Best Interests of Retirement Investors Protected in New DOJ Fiduciary Rule

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On April 6, 2016, the DOL published its final rule for implementing the fiduciary standard of care for firms and advisors in relation to ERISA and other plans such as 401(k), SEP and HSA plans. The implementation date of these rules will be in April 2017. In short, with few exceptions, advisors of retirement plans who receive fees or other compensation for such services, including registered investment advisors, broker-dealers, banks and insurance companies, will be held to a fiduciary standard to put the client’s best interest ahead of the advisor’s own profits. The determining factor whether advisor advice is covered by the fiduciary rule is whether the advisor makes a “recommendation” to the customer or otherwise represents or acknowledges a fiduciary relationship with the customer exists. A recommendation is broadly defined as a communication that would reasonably be viewed as a suggestion that the recipient take or refrain from a particular course of action. General investor educational materials, general economic discussions, and providing platform investment alternatives to plan fiduciaries are not considered recommendations. There are also exclusions for third-party administrators who assist plan fiduciaries. There are also exemptions to protect the employers and their employees who provide administrative services or general advice to their employee/plan participants. Finally, the new rule also provides that the DOL may issue specific exemptions, such as the Best Interest Contract Exemption, to allow firms to continue to rely on current compensation and fee practices and to engage in other activities that may trigger a conflict of interest, such as selling products from the firm’s own inventory or selling the firm’s proprietary products. Existing IRA accounts will be grandfathered and new contracts will not be required for existing accounts, but new recommendations to clients will be covered.

The rule mentions and dovetails with FINRA’s Rule 2111 which addresses situations where securities brokers are considered to be making recommendations. For example, the new rule makes clear that recommendations about whether to take distributions from a plan are covered.

Variable annuity products and index annuity products are covered by the new rule but fixed annuity products are not. Non-investment insurance products are also not covered. Recommending an investment advisor to a customer is not a covered recommendation.

For many advisory firms, it will be business as usual since they have always treated their customer relationships as fiduciary in nature; however, firms that continue to allow their advisors to put customers in unsuitable products or those with higher compensation for the advisors, or allow double-dipping by allowing commissions to be charged on trades in accounts otherwise being charged management fees, may find themselves in violation of the new rule and also exposed to breach of fiduciary duty claims by disappointed customers.

David Dyer is an AV rated commercial litigation attorney who regularly represents firms and individual brokers and advisors in securities arbitrations and lawsuits. He also represents firms and individuals in regulatory actions before state and federal regulators. Learn more about David here.