But, what does this mean? Here is a little background.
BEFORE THE RULE
Previously, financial salespersons such as brokers, planners and insurance agents (“Broker”) who work with retirement plans and accounts, operated under a “suitability standard”. This required the Brokers to take steps to ensure that the investment they recommended was suitable for the client to whom they were making the recommendation. The Broker would take into consideration the risk tolerance, total net worth, and investment experience (among other things) when deciding if an investment was suitable. There is much left to the Broker’s subjective discretion.
Only Investment Advisors registered with the Securities and Exchange Commission or individual states (“RIA”) follow the “Fiduciary Standard”. This requires the RIA to put their client’s best interests ahead of their own profits. Acting as a fiduciary creates legal liability and obligations between the Fiduciary (Investment Advisor) and the party placing special trust, confidence and reliance on the Fiduciary.
Some argue that with the suitability standard, Brokers were able to offer investment advice or reccomendations, possibly resulting in conflicts of interest and in many instances, large commissions or other forms of payments to the Brokers themselves. Supporters of the DOL’s Final Rule say that treating anyone who offers investment advice or reccomendations as Fiduciaries will minimize conflicts of interest will protect the Investor.
The Final Rule, redefined who is a “fiduciary” of an employee benefit plan under the Employee Retirement Income Security Act of 1974. (“ERISA”) and updated the conflict of interest rules applicable to such a “fiduciary.” The Final Rule is applicable to a “fiduciary” of a plan (including Individual Retirement Accounts (IRA) under the Internal Revenue Code of 1986 (the “Code”)).
Who Does it Apply To?
An individual falls under the scope of the Final Rule if they provide “investment advice” for a fee or other compensation (direct or indirect) and;
- Represents or acknowledges that they are acting as a fiduciary within the meaning of ERISA or the Code;
- Provides advice rendered pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the specific investment needs of the recipient; or
- Provides recommendations directed to a specific recipient or recipients regarding the advisability of a particular investment or management decision;
Under the Final Rule “Investment Advice” includes:
- A recommendation as to the advisability of acquiring, holding, disposing of, exchanging, rolling over, transferring, or distributing securities or other investment property of the plan or IRA; or
- A recommendation as to the management of securities or other investment property including, among other things, recommendations on investments (policies or strategies), portfolio composition, selection of investment account arrangements, selection of persons to provide investment advice or management services, or recommendations with respects to rollovers, transfers, or distributions.
A communication is considered a “recommendation” when its content, context, and presentation would reasonably be viewed as a suggestion that the recipient of that communication engage in or refrain from taking a particular course of action. The rule states that the standard is intended to be objective, not subjective. As a practical matter, the more client-specific the communication, the more likely it will be considered a “recommendation.”
As a practical matter, anyone offering advice relating to retirement account under ERISA or the Code, will have to act as a “fiduciary.” If you are an investor this means that you may be afforded greater protection from potential conflicts of interest. If you are a broker, investment advisor or other financial salesperson, this means that you should become intimately familiar with the new requirements and disclosures.
 delayed from the original April 10 Applicability Date, with a further transition period for many BIC provisions and revisions to PTE 84-24 other than the impartial conduct standards until January 1, 2018, and a conditional grandfather rule for certain arrangements existing before June 9, 2017