Rule Change Updates

On November 27, the Department of Labor announced an implementation extension for certain controversial provisions of its “Fiduciary Duty Rule’ that was effective in April 2017.  The provisions covering exemptions for best-interest contracts and principal transactions will now go into effect July 1, 2019, along with some amendments to prohibited transaction exemptions.

This announcement follows a request from President Trump for further analysis of the rule’s impact on access to retirement information and financial advice.  The DOL’s review process could ultimately change or eliminate the implementation of the remaining rule provisions.

The BICE and Commission Business

The Rule’s Best Interest Contract Exemption (BICE) requires financial advisors who wish to continue working on a commission basis to avoid all conflicts of interest and work exclusively in the client’s best interest. Certain industry participants believe that the complexity of administering the contract as required by the rule will eliminate commission business.

A complete shift to fee- only business could be disadvantageous to certain customers.  In fact, many advisors could not afford to provide financial advice to many middle- and lower-market investors, creating a highly underserved market.

Current Status of the Fiduciary Rule

The provisions of the Rule that were implemented in April 2017 require financial representatives to apply a fiduciary standard instead of the FINRA suitability standard when recommending products and strategies for IRAs and retirement plan rollovers. The more stringent fiduciary standard requires financial advisors to act impartially in the best interest of their clients.

By contrast, the suitability standard meant that if an investment recommendation met a client’s defined need and objective, it was deemed appropriate. Now, financial professionals are legally obligated to put their client’s best interests first instead of making only “suitable” investment recommendations. This means that financial advisors cannot conceal any potential conflicts of interest and must clearly disclose all fees and commissions in dollar form to clients.

The portion of the DOL’s rule that is now in effect requires representatives providing advice in retirement accounts to follow the three conduct standards below to comply with the rule’s fiduciary standard:

  • Compensation for services must be reasonable;
  • Advice must be in the best interest of retirement savers;
  • No materially misleading statements can be made.

Examples of conduct that violates the fiduciary standard include:

  • Choosing products that pay higher compensation, even though they may be suitable for the client; and
  • Recommending only proprietary products when other products may be more appropriate.

Exam Impact

FINRA licensing exams could include questions on the currently implemented portions of the DOL reforms regarding retirement plan advice.

Check back for regular updates from Knopman Marks and stay up-to-date with the latest rule changes.