Posted by Barry Hollander on 04/20/2016

On April 6th, The Department of Labor ("DOL") issued the final version of its highly controversial fiduciary regulation package which sets a new standard for investment advice provided to employee benefit plans and individual retirement accounts. Investment advice to these accounts under the rule is considered fiduciary advice and consequently must be in the “best interest” of the client. This effectively means that financial advisors who provide investment advice will face limits on receiving variable (such as commission based) compensation. The final rule will be effective on April 10, 2017, with implementation of certain requirements due on January 1, 2018.

The final rule, expands the types of retirement advice or recommendations covered by fiduciary protections, especially for IRAs. It also provides certain exclusions from the term recommendation for platform providers, investment education and retirement education as well exclusions from the term "fiduciary" for sellers to institutional fiduciaries, swap counterparties and plan sponsor employees. The DOL has also provided certain exemptions including the “Best Interest Contract" ("BIC") exemption for advisors earning variable compensation for non-discretionary accounts. The exemption takes several different forms depending on certain factors such as the type of retirement account and the fee arrangement. In addition, there are transitional BICs that provide relief from April 10, 2017 to January 1, 2018.  The rule also impacts fee based discretionary advisors in such areas as advising on IRA rollovers.

The DOL made a number of modifications to the April 2015 proposal but generally did not materially alter its structure or scope. Key modifications include clarification of the difference between “education” and “advice”, expansion of the BIC exemption to cover all asset types and not just a limited number of asset types, and inclusion of provisions on level fee arrangements.

There are also grandfathering rules for existing clients, including providing that existing IRA clients are not required to enter into a new contract under the BIC exemption but instead may receive a notice and be deemed to agree by “negative consent.”

For now, it is important that all firms deemed to be providing advice to retirement accounts do the following:

  • Identify all products/services sold to retirement plans/IRAs
  • Identify all instances of variable compensation, e.g. commissions
  • Consult with appropriate professionals as to compliance strategies

For more information on how SCA may be able to assist with your DOL fiduciary compliance strategies and implementation please contact Michael Heaton at (877) 394-9471, ext. 704.