Client Bulletin #576

The highly anticipated fiduciary rule intended to provide significant protection for retirement investors was issued on April 6.  Although the final rule contains concessions that appease investment professionals, most agree that the rule greatly improves the protection of retirement investors relying on investment advice in purchasing complicated investment products.

The final rule requires advisors who provide investment advice to retirement plan participants and individual retirement account owners to put the best interests of the client first – a higher standard than is currently required. Under existing rules, advisors must offer products that are “suitable” for investment but not necessarily in the best interest of the investor. The new “best interest” standard significantly increases fiduciary responsibility. Putting the customer first is now the law.

An individual will be a fiduciary if he or she receives compensation for investment advice that is specifically directed to a plan sponsor, a participant, or an IRA owner with regard to a retirement investment.  This may include advice regarding whether to buy or sell assets, whether to make a rollover from a qualified plan to an IRA, or similar decisions. Among those likely to be fiduciaries in this context are registered investment advisors, brokers, and insurance agents. Under the new rule, fiduciaries will be required to provide impartial advice that is in the best interest of the customer and will be prohibited from accepting payments that create conflicts of interest (unless a specific exemption is satisfied that will assure adequate protection for the customer).

After the proposed fiduciary rule was issued in April 2015, the government received many comments and held meetings over the past year to receive and consider input. As a result, several significant modifications were made to the final rule. For example, the final rule clarifies activities that constitute “fiduciary advice,” providing that general circulation newsletters, talk show commentary, and basic investment education do not rise to the level of fiduciary advice.  The “best interest contract” exemption is available for a wider range of advice, and the requirements for the exemption are simplified. The final rule eliminates the requirement to have a contract with ERISA plans, and it provides greater flexibility for the timing of entering into a contract with an IRA owner. The final rule also simplifies and streamlines the disclosure requirements and data retention obligations from the proposed rule.

As a result of a phase-in of the requirements, certain provisions (for example, the broader definition of “fiduciary” and certain best interest contract provisions) will take effect in April 2017, with the other requirements becoming effective in January 2018. Despite the final rule’s “watering down” of some of the provisions in the proposed rule, legal challenges are likely. The Department of Labor appears to be poised and ready for the challenges as the debate over “stronger protection for investors” versus “onerous and costly regulation” is expected to continue.

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