Just The Facts on the RIA Conflict of Interest Rule
The Department of Labor published a much-discussed conflict of interest (fiduciary) rule on April 8, 2016. With all the conversation about the implications of the changes for the profession, it’s difficult to keep track of exactly what new requirements will apply to registered investment advisers (RIAs). This post covers the basics of the DOL’s new fiduciary duty rule and its key implications for RIA compliance.
The new DOL rule aims to ensure that investment advisers treat retirement investment advice as fiduciary advice. This affects advice on every 401(k) plan, every IRA, and every rollover or distribution. It also changes the way RIAs receive compensation, but allows for two exemptions that will allow the current method of compensation – each with their own set of requirements.
Definition of a “fiduciary”
In general terms, a fiduciary is a person who “is invested with rights and powers to be exercised for the benefit of another person,” and must act with “the scrupulous good faith and candor” required by the trust inherent in such a relationship.
Under the DOL’s new rules, any person who receives compensation for providing advice with the understanding that advice is based on a particular person, plan sponsor, plan participant, or IRA owner’s needs qualifies as a fiduciary.
“Advice” includes such things as what assets to purchase or sell, and whether to rollover from an employment-based plan to an IRA.
Origins of the new rules
Recognizing that its rules for investment advice had not changed significantly since the passage of the Employee Retirement Income Security Act (ERISA) in 1974, the DOL began a multi-year project in 2009 focused on updating conflict of interest rules for investment advisers to take into account the rise of new investment vehicles such as 401(k)s and IRAs. That project resulted in the rules promulgated in April.
Fiduciaries to plans and plan participants:
- must act impartially and provide advice that is in their clients’ best interest; and
- cannot receive payments creating conflicts of interest unless they comply with the conditions of a listed exemption (see below).
The final regulation went into effect on June 7, 2016, but investment advisers have until April 10, 2017 to comply with most of the new rules. For other rules, advisers have even more time before the rules become applicable.
The DOL has adopted a “phased” implementation approach for Best Interest Contract and the Principal Transaction Exemptions (BICE and PTE, respectively). The full disclosure provisions, the policies and procedures requirements, and the contract requirement for BICE and PTE
do not fully go into effect until January 1, 2018. During the period between the general applicability date in April 2017 and this later date, fewer conditions will apply.
Firms and advisers must still follow certain rules prior to 2018 under the phased approach. According to the DOL, “firms and advisers must adhere to the impartial conduct standards, provide a notice to retirement investors that, among other things, acknowledges their fiduciary status and describes their material conflicts of interest, and designate a person responsible for addressing material conflicts of interest and monitoring advisers’ adherence to the impartial conduct standards.”
The DOL intends to focus on providing compliance assistance to help make the transition to the new rule and its exemptions as painless as possible.
Creation of a fiduciary duty
The new rules have generated much discussion concerning when RIAs must sign a contract with a plan investor to formally recognize and commence the RIA’s fiduciary duty.
For ERISA plans, the new rule eliminates the need for a formal contract. Firms simply need to acknowledge in writing that they, and their advisers, are acting as fiduciaries when providing investment advice to the plan, participant, or beneficiary.
For IRA holders, the new rules don’t change when a contract needs to be signed. The parties can sign a contract at the same time as, or before, any account-opening documents. Any advice given before a contract was signed must be covered by the contract and must also meet a best interest standard, however.
For both ERISA plans and IRAs, firms must continue to retain records showing they complied with the new requirements.
The Best Interest Contract Exemption
The BICE allows firms and advisers to maintain their existing forms of compensation through receiving third party payments and selling proprietary products.
In order to take advantage of this exemption, firms must accept “Impartial Conduct Standards” that they contractually warrant for IRA accounts. These rules ensure that any variability in differential compensation is based on “neutral factors.”
To apply for a BICE, firms will need:
- Well-documented policies and procedures addressing their adherence to the Impartial Conduct Standard
- Anti-conflict policies and procedures
- A system that places these policies and procedures into an effective supervisory structure
Principal Transaction Exemption
The DOL also created a Principal Transaction Exemption that allows fiduciaries to sell or purchase certain recommended debt securities. The Principal Transaction Exemption allows for the purchase of debt security, unit investment trusts, or CDs based on certain credit and liquidity standards, as well as the sale of all securities. 
The PTE includes the same requirements as the BICE, and financial institutions may not give advisers financial incentives to make recommendations that go against the customer’s best interest.
Penalties for non-compliance
Retirement investors can institute proceedings to hold advisers and firms accountable for any breach of the new rules. Depending on the type of plan, this could occur via a breach of contract claim or under the provisions of ERISA.
Where can I get more information?
The resources listed here have valuable information. For specific advice and legal interpretations, ask your legal counsel or your compliance department.
Jurispect can also alert you about any agency activity on this rule. This includes:
- Agency guidance and interpretations
- Adjustments of the compliance dates
- Enforcement actions
Get all the information you need in one place with Jurispect’s advanced regulatory tracking system.