USDOL_Seal_circa_2015_svgOn April 6, 2016, the United States Department of Labor issued a Final Rule with respect to the fiduciary duty owed by any individual or entity providing recommendations with respect to a retirement plan.  It takes effect in April of 2017.

The rule was spurred into existence due to the fact that many advisors and brokers were able to recommend certain financial products when such products may or may not have been in the best interest of the client.  A product could be recommended which would have a smaller return to the client, but net the advisor a larger commission.  While doing so has large conflicts of interest with respect to advice given to the client, many times the lack of fiduciary duty owed didn’t have to be disclosed and there was little liability on the advisor’s end.

In typical bureaucratic fashion, the DOL has been working on this since 2009.  Seven years later we have a final rule (in the DOL’s defense there were competing interests and many stakeholders, all of which needed to be taken into account).  The final rule in essence, subjects all advisors who provide retirement investment advice to plans, plan fiduciaries and IRAs and investors in the foregoing to a fiduciary standard, which requires they put the client’s best interest first.   Like all federal regulations there are exemptions.  Some of which allow brokers and other intermediaries to receive the same type of compensation if they meet standards aimed at ensuring their advice puts the client first.

The rule puts compliance requirements on broker-dealers, registered investment advisors, insurance companies and agents, pension consultants and others providing investment advice to plans or IRA investors.

What does the Rule Cover?

“Covered investment advice” is defined as:

a recommendation to a plan, plan fiduciary, plan participant and beneficiary or IRA owner for a fee or other compensation, direct or indirect, as to the advisability of buying, holding, selling or exchanging securities or other investment property, including recommendations as to the investment of securities or other property after the securities or other property are rolled over, transferred or distributed from a plan or IRA.

Covered investment advice also includes recommendations as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made.

The trigger is whether a “recommendation” has been made. A “recommendation” is defined as: “a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.”  This is a mushy standard if I ever saw one, but really it is a hard thing to define. My view is that the more specific an advisor is with a client, the higher the likelihood such communication is a recommendation.

Note that compensation is required.  Getting a recommendation from your uncle for free at a family reunion isn’t enough to trigger the rule.  For a recommendation to constitute covered investment advice, it must be given in exchange for or in connection with a fee or other consideration (the source of the consideration makes no difference).

Exemptions

There are situation where communcaitons can be made regarding retirement plans,where such communication would not be subject ot the rule, including:

  1. Educational Communication – education on investment alternatives (if certain conditions are met);
  2. General communications – speeches, articles, talk shows;
  3. Platform Providers – record keepers and third party administrators;
  4. Transactions with plan fiduciaries with financial expertise – if the client is itself a licensed provider of financial services or manage over $50,000,000 in assets.
  5. Swap and Security-based swap transactions
  6. Employees of plan sponsors, affiliates, plans, employee organizations or plan fiduciaries – employees who work in company’s payroll, HR, accounting or financial departments who routinely develop reports and recommendations are exempt provided certain conditions are met.

Additionally, there is the Best Interest Contract Exemption, which allows advisors to continue to rely on current fee and compensation practices as long as certain conditions are met.