The New Fiduciary Rule – What Happens on June 9, 2017?

What is the Fiduciary Rule?

This is a new Department of Labor ruling created under the Obama Administration that adds increased responsibilities for those acting as a fiduciary by redefining the term “investment advice fiduciary” as found in the Employee Retirement Income Security Act of 1974  (ERISA). It requires that an advisor in a fiduciary position must not only act in the best interest of a client, but they must put that client’s interests first – ahead of financial gain to the advisor. The Ruling also outlines prohibited transactions and defines the “impartial conduct standards” that include the requirements of exemptions to the Rule.

One of the biggest issues facing fiduciaries is in the area of conflicts of interest, which must be disclosed to clients. The new Ruling now requires that fiduciaries ensure clients pay reasonable fees for a portfolio of diversified products that could be clearly understood by a reasonably prudent person.

What is a fiduciary?

In simplified terms, a fiduciary is someone who manages the assets of another person or group. The new Rule creates unclear implications for some insurance brokers and agents, who were previously held only to the suitability standard; ensuring that the product met the investment needs of the client. A fiduciary is held to the highest legal obligation of loyalty in their interactions with others, requiring additional compliance requirements and regulatory oversight.

History  

The Investment Advisors Act of 1940 became the first standard for people who are paid to provide retirement advice.  In 1975, ERISA was created to make sure pension administrators were prudent in their care of employee pensions. ERISA requires that fiduciaries meet certain standards of conduct, including reporting obligations to the government and disclosure requirements to plan participants.

Who is a Fiduciary?

Prior to the new Ruling, only certain insurance people – such as licensed securities agents and registered investment advisors – were considered fiduciaries under ERISA. However, many retirement plans were not in existence when ERISA was enacted, making regulation difficult. Due to the growth of self-directed retirement options (think IRAs, and 401Ks) and a decrease in employer-sponsored benefits, the Obama administration created the Fiduciary Rule with updated standards for fiduciaries. This could impact agents who strictly sell insurance products, and those selling under the umbrella of an FMO. The issue of whether a person is a fiduciary is further complicated by the various jurisdictions governing the sale and marketing of annuities (insurance and/or securities products), since the rules and regulations that apply are often inconsistent. Many federal rules are in conflict with state regulation, making it difficult for fiduciaries to determine compliance.

What happens on June 9, 2017?

As of June 9, 2017, anyone who acts as an advisor to someone for their retirement savings will be considered a “fiduciary.” This includes acquisition, disposition, and the exchange of a client’s securities, including any tax-deferred accounts. However, the Trump Administration has delayed enforcement of this Rule until January 1, 2018, and it is possible that this date could be pushed back after review by the Trump administration.

What happens between June 9, 2017 and January 1, 2018?

During this period, fiduciaries must act with prudence and loyalty. This means that advice given to their clients must meet the required level of professional standard of care and be based on the best interests of the client and not on the financial considerations of the advisor. Fiduciaries must also make sure they charge reasonable fees and that they diversify their client’s plans consistent with ERISA.  According to the Department of Labor, advisors must not make misleading statements about investment transactions, compensation, and conflicts of interest.” To view the Conflict of Interest FAQs released by the DOL, click here.  However, enforcement of the Ruling will not occur during this period of transition.

What Next?

Although the ruling won’t officially be enforced until January 1, 2018, the Trump administration is taking the time to review the issues and is expected to request additional input from the general public.  To read the Presidential Memorandum on Fiduciary Duty Rule, click here .