As of 11:59 PM local time today, all registered investment adviser (“RIA”) firms will need to comply with the June 9, 2017 applicability date for the Department of Labor (“DOL”) fiduciary rule. The deadline to comply with the rule was originally delayed 60 days from April 10, 2017 to June 9, 2017. While there may be future revisions to the rule, the DOL has confirmed in recent weeks that today’s applicability date will stand. During the “transition period” from June 9, 2017 to January 1, 2018, RIA firms will need to comply with the “Impartial Conduct Standards” when providing investment advice to applicable retirement accounts including IRAs. Recently, the DOL released its third set of frequently asked questions to provide additional guidance as to how firms can comply with the rule during the transition period.
Note: RIA in a Box LLC is not a law firm and does not provide legal advice. We strongly advise that all RIA firms that provide services to individual retirement investors, pension plans, profit sharing plans, and/or retirement plans to consult with a qualified Employee Retirement Income Security Act of 1974 (“ERISA”) attorney in matters relating to DOL and ERISA law. This overview is provided for general information purposes only and should not be relied upon to take any action.This post below is as June 9, 2017. As the DOL issues additional guidance, we anticipate additional updates and/or modifications will be made to this solely educational overview.
As we have previously written, the recently issued DOL FAQs confirm that beginning today, RIA firms must comply with the Impartial Conduct Standards in regards to investment recommendations related to an IRA rollover from a qualified retirement plan, an IRA rollover from another IRA, a switch from a commission to fee-based IRA, or other applicable scenarios. In this latest FAQ document, the DOL describes the Impartial Conduct Standards as follows:
- Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
- Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
- Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm;
- Charge no more than reasonable compensation; and
- Make no misleading statements about investment transactions, compensation, and conflicts of interest.
The most valuable insight provided by the recent FAQ document relates to question 6’s response which includes the following DOL guidance related to complying with the rule during the transition period (bold added for emphasis):
During the transition period, the Department expects financial institutions to adopt such policies and procedures as they reasonably conclude are necessary to ensure that advisers comply with the impartial conduct standards. During that period, however, the Department does not require firms and advisers to give their customers a warranty regarding their adoption of specific best interest policies and procedures, nor does it insist that they adhere to all of the specific provisions 6 of Section IV of the BIC Exemption as a condition of compliance. Instead, financial institutions retain flexibility to choose precisely how to safeguard compliance with the impartial conduct standards, whether by tamping down conflicts of interest associated with adviser compensation, increased monitoring and surveillance of investment recommendations, or other approaches or combinations of approaches. For example, some firms have indicated that they intend to rely upon or build on existing regulatory compliance structures to monitor their advisers’ sales practices and recommendations, document the bases for those recommendations, and ensure that the impartial conduct standards are met (e.g., by subjecting transactions involving conflicts of interest to heightened scrutiny and surveillance).
Also, on May 22, 2017, the DOL issued a new temporary enforcement memorandum that states, “during the phased implementation period ending on January 1, 2018, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemption.” The DOL also confirmed that the Internal Revenue Service (“IRS”) will follow the same enforcement policy during the transition period. It’s also vital to note that this temporary enforcement policy only applies to the DOL and IRS enforcement of the rule.
As we have stated in recent months, we continue to recommend that RIA firms take the following steps to comply with the requirements of the DOL fiduciary rule:
- Prepare now to comply with the streamlined Level Fee Exemption by reviewing current firm compensation and client fee billing practices.
- Educate and train all advisory firm staff members on the broader DOL Fiduciary Rule and specifically the Impartial Conduct Standards. In particular, staff should be trained on the relevant scenarios for which the new standards may apply.
- Develop proper internal documentation through an “IRA Investment Recommendation Due Diligence Checklist” to demonstrate that proper diligence was conducted to ensure that an applicable investment recommendation is in the client’s best interests, no more than reasonable compensation is charged., and complies with the Level Fee Exemption (if relevant).
- Implement a new internal compliance process to review the diligence documentation on the proposed investment recommendation before the recommendation is made to the client.
- Establish additional compliance policies and procedures around staff onboarding, training, and client account review to ensure ongoing compliance with the rule.
It’s also very important to note that RIA firms that do not operate a “fee only business model” should continue to consult with any affiliated broker dealers, insurance companies, or other third parties to ensure full compliance with any relevant Prohibited Transaction Exemptions.
As RIA compliance consultants, we also suggest that all RIA firm principals review our past coverage of the DOL fiduciary rule:
- The Top 5 DOL Fiduciary Rule Experts Every RIA Firm Should Follow
- How an RIA Firm can Comply with the DOL Fiduciary Rule
- Part 1 of DOL Fiduciary Rule FAQs Confirms RIA Level Fee Exemption
- DOL Fiduciary Rule FAQs Part 2 Clarifies When the Rule Applies to RIAs
- The DOL Fiduciary Rule for RIA Firms: Where it Stands Today
- The DOL Fiduciary Rule for RIA Firms is Officially Delayed for 60 Days
- RIAs should Prepare for the June 9, 2017 DOL Fiduciary Rule Deadline