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Legal Update for Securities

DOL Proposes Another Delay For Implementation of the Fiduciary Rule: What It Means to RIAs

Prepared by John P. Quinn, Esq.

On Wednesday, August 9, 2017, the Department of Labor (DOL) announced in a court filing that it will delay the effective dates of the remaining provisions of the fiduciary rule until July 1, 2019. The proposed rule will delay implementation of all portions of the rule not currently effective, including: the best interest contract exemption (BICE and Level Fee BICE), the principal transaction exemption (PTE 2016-02), and amendments to the PTE 84-24 concerning certain insurance transactions. The notice does not revoke the portions of the fiduciary rule already in effect since June 9, 2017.

What Does This Mean for Registered Investment Advisers?

Since June 9, the DOL's fiduciary rule required all persons who, for direct or indirect compensation, render "investment advice" to a plan, including an ERISA plan and IRA, to comply with the three-pronged Impartial Conduct Standards

1.                Acting in the Best Interest of the Customer: The adviser must provide such investment advice that a prudent person would provide based on the investment objectives, risk tolerance, financial circumstances and needs of the retirement investor, without regard to the financial interests of the adviser or affiliate;

2.                No More Than Reasonable Compensation: The recommended transaction may not provide the adviser more than "reasonable compensation"; and

3.                No Materially Misleading or Omitted Information:  The adviser may not make any materially misleading statements to the retirement investor about transactions, fees, compensation, material conflicts of interest, and any other relevant matters.


The more onerous portions of the fiduciary rule—the BICE contract, principal transaction restrictions and PTE 84-24 conditions—were delayed until January 1, 2018; however, the August 9, 2017 announcement will delay implementation of these requirements until July 1, 2019. Nonetheless, the existing Impartial Conduct Standards remain applicable to investment advice to retirement accounts.

The Impartial Conduct Standards largely mirror the existing fiduciary duties that RIAs owe to all clients, not just retirement investors.  Nonetheless, it is important to note that the rule applies specifically to recommendations concerning rollovers and distributions from plan assets that may not be subject to RIA's asset management fee prior to rollover or distribution. Thus, registered advisers must act within the best interest of the customer when offering advice as to rolling over plan assets or investing distributions of plan assets into a managed account. 

For example, where an adviser recommends a customer roll over plan assets or other distributions from a plan into an account that is subject to the adviser's asset management fee (thus increasing the adviser's overall revenues) this recommendation is technically a conflict of interest and must, therefore, be justified as in the customer's best interest. The adviser should document the relative fees associated with leaving the assets in the plan versus rolling those assets into the adviser's managed account (which ordinarily results in the customer paying a higher management fee), as well as the non-monetary reasons for the rollover, including portability, choice, services, etc. Recommending that a client roll over assets from an existing 401(k) into an IRA managed by the adviser, and consequently subjecting the assets to the adviser's asset management fee, may make good business sense for the adviser, but the adviser must demonstrate why such a transaction is in the best interest of the customer.

If approved by the Office of Management and Budget, the delay will ultimately provide the DOL and industry more time to review the impact of the fiduciary rule and the prohibited transaction exemptions on the retirement advice industry and the retirement investors.  Although changes to the exemptions are highly likely, for now it is important to remember that the Impartial Conduct Standards remain in effect, and good faith compliance is required by all advisers to retirement accounts. 


The material in this law alert has been prepared for our readers by Marshall Dennehey Warner Coleman & Goggin. It is solely intended to provide information on recent legal developments, and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.
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