- Hold on to Your (Fiduciary) Hats: the Countdown to Compliance with the Department of Labor’s Final Fiduciary Rules Begins
- June 17, 2016 | Author: Alden J. Bianchi
- Law Firm: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. - Boston Office
- After six years in the hopper, the Department of Labor finally issued final fiduciary regulations late last week that will greatly impact a wide variety of stakeholders. The Employee Retirement Income Security Act (ERISA) governs fiduciary conduct and establishes rules that bar certain transactions, referred to as “prohibited transactions.” While ERISA’s fiduciary standards and prohibited transaction rules apply principally to retirement plans, ERISA also amended the Internal Revenue Code to impose nearly identical prohibited transaction, but not fiduciary, rules on IRAs, Health Savings Accounts, Archer Medical Savings Accounts and Coverdell Education Savings Accounts. The Department of Labor is charged with interpreting the ERISA and Code provisions relating to fiduciary status and prohibited transactions, and its much anticipated suite of final regulations:
- Makes sweeping changes to the definition of the term “fiduciary” under ERISA;
- Imposes strict, new conflict of interest provisions on persons who provide investment advice to ERISA-covered retirement plans and Individual Retirement Accounts; and
- Modifies a handful of existing prohibited transaction class exemptions.
The final rules make some important and welcome changes to a proposed set of rules the DOL issued in 2015, which we explained in a series of posts beginning. The newly issued final rules include the following:
- Definition of the Term “Fiduciary”; Conflict of Interest Rule - Retirement Investment Advice
- Best Interest Contract Exemption
- Class Exemption for Principal Transactions in Certain Assets between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs
- Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters
- Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 86-128 for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers; Amendment to and Partial Revocation of PTE 75-1, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers and Banks
- Amendment to Prohibited Transaction Exemption (PTE) 75-1, Part V, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks
- Amendments to Class Exemptions 75-1, 77-4, 80-83 and 83-1
The DOL has announced that the deadline for compliance with the new requirements will start in April 2017. In the Department’s view, this delay, among other things, “provides adequate time for plans and their affected financial services and other service providers to adjust to the change from non-fiduciary to fiduciary status.” While a full year sounds like a long time, it’s not. These rules are staggeringly complex, and they will in some though not all cases require major changes on the part of financial advisors of most stripes. It is difficult to underestimate the significance of the new rules. At bottom, they will change the way that advice is delivered, principally to small retirement plans and to IRA investors.
This rule has been in development for more than 6 years. During that time, the financial services industry has been unwavering in its opposition. It remains to be seen whether the changes to the final rule, purportedly made in response to criticisms voiced in formal comments and in three days of public hearings, will assuage critics or invite further challenges in the courts or in Congress. Regardless, given the proximate compliance date and breadth of the final regulations, financial advisors cannot adopt a wait-and-see approach.
* * * * *
Given the widespread implications of this rule to companies in the financial services industry, we are also planning to host a webinar on the subject of the DOL’s new suite of final fiduciary and conflict of interest rules. The webinar will focus on the new definition of “fiduciary,” the Best Interest Contract Exemption, and the Class Exemption for Principal Transactions. It will also survey the changes to several Prohibited Transaction Exemptions. Please stay tuned for further details.