T
ement
The United States Department of Labor (DOL) has
proposed its long-awaited fiduciary rule addressing
conflicts of interest in retirement advice. Consistent with
previous announcements made by the White House,
the new proposal broadens the scope of retirement
advisors who would become subject to the DOL fiduciary
standard. It also includes proposed exemptions that
would give brokers and insurance agents (and their
firms) the ability to continue to earn transaction-based
compensation when advising retirement clients, subject
to certain significant restrictions.
Broad
Coverage of
Retirement
Advisors.
Under the DOL proposal, any individual receiving some
compensation for providing advice that is specifically
directed to a particular plan sponsor, plan participant or
IRA owner would automatically be deemed a “fiduciary.”
For example, fiduciary status would be triggered by
recommending what assets to purchase or sell, and
whether to roll over assets from a plan to an IRA.
The DOL proposal to broaden its “fiduciary” definition
would potentially apply to brokers, registered investment
advisers (RIAs), insurance agents, administrative service
providers and salespeople. However, the following
individuals would be excluded from the fiduciary definition:
1
2
Brokers acting strictly as order-takers for customers
who are telling them exactly what to buy or sell without
asking for advice
Financial institutions (intending to act as counterparties)
making a “sales pitch” to fiduciaries of large plans with
financial expertise
3
Providersof non-fiduciary investment education only
to IRA clients who do not identify specific investment
products
4
Providers of valuation services for ESOP stock
“Best Interest”
Fiduciary
Standard.
As proposed, all fiduciary advisors would have a duty
to provide impartial advice in their client’s best interest.
Furthermore, they cannot accept any payments creating
conflicts of interest, unless they qualify for an exemption
intended to assure that the customer is adequately
protected, such as the newly proposed “Best Interest
Contract Exemption.”
Best Interest
Contract
Exemption.
The DOL proposal establishes a new Best Interest
Contract Exemption, giving fiduciary advisors the ability to
set their own compensation practices and earn “variable
compensation” including commissions.
Written Contract. To qualify for this exemption, the firm
would need to enter into a written contract with the client
that provides for the following:
1
The firm commits to following the “best interest” fiduciary
standard
2
The firm represents and warrants that it has adopted
compliance policies designed to mitigate conflicts
(and there are no differential compensation or other
incentives that would tend to encourage individual
advisors to make improper recommendations)
3
Any conflicts have been identified and disclosed (and
the contract must direct the customer to a web page
with additional compensation disclosures)
4
The customer has a private right of action against the
firm for contractual breaches (and arbitration clauses
are permitted so long as the client has the right to bring
class action lawsuits)
A failure to adopt appropriate compliance policies would
not necessarily result in a violation of the exemption, but
it may give rise to a private right of action by the customer
for the contractual breach.
Customer Disclosures. In addition to the written contract
requirement, the Best Interest Contract Exemption would
also require various disclosures to be provided to the
customer including:
a A point-of-sale disclosure to the customer that includes
the all-in and ongoing costs of the recommended
investment
b Annual compensation disclosures that also list the
investments purchased or sold during the year
c
A web page with disclosures of all direct and indirect
compensation
d
Notice and other related disclosures if the advisor is
unable to recommend a sufficiently broad range of
investments due to platform-related or other limitations
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