Corporate Strategy Analyst, Global CTS Specialists
Fran joined FactSet in 2015 as an experienced capital markets professional with extensive fixed income trading, structuring and sales expertise at top-tier investment banks like Morgan Stanley, UBS, Lehman Brothers and Barclays Capital. Fran is an industry author and speaker on topics including debt capital markets, financial regulatory reform, housing reform and public policy matters. Over his career, Fran has managed institutional trading and sales teams for large complex investors like the U.S. Government Sponsored Enterprises (GSEs), European Supra, Sovereign and Agencies (SSAs), central banks, commercial banks, hedge funds, insurance companies and asset managers.

In April 2016, the U.S. Department of Labor (DOL) Employees Benefits Security Administration finalized a rule to address conflicts of interest for investment advice on Individual Retirement Accounts (IRA); this has become commonly known as the “fiduciary rule.” Although five years in the making the fiduciary rule has been highly controversial from the start. The final rule is scheduled to be implemented over time, with the first elements of compliance set for April 2017.

The guidelines extend the reach of the fiduciary rule that currently applies to advisers working with 401(k)s and other workplace plans, broadening the existing rule to apply to advisers speaking with individuals about existing IRAs and possible rollovers of money from a 401(k) or other workplace plan to an IRA.

Functionally, the new rule’s goal is to prevent brokers from operating under the “suitability” standard of conduct, which allows them to recommend investments that pay them the highest sales incentives. There are varying sets of rules for fiduciary advice that apply in different circumstances and under the jurisdiction of multiple regulators—with a wide variance of prescription.

The Employee Retirement Income Security Act of 1974 (ERISA) is the primary federal law governing the world of workplace retirement plans, like 401(k) plans. As a qualified fiduciary under ERISA, an adviser must act prudently and solely in the interest of the client. But, ERISA can be a complicated arena full of specificity, like “prohibited transaction” rules that can trigger tax penalties under tax law.

The new DOL fiduciary rule extends ERISA’s “higher standard” over workplace retirement plans to cover all retirement investments and advice, including IRAs. The new rule states that anyone receiving compensation for providing individualized “advice” or specifically directed to a plan sponsor, plan participant, or IRA for consideration in making a retirement investment decision is a fiduciary. Questions of government overstep and benefit vs. burden commonly crop up when new regulatory requirements emerge, but here those concerns are amplified by lack of clarity over agency jurisdiction.

Best Interest Contract Exemption

In addition to extending ERISA standards, one of the single most contentious aspect of the DOL’s Fiduciary Rule is the Best Interest Contract Exemption (BICE), which mandates advisors providing retirement investment advice for a fee, directly or indirectly, are deemed a fiduciary and therefore must act in the best interest of all clients. 

Fiduciaries providing advice which results in variable compensation (i.e., commissions associated with the investment) are engaging in a “prohibited transaction” which requires a prohibited transaction exemption in the form of a signed and properly documented best interest contract exemption. Although BICE may mean slightly different things for different types of firms, it becomes an enforceable contract. 

Ultimately, the exemption provides for enforcement of the standard it establishes. If enacted, retirement investors will possess the mechanism to hold financial institutions accountable and sue for breach of contract, if they do not adhere to the standards established in the exemption. Although investors will not be able to use this enforcement mechanism simply because they don’t like how an investment turned out, the significant industry fear of BICE being used to create potentially baseless investor class action suits because of investment losses is an obvious tangible concern.

While enactment of the rules is not yet a given, (especially with the scrutiny they may face from the incoming presidential administration) the changes have the capacity to reshape the regulatory landscape as it relates to retirement investment.

To learn more about the fiduciary rule and how it can impact you, download our eBook, or register for our upcoming webcast: Countdown to the DOL Fiduciary Rule: Are You Prepared?

Download our eBook: The Future of Fiduciary Responsibility

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