After a five-month comment period, four days of public hearings, more than 3,000 comment letters, some 300,000 petitions, and more than 100 meetings with stakeholders, nearly a year to the day that the Department of Labor (DOL) unveiled its “Conflicts of Interest” proposal, we have a final fiduciary regulation.
The ‘New’ Fiduciary
Under the rule, any individual receiving compensation for making investment recommendations that are individualized or specifically directed to a particular plan sponsor running a retirement plan, plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary. According to a White House factsheet, being a fiduciary under the final regulation means that an advisor must provide impartial advice in the client’s best interest and cannot accept any payments creating conflicts of interest unless the advisor qualifies for an exemption intended to ensure that the customer’s interests are protected.
The rule clarifies what does and does not constitute fiduciary advice, and includes examples of communications that would not rise to the level of a recommendation and thus would not be considered advice. It specifies that education is not included in the definition of retirement investment advice so advisors and plan sponsors can continue to provide general education on retirement saving without triggering fiduciary duties.
Investment Education
The final rule defines a variety of investment education activities that fall short of fiduciary conduct, and makes clear that advisors do not act as fiduciaries merely by recommending that a customer hire them to render advisory or asset management services. It also expressly provides that investment advice does not include communications that a reasonable person would not view as an investment recommendation. This includes general circulation newsletters, television, radio, and public media talk show commentary, remarks in widely attended speeches and conferences, research reports prepared for general circulation, general marketing material and general market data.
Significantly, a side-by-side comparison of the original proposal and the final regulation explains that education to plan participants including naming specific funds would be permitted “if certain conditions are met.” The original proposal would have restricted plan advisors from being able to mention specific funds in the plan menu in asset allocation education materials.
However, in the context of IRAs, the DOL notes that there is no independent fiduciary to review and select investment options, and so references to specific investment alternatives will NOT be considered education.
Additionally, under the final rule, all appraisals (as opposed to just ESOP appraisals in the proposal) will not be considered advice for purposes of this rule but will be reserved for future rulemaking.
Seller’s Exception
Under the final rule, recommendations to plan sponsors managing more than $50 million in assets (vs. $100 million in the proposed rule) will not be considered investment advice if certain conditions are met and hence will not require an exemption.
No Contract Requirements for ERISA Plans
The new rule eliminates the contract requirement for ERISA plans and their participants and beneficiaries. Firms must acknowledge in writing that they, and their advisors, are acting as fiduciaries when providing investment advice to the plan, participant, or beneficiary, but no contract is required.
While the original proposed rule required the firm, advisors and the client to be parties to the contract, the DOL acknowledges that could be difficult in situations like call centers where the customer speaks to multiple advisors at a firm. The final exemption simplifies the contract requirement so that it is only between the firm and the client, and notes that there does not have to be a new contract for each interaction with a different employee of the same firm.
Litigation
The rule and exemptions ensure that advisors are held accountable to their clients if they provide advice that is not in their clients’ best interest. If advisors and firms do not adhere to the standards established in the exemption, retirement investors will be able to hold them accountable — either through a breach of contract claim (for IRAs and other non-ERISA plans) or under the provisions of ERISA (for ERISA plans and participants).
Transition Timing
There will be more time to implement — but not a lot more. In April 2017 (one year after the rule’s publication), the broader definition of fiduciary will take effect, but to take advantage of the best interest contract (BIC) exemption, firms will be required to comply only with a subset of conditions, including:
The DOL said it intends to focus during that time on providing compliance assistance to help plan fiduciaries and fiduciary investment advisors make the transition to the new rule, exemptions and consumer protections for investment advice.
The wait, as they say is over. Now the work begins.
DON’T MISS: The Final DOL Fiduciary Regulation: What’s New and What Does it Mean for 403(b) Advisors? A complimentary webcast for NTSA members on Wednesday, April 13, 2016, 2:00 - 3:00 p.m. ET
Speakers: Chris DeGrassi, CPFA, Executive Director, NTSA; and Sue Diehl, QPA, CPC, President, PenServ Plan Services
More information is available here.
Resources
The final version of the regulation is available here.
A consumer-focused list of FAQs is available here.
The DOL’s fact sheet on the regulation is here.
