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Risk in Context

The DOL’s Fiduciary Rule Is Here

Posted by Michael White June 09, 2017

Companies that offer retirement investment advice may now be considered fiduciaries and required to act in the best interest of their clients.

The US Department of Labor’s (DOL) anticipated Conflict of Interest Rule, which imposes a fiduciary standard on investment professionals rendering investment advice to participants in retirement plans, subject to Employee Retirement Income Security Act (ERISA), went into effect June 9.

The prohibited transaction exemptions to the rule — such as the Best Interest Contract Exemption and the Principal Transactions Exemption — also went into effect but will remain under a phased implementation period ending on January 1, 2018. During this period, financial firms looking to use the exemptions will not have to satisfy all of the requirements but will have to ensure that they:

  • Give advice that is in the client’s “best interest.”
  • Charge no more than reasonable compensation.
  • Make no misleading statements about the transaction, compensation, or conflicts of interest.

After January 1, 2018, all firms will need to fully comply with each exemption’s specific requirements in the rule.

Managing the Effects

The DOL also announced a temporary enforcement policy through January 1, 2018. Under this policy, the DOL will not pursue claims against fiduciaries that are working in good faith to comply with the rule.

Financial institutions that have fully prepared for the rule with policies that are ready to be implemented will likely gain a competitive advantage over their competitors that lagged behind. For those firms that have yet to formalize any procedures, the DOL’s temporary enforcement policy gives them an opportunity to catch up without experiencing violations.

Companies working to finalize policies and procedures related to the rule — and those with existing ones — should consider:

  • Reviewing disclosure and transparency policies and procedures regarding fees and commissions.
  • Evaluating all account relationships to determine if any fiduciary obligations under the rule have been triggered.
  • Reviewing fee and commission schedules.
  • Revisiting fee-based versus commission-based compensation arrangements on an account-by-account basis to determine what is in clients’ best interests.

The DOL intends to seek additional public input around additional exemptions, and may extend the temporary enforcement policy and the phased implementation period beyond January 1, 2018. While the rule’s implementation has removed some uncertainty, it remains to be seen how exactly it will affect financial firms.

For now, work with your insurance advisor to understand the potential risks and review your professional liability insurance contracts to ensure there are no exclusions pertaining to fiduciary obligations.

Michael White

Michael White is the investment management industry leader in Marsh’s FINPRO Practice.