Despite Today's Delay, DOL Fiduciary Rule Remains Applicable to RIAs

Today, the final exemptions related to the Department of Labor fiduciary rule were once again officially delayed until July 1, 2019. However, all registered investment adviser (“RIA”) firms still need to comply with the current requirements of the fiduciary rule which went into effect on June 9, 2017. During this now extended “transition period” which started on June 9, 2017 and now extends to July 1, 2019, RIA firms will need to comply with the “Impartial Conduct Standards” when providing investment advice to applicable retirement accounts including IRAs. In May 2017, 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 November 27, 2017. As the DOL issues additional guidance, we anticipate additional updates and/or modifications will be made to this solely educational overview.

Today’s official rule announcement states the following:

The Department is granting the delay because of its concern that, without a delay in the applicability dates, consumers may face significant confusion, and regulated parties may incur undue expense to comply with conditions or requirements that the Department ultimately determines to revise or repeal. The former transition period was from June 9, 2017, to January 1, 2018. The new transition period ends on July 1, 2019, rather than on January 1, 2018. The amendments to these exemptions affect participants and beneficiaries of plans, IRA owners and fiduciaries with respect to such plans and IRAs.

During this currently in effect “transition period,” 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 the previous 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.

In regards to the Impartial Conduct Standards, the DOL states the following in today’s rule release:

…the duties of prudence and loyalty embedded in the Impartial Conduct Standards provide protection to retirement investors during the Transition Period, apart from the additional delayed enforcement and accountability provisions. The Department previously articulated the view that, during the Transition Period, it expects that advisers and financial institutions will adopt prudent supervisory mechanisms to prevent violations of the Impartial Conduct Standards.Likewise, the Department also previously articulated its view that the Impartial Conduct Standards require that fiduciaries, during the Transition Period, exercise care in their communications with investors, including a duty to fairly and accurately describe recommended transactions and compensation practices.

In addition, question 6 in the most recent FAQ document released in May 2017 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 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 part of today’s new rule announcement, the DOL confirmed that this temporary enforcement guidance will now extend through July 1, 2019:

…the Department has determined that extended temporary enforcement relief is appropriate and in the interest of plans, plan fiduciaries, plan participants and beneficiaries, IRAs, and IRA owners. Accordingly, during the phased implementation period from June 7, 2016, to July 1, 2019, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the Fiduciary Rule and applicable provisions of the PTEs, or treat those fiduciaries as being in violation of the Fiduciary Rule and PTEs

However, the DOL final rule announcement also notes the following in regards to enforcement during this extended Transition Period:

At the same time, however, the Department emphasizes, as it has in the past, that firms and advisers should work “diligently and in good faith to comply” with their fiduciary obligations during the Transition Period. The “basic fiduciary norms and standards of fair dealing” are still required of fiduciaries during the Transition Period.

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:

Despite Today’s Delay, DOL Fiduciary Rule Remains Applicable to RIAs

Subscribe to the COMPLY Newsletter