Department of Labor Amends Final Fiduciary Rule in Attempt to Address Industry Worries

Many federal agencies have, at times, been characterized as less than business-friendly in its approach to issues. In fact, the unveiling of a higher fiduciary standard back in 2010 resulted in intense and, at times, vociferous opposition that led to the proposal’s temporary shelving. A a modified proposal was unveiled in 2015 due to concerns regarding the quality of financial advice Americans were receiving regarding their retirement savings and investments.

Recent changes to the Department of Labor’s long-pending, proposed fiduciary rule perhaps illustrate a greater level of flexibility from the  than many expected. The changes to the now final rule addressed a number of the industry concerns and charges against the rule. However, the rule is still consumer friendly and potentially offers significant new protections for consumers.

What Is the Purpose of the New Rule?

The new, revised fiduciary rule should provide much stronger protections for consumers. Companies that proceed with business, as usual, run the risk and reasonable likelihood of facing significant potential penalties. Under the new rule,  provisions are complex but the general goal is to bring financial services industry workers under the more stringent fiduciary standard. The fiduciary standard requires an individual to work solely in the interest of the client when he or she renders financial or investment advice.

The move to a fiduciary rule was likely inevitable in light of a retirement savings and investment landscape shaped by ERISA and pensions and other defined benefits plans continuing to fall by the wayside. In a world where 401(k) plans and Individual Retirement Accounts (IRAs) have transferred responsibility for retirement from institutions to individuals, the need for sound financial advice free from conflicts is more important than ever.

Essentially, the rule has a number of main goals. However, one of the most important goals is to increase the likelihood that retirement savers will accumulate investments significant enough to maintain their standard of living. One way this is accomplished is by creating a “best interest” standard that prohibits fiduciaries from placing clients in inappropriate plans. The new rule accomplishes this by redefining the term “investment advice” by replacing the original five-part test with a more inclusive four-part test. Advisors can be held to this standard regarding 401(k) assets, 401(k) distributions, and IRA assets. The recommendation to rollover assets is considered a fiduciary act under the new standard. However, certain parties and activities are specifically exempted:

• counterparties to large plans
• swap counterparties
• employees of the plan sponsor
• platform providers
• financial valuations and appraisals
• investment education

These are but a few of the changes brought by the fiduciary standard’s broader application in the industry.

Changes Made to the Rule by the DoL Due to Industry Concerns

While the rule could potentially represent a source of major liability, the administration did incorporate a number of changes at the urging and request of business interests. First, the timeline to implement the final rule as released in early April 2016 was extended to a full year from the originally proposed eight-month window. Thus, firms now have until January 1, 2018, before they must be in full compliance with the standard and all of its provisions. The final rule also does not penalize proprietary products provided that the firm and advisor adhere to their fiduciary duty. Changes to the best interest exemption have also been enacted. DoL indicates that clients will not be required to sign exemptions of this type until they open an account and not upon their first meeting with an agent or advisor.

These changes represent only a few of the alterations made to the proposed rule. The new standard requires financial and investment firms to thoroughly reconsider their operating practices, procedures, and policies in all affected areas.

Work With an Experienced Baltimore Commercial and Financial Attorney

The Law Firm of William S. Heyman providers on-point corporate legal guidance to financial firms and advisors regarding the shifting regulatory framework surrounding the fiduciary rule. For more than 20 years, Mr. Heyman has provided advice to and litigated on behalf of financial firms and advisors. To schedule a confidential consultation with a lawyer experienced in matters relating to ERISA, FINRA, and other regulatory frameworks call (410) 305-9287 or contact commercial litigator William Heyman online.