent with the best interests of a Retirement Investor.
- Compensation. Evaluate current compensation arrangements and verify that they are consistent with what is typically charged in your area. Eliminate instances of “double-dipping” (for example, charging both an advisory fee and a 12b-1 fee for mutual funds in an IRA) as that is presumably “unreasonable.” NOTE: The level compensation for reps required by the Best Interest Contract Exemption will NOT become effective until January 1.
- Sales and marketing. Review marketing materials to ensure that statements cannot be construed as “misleading.”
- Procedures. While procedures specifically mandated by the BICE are not required until January 1, it will be difficult (if not impossible) to demonstrate compliance with the Impartial Conduct Standards without written procedures showing the specific steps your firm uses to adhere to these standards. Moreover, written procedures are your firm’s first line of defense should a rep fail to comply with the Impartial Conduct Standards.
Finally, firms must begin training their reps, officers and staff on the Impartial Conduct Standards. NRS provides DOL Training, through our acquisition of FIRE Solutions, to help firms prepare staff for compliance with the Fiduciary Rule.
DOL is still receiving comments regarding the sweeping review of the Fiduciary Rule required by President Trump’s Memorandum. The period for these comments ended on April 17. It is entirely possible that later on this year the DOL will issue further rules that amend or withdraw the Fiduciary Rule.
We are also watching appeals to judicial rulings upholding the Fiduciary Rule to see if any parties successfully request additional delays or injunctions to the June 9 applicability date while appeals are pending. In the meantime, if you would like to speak with on of NRS’ experts regarding the DOL Rule, please contact us today.