The Department of Labor (DOL) proposes to amend regulations governing the actions of fiduciaries. The new fiduciary rule takes effect on April 10, 2017*, with a transition period for exemptions until January 1, 2018. Regulators are implementing the new rule to clarify the definition of who qualifies as a ‘fiduciary’ of employee benefit plans and Individual Retirement Accounts (IRAs) and to address conflicts of interest. The fiduciary rule may affect IRA trustees and custodians of IRA trusts.
Existing law provides for potential ‘self-dealing,’ wherein an advisor or other financial service provider may receive commissions related to the employee’s investment decisions. The new rule imposes requirements on commissions and creates liability for fiduciaries; these factors may prompt some service providers to cease operation.
In response to the forthcoming regulations, many financial service companies are creating separate divisions that will serve as fiduciaries. These fiduciary service provider programs are intended to alleviate conflict of interest and liability by taking the fiduciary duty off the shoulders of the advisor. The companies plan to outsource fiduciary roles to these new programs to help ensure compliance with the DOL fiduciary rule. In addition to these new compliance efforts, here are a few considerations about the forthcoming rule:
- Exempt advisors. The Best Interest Contract Exemption (BICE) addresses advisors who are exempt from the new rule. BICE’s application to fiduciary relationships is complicated. The new rule prevents advisors from receiving variable commissions related to dealings with a client’s retirement account. Multiple versions of contracts provide for BICE. However, a transition contract is designed for use exclusively during the transition period noted above.
- Good faith. While violation of the new regulations is a breach of fiduciary duty, and the consequences of such action could be rife with litigation and expense, during the nearly year-long transition period fiduciaries can expect less focus on consequential matters and more on guidance. According to Wealth Management, parties that work in good faith toward compliance will likely be assisted rather than penalized.
- Delay. A bill introduced on Friday, January 6, 2017 proposed to delay the fiduciary rule’s effective date by two years. In early February, President Trump requested a 60-day delay. The DOL sent the final rule to the Office of Management and Budget in late March 2017.
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*As of this writing, the anticipated effective date is June 9, 2017.