April 14, 2016
The Rule Will Require Restructuring of Pay and Compliance Policies at Financial Institutions Serving Retail Retirement Clients
The Rule Also Increases the Litigation Risks to Financial Institutions Associated with Providing Investment Advice to IRAs and IRA Beneficiaries
On April 6th, the US Department of Labor issued its final “fiduciary” rule. Over 800 pages in length and more than 15 years and three iterations in the offing, the rule and its related prohibited transaction exemptions (“PTEs”) will, for the first time since the passage of ERISA, subject many of the investment and asset management recommendations from broker dealers, banks and other financial organizations to individual retirement accounts (“IRAs”) and other retail retirement clients to ERISA’s fiduciary standards and remedies.
The most immediate impact of the rule will be on the compensation practices at broker-dealers and other financial institutions and on the fee and revenue sharing arrangements among funds, fund sponsors and the financial institutions that offer investment advice to retail retirement clients. The rule and related exemptions require new client contracts, new internal “best interest” or “impartial conduct” policies and procedures, new websites and additional disclosures to both investors and the DOL. The rule also increases the litigation risks to financial institutions in providing investment and other services to retail retirement clients, because the rule subjects advice to IRA and other non-ERISA plan clients to ERISA’s remedial provisions, and does so in a context that emphasizes subjective fair treatment in a complex environment.
The rule will be applicable to financial institutions and the financial advisers employed by them on April 10, 2017, which is one year after its effective date. However, in response to implementation and feasibility concerns raised by the financial services industry, the DOL has delayed full compliance with certain provisions of the “best interest contract” and “principal transaction” exemptions until January 2018.
This publication describes the main provisions of the rule, as well as the key terms of the new and amended PTEs promulgated by the DOL.