Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > Federal Regulation > DOL

Clock is ticking on DOL fiduciary compliance

Your article was successfully shared with the contacts you provided.

Advisors shouldn’t dilly-dally in complying with the Department of Labor’s fiduciary rule, which officially kicks in next April 10, prominent fiduciary attorney Fred Reish says, particularly since the rule “dramatically expands” the definition of fiduciary to include, for instance, advice on IRAs and rollovers.   

“I’m not encouraging you to wait,” Reish, a partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group, said on a recent webcast held by TD Ameritrade Institutional. “You’ve got to get started if you haven’t already gotten started on compliance.”

First, Reish said, the rule is “voluminous” and “complex,” and for advisors who provide advice to IRAs (which Reish said he bet would include 100% of the webcast participants), the rule brings IRAs and rollovers into the fiduciary equation.

The final rules allow a year before compliance is required, Reish told ThinkAdvisor in a previous interview. “Even then, compliance with the best interest contract exemption (BICE) is simplified until the full requirements take effect on Jan. 1, 2018, over a year and a half from now.”

Reish told webcast attendees that DOL’s rule really includes two sets of rules: The fiduciary rule, which is a “regulation that defines what fiduciary investment advice is, and it’s much wider than what you think,” and then “two sets of conflicts of interest that can apply to advisors when they give fiduciary advice to plans, to participants in the IRAs,” namely the 84-24 rule that impacts annuities, as well as the BICE.

“For each of those two prohibited transactions there are exemptions,” he continued. “In other words, there are exceptions to the rule that say ‘if you follow all of the following conditions, if you satisfy them all, then you can go ahead and proceed with the transaction and receive your compensation,’” Reish said. “But when you run into a prohibited transaction if you don’t comply with the conditions of the exemption it is prohibited for you to receive your compensation. That’s a big deal.”

Advisors who provide advice to a plan, a participant or a beneficiary in a plan, an IRA or an IRA owner, for fee or other compensation, direct or indirect, is held to a fiduciary standard under DOL’s rule, Reish explained.

“You may say, ‘gee, when I’m working with somebody to make a rollover, I’m not getting paid for that,’” Reish said. “But that’s not how these rules work. The courts and the Department of Labor have no trouble finding compensation” as it relates to rollovers. “They’ll say, ‘well, the money you make inside the rollover is part of what you’re getting for recommending the rollover, therefore you’ve got a fee, or compensation.’”

In other words, Reish continued, “they trace the money and they say, ‘somewhere in the picture are you making money on this?’ And the underlying theory is: Nobody works for free.”

As to what qualifies as a recommendation, Reish stated that DOL “wrote the rules so broadly that they’re extremely difficult to get around.” For example, a recommendation is a communication that “could reasonably be viewed as a suggestion that somebody do something,” he said. “So almost any conversation where an advisor were to say to a participant or an IRA owner, it would be good for you to do this or I think it’d be a great idea if you did this, all those things can be suggestions, even casual comments in the right context can be suggestions.”

Reish warned that a plaintiff’s attorney or a claimant’s attorney could “put together a argument that you may disagree with, but might be plausible to somebody else, that the comment [an advisor made] was a suggestion.”

Be “very cautious and just assume that if you’re talking to somebody about distributions and rollovers that it might be a suggestion,” Reish added.

What else constitutes fiduciary advice?

“A recommendation to buy, sell or hold an investment property is fiduciary advice,” Reish said. “Or a recommendation to a participant about how to invest their money if they roll over to an IRA with you; so the money’s still in the plan and you say, ‘Gee, if you roll over with me, I would invest you in a portfolio with the following kinds of index funds or whatever, and that would be fiduciary investment advice.”

Also, if “you’re talking to somebody who’s got their IRA with another broker-dealer or another RIA firm and you say to them, ‘If you come with me here’s how I would invest your money,’ that is fiduciary investment advice. If they come with you and you make money on it that payment of the fee in connection with the advice makes you a fiduciary investment advisor.”

See also:

DOL 101: The fiduciary rule’s impact on insurance-only agents

The new fiduciary challenges

Final DOl fiduciary rule issued

Industry insiders react cautiously to DOL fiduciary rule

You’re invited to join us on Facebook.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.