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In Plain English

A publication of THE SECURITIES LAW GROUP | James E. Grand | January 2017

As Donald Trump’s inauguration approaches, many are wondering what will happen to the DOL’s new fiduciary rule which governs advice to retirement plan assets. It is no secret that Trump intends to take aim at existing regulations. Indeed, on the campaign trail, candidate Trump remarked that as many as 70% of federal regulations would be on the “chopping block” if he were elected. Some believe the Trump administration will indeed repeal the fiduciary duty rule. For the following reasons, however, given the political, procedural and business dynamics at play, we believe it would be unwise for advisers to cease or even slow down compliance efforts.

First, the Obama administration, concerned that a Republican Congress and president could overturn the regulation, made sure the final DOL rule was issued more than 60 legislative days before Trump’s inauguration so that the use of an expedited legislative procedure to repeal the regulation under the Congressional Review Act is no longer an option. As things presently stand, Mr. Trump will have to go to Congress and request that it repeal the fiduciary rule. However, without a filibuster-proof majority in the Senate (60 votes and the Republicans only have 52) the likelihood of that occurring is a long shot.

Second, the fiduciary rule becomes generally effective on April 10, 2017, less than 90 days after Trump is inaugurated. Even if the fiduciary rule is high on Trump’s priority list (which it does not appear to be based on recent comments), the ability of the president to undo existing regulations is very limited. At best, it seems that Trump might be able to delay the effective date and begin the formal process of repeal.

In light of all this, preparing for full compliance with the regulation is both reasonable and prudent.


Why did the DOL adopt the fiduciary duty rule?

First, advisers should understand that the definition of a “fiduciary” is of utmost importance in the retirement space. Fiduciaries are subject to many duties and responsibilities, including duties or prudence and loyalty, and strict prohibited transactions restrictions. Violations of a fiduciary’s duties can have severe–even criminal, consequences.

The DOL’s motivation for the rule is to help assure that investors know the investment advice they are receiving is in their best interest and not the interest of the person giving the advice. This is the first major rewrite to the fiduciary definition since ERISA was enacted in 1974.

The bottom line is this: under the new rule Brokers and RIAs must ban financial incentives that encourage registered representatives and advisers not to act in the client’s best interest.  This is already the fiduciary model that the vast majority of RIAs follow today. Hence, we see potential for the rule ultimately to be a competitive advantage for advisers who are and always have been fiduciaries.

Does the fiduciary rule apply to all investments?

For now, the rule applies only to retirement investments — 401(k)s, IRAs and other related plans. The SEC may adopt a fiduciary rule for the broader investment industry in the future.

How does the fiduciary rule affect financial advice?

A number of communications that were formerly not considered fiduciary “recommendations” may now be considered to be “investment advice” for purposes of ERISA. This will trigger fiduciary status, meaning that if those recommendations affect the adviser’s compensation, the recommendation must likely comply with one of two new exceptions: (1) the Best Interest Contract Exception (BICE) or (2) an exception for advice provided to sophisticated plan fiduciaries and intermediaries. These are the two key compliance paths.

What is the Best Interest Contract Exemption (“BICE”)?

The Best Interest Contract Exemption is a component of the fiduciary rule. It is intended to align individual advisers’ interests with those of their plan or IRA clients. The DOL put into place this exemption to permit advisers (and other financial institutions that are fiduciaries) to receive various forms and levels of compensation that would otherwise be prohibited under the current prohibited transaction rules governing ERISA plans and IRAs. As a condition of receiving these otherwise prohibited forms of compensation, the exemption requires financial institutions to acknowledge their fiduciary status and the fiduciary status of their registered representatives and advisers. Specifically, the exemption allows firms to continue to use certain compensation arrangements that might otherwise be forbidden so long as they, among other things, commit to putting their client’s best interest first, adopt anti-conflict policies and procedures (including avoiding certain incentive practices) and disclose any conflicts of interest that could affect their best judgment as a fiduciary rendering advice.

How will the BICE work?

Advisers will be hearing a good bit about the BICE. It is worth keeping in mind that the BICE is really a series of rules designed to impose different conditions on advice in varying circumstances. Hence, different rules will apply to: (1) IRA and rollover advice, (2) advice to ERISA plans and participants, (3) “Level Fee” advice, (4) advice during a short transition period from April 10, 2017 to Dec. 31, 2017, and (5) advice on products sold before the effective date. In all cases, the core of the BICE is to ensure that an adviser’s advice is in the client’s “best interest,” that advisers not have compensation incentives intended to cause recommendations not in the client’s best interest. The general rule will be this: fiduciaries cannot recommend an investment that affects their compensation. Regulators believe compensation like 12b-1 fees paid by mutual funds can inappropriately affect an adviser’s judgement in making recommendations. So, advisers who are considered fiduciaries under the new rule can only receive 12b-1 fees from an IRA or other retirement account if they comply with the terms of the new BIC exemption.

When will advisers need to sign a new contract with their clients?

The contract provisions of the BICE will not go into full effect until Jan. 1, 2018. However, some requirements are effective as of the BIC exemption’s “applicability” date”, which is April 10, 2017–approximately 90 days from now. For customers who execute a contract, the adviser will state that it and its individual advisers are acting as fiduciaries when they provide certain kinds of investment advice to retirement accounts, 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 adviser 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.

Can an adviser still offer actively managed separate accounts?

This is an important question because it cuts right to the heart of the investment advisory business. The concerns are (1) active management can result in high fees to the adviser and (2) there is a risk that actively managed investments could significantly underperform the market (or their benchmark indices) and thus plan fiduciaries would face a higher risk in offering active management services rather than passively managed investments. While it is true that active management could result in higher fees to the adviser, advisers who are plan fiduciaries under the new rule and who prudently select and monitor investments (whether active or passive) are not liable for the underperformance of the investments. The prudence test under ERISA is whether the plan fiduciaries used a prudent process in reaching an investment decision. “The focus of the inquiry is how the fiduciary acted in his/her selection of the investment, and not whether his/her investment succeeded or failed.” In other words, plan fiduciaries’ actions are not to be judged from the vantage point of hindsight. While plan fiduciaries who prudently select an investment would have a continuing duty to monitor the investment, plan fiduciaries who satisfy their monitoring responsibility should not be liable if an actively managed investment fails to beat (on a net of fees basis) a comparable passively managed investment managed to the same benchmark. As noted above, “[t]he ultimate outcome of an investment is not proof of imprudence.”


There is some question as to whether the Trump administration will repeal the fiduciary duty rule. For the reasons set forth herein, however, given the political, procedural and business dynamics at play, we believe it would be unwise for advisers to cease or even slow down compliance efforts.

Under the new rule, brokers and RIAs must ban financial incentives that encourage registered representatives and advisers not to act in the client’s best interest. This is already the fiduciary model that the vast majority of RIAs follow today. We see potential for the fiduciary rule ultimately to be a competitive advantage for advisers who are and always have been fiduciaries.


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This newsletter is published as a source of information only for clients and friends of The Securities Law Group and should not be construed as legal advice or opinion on any specific facts or circumstances.  The delivery of this publication is not intended to create, and receipt of it does not create, an attorney-client relationship.


James Grand