The ‘New’ Fiduciary
Under the rule, any individual receiving compensation for making investment recommendations that are individualized or specifically directed to a particular plan sponsor running a retirement plan, plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary. According to a White House factsheet, being a fiduciary under the final regulation means that an advisor must provide impartial advice in the client’s best interest and cannot accept any payments creating conflicts of interest unless the advisor qualifies for an exemption intended to ensure that the customer’s interests are protected.
The rule clarifies what does and does not constitute fiduciary advice, and includes examples of communications that would not rise to the level of a recommendation and thus would not be considered advice. It specifies that education is not included in the definition of retirement investment advice so advisors and plan sponsors can continue to provide general education on retirement saving without triggering fiduciary duties.
Investment Education
The final rule defines a variety of investment education activities that fall short of fiduciary conduct, and makes clear that advisors do not act as fiduciaries merely by recommending that a customer hire them to render advisory or asset management services. It also expressly provides that investment advice does not include communications that a reasonable person would not view as an investment recommendation. This includes general circulation newsletters, television, radio, and public media talk show commentary, remarks in widely attended speeches and conferences, research reports prepared for general circulation, general marketing material and general market data.
Significantly, a side-by-side comparison of the original proposal and the final regulation explains that education to plan participants including naming specific funds would be permitted “if certain conditions are met.” The original proposal would have restricted plan advisors from being able to mention specific funds in the plan menu in asset allocation education materials.
However, in the context of IRAs, the DOL notes that there is no independent fiduciary to review and select investment options, and so references to specific investment alternatives will NOT be considered education.
Additionally, under the final rule, all appraisals (as opposed to just ESOP appraisals in the proposal) will not be considered advice for purposes of this rule but will be reserved for future rulemaking.
Seller’s Exception
Under the final rule, recommendations to plan sponsors managing more than $50 million in assets (vs. $100 million in the proposed rule) will not be considered investment advice if certain conditions are met and hence will not require an exemption.
No Contract Requirements for ERISA Plans
The new rule eliminates the contract requirement for ERISA plans and their participants and beneficiaries. Firms must acknowledge in writing that they, and their advisors, are acting as fiduciaries when providing investment advice to the plan, participant, or beneficiary, but no contract is required.
While the original proposed rule required the firm, advisors and the client to be parties to the contract, the DOL acknowledges that could be difficult in situations like call centers where the customer speaks to multiple advisors at a firm. The final exemption simplifies the contract requirement so that it is only between the firm and the client, and notes that there does not have to be a new contract for each interaction with a different employee of the same firm.
Litigation
The rule and exemptions ensure that advisors are held accountable to their clients if they provide advice that is not in their clients’ best interest. If advisors and firms do not adhere to the standards established in the exemption, retirement investors will be able to hold them accountable — either through a breach of contract claim (for IRAs and other non-ERISA plans) or under the provisions of ERISA (for ERISA plans and participants).
Transition Timing
There will be more time to implement — but not a lot more. In April 2017 (one year after the rule’s publication), the broader definition of fiduciary will take effect, but to take advantage of the best interest contract (BIC) exemption, firms will be required to comply only with a subset of conditions, including:
- acknowledging their fiduciary status;
- adhering to the best interest standard; and
- making basic disclosures of conflicts of interest.
The DOL said it intends to focus during that time on providing compliance assistance to help plan fiduciaries and fiduciary investment advisors make the transition to the new rule, exemptions and consumer protections for investment advice.
The wait, as they say is over. Now the work begins.
DON’T MISS: The Final DOL Fiduciary Regulation: What’s New and What Does it Mean for 403(b) Advisors? A complimentary webcast for NTSA members on Wednesday, April 13, 2016, 2:00 - 3:00 p.m. ET
Speakers: Chris DeGrassi, CPFA, Executive Director, NTSA; and Sue Diehl, QPA, CPC, President, PenServ Plan Services
More information is available here.
Resources
The final version of the regulation is available here.
A link to documents and amendments relevant to the regulation is here.
A chart listing the changes made to the 2015 fiduciary proposal is online here.A consumer-focused list of FAQs is available here.
The DOL’s fact sheet on the regulation is here.
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