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Regulation and Compliance > Federal Regulation > DOL

Fiduciary Rule Readiness Check: June 9 Effective Date

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Despite the views of many industry experts, the June 9 applicability date for the Department of Labor (DOL) fiduciary rule was not delayed further—meaning that financial professionals and their firms must now take steps to comply in good faith with the rule’s requirements.

This rule will impact a wide group of advisors, including those that sell indexed and variable annuity products, as well as those who provide investment recommendations regarding retirement savings generally.  Because of this, it is crucial that these advisors understand what the June 9 applicability date actually means—and how business can practically be conducted without incurring liability and running

June 9 Compliance Obligations

While the applicability date for the DOL fiduciary rule is June 9, 2017, only certain portions of the rule go into effect on that date—many other provisions are only effective beginning January 1, 2018. Further, the DOL has released guidance indicating that it will focus on compliance efforts, rather than enforcement, during the transition period (June 9, 2017 – January 1, 2018).  Therefore, as long as advisors make reasonable, good faith efforts to comply with the rule’s terms, they should not be subject to penalty.

Generally, beginning June 9, advisors must (1) make no misleading statements to clients, (2) receive only reasonable compensation and (3) make investment recommendations that are in the client’s best interests.

(Related: House GOP Introduces Bill to Overturn DOL Fiduciary Rule)

The DOL has recently released guidance providing that sales of fixed indexed and variable annuities may continue to be made under the previously existing rules until the January 1, 2018 full effective date.  Further, during the transition period advisors may rely upon the best interest contract exemption for newly designed compensation structures that have been developed in order to reduce the potential for conflicts (but that may not be perfected by the June 9 deadline).  During the transition period, advisors must simply ensure that the rule’s impartial conduct standards are followed.

Certain level fee providers and “robo” advisors will be considered to meet the best interest contract exemption standards so long as they satisfy the impartial conduct standards.  This is the case even though they may not fully satisfy the rule’s disclosure obligations (meaning that they need not acknowledge their fiduciary status to clients) or documentation requirements.

Future Compliance Obligations

The actual fiduciary rule contract and disclosure requirements do not become effective until January 1, 2018.  On this date, the best interest contract exemption requires that the advisor’s firm enter into a contract with the client that commits the advisor to act in the best interests of the client. The contract must contain an acknowledgement of the fiduciary status of the firm and its advisors.

 The contract must also state that the firm and its advisors will adhere to certain impartial conduct standards (including the best interest standard). The DOL has clarified that the impartial conduct standards are measured based on the circumstances as they exist at the time of the recommendation, rather than upon the ultimate performance of the investment, however.

 The contract must also contain the firm’s warranty that it has adopted, and will comply with, policies and procedures designed to mitigate conflicts, and must include a disclosure about the firm’s services, including its fees and compensation practices.

Conclusion

While the fiduciary rule becomes effective June 9, there is still considerable time during the transition period for the rule to be modified or even repealed.  Despite this, it is likely that the rule has made its mark in the industry and is likely to have an impact regardless of its future.

Check out previous coverage of the DOL fiduciary rule in Advisor’s Journal, and for in-depth analysis of fiduciary responsibility generally, see Advisor’s Main Library.

Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.


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