The new rule is contained in seven separate releases. At its core, the regulatory package is very simple: it requires more retirement investment advisers to put their clients’ best interest first. It does this by closing existing loopholes and expanding the types of retirement advice subject to fiduciary protections. At the same time, the rule distinguishes activities that are not advice, like education. The regulatory package also includes broad exemptions that give fiduciary advisers flexibility to continue many common fee and compensation practices so long as protections are in place to ensure that their advice is in their clients’ best interest.
The new rule will apply one year after publication of the final run win the Federal Register (which is supposed to be Friday, April 8, 2016). In addition, the DOL has adopted a “phased” implementation for the Best Interest Contract Exemption and the Principal Transaction requirements. In particular, the full disclosure provisions, the policies and procedures requirements, and the contract requirement do not go into effect until January 1, 2018.
As of that date, IRA customers entering into a new advisory relationship should expect to sign the contract any time before, or at the same time as, the execution of a new recommended transaction. The contract may be a stand-alone document, or it may be incorporated into another agreement between the customer and the firm. IRA customers already working with an investment adviser as of January 1, 2018, may receive a notice from their adviser or firm describing the customer’s new rights. It will not require the customer to take any action unless they object to the terms of the notice.
For customers who execute a contract, the firm will state that it and its individual advisers are acting as fiduciaries when they provide investment advice, and make certain commitments, including to provide advice that is in the customer’s best interest, charge no more than reasonable compensation, and make no misleading statements regarding investment transactions, compensation, and conflicts of interest. The firm will also commit to put in place, and comply with, policies and procedures designed to prevent violations of the impartial conduct standards, and to refrain from giving or using incentives (such as compensation payments and bonuses) for individual advisers to act contrary to the customer’s best interest. The contract will also disclose the fees, compensation, and material conflicts of interest associated with the recommendations.
As the final rule itself has 208 pages, stay tuned for additional information in the months to follow.