The U.S. Department of Labor announced a new exemption for investment advice fiduciaries on Tuesday. Fiduciary expert Fred Reish, a partner with law firm Faegre Drinker, took a preliminary look and noted that the final exemption retains much of what was in the proposed fidicuary rule introduced in June.
“For example, the preamble continues the DOL’s interpretation that advisors who recommend rollovers can be fiduciaries if they have an ongoing financial advice relationship with the participant, even for personal assets, or if the advisor intends to provide ongoing advice to the rollover IRA,” he said.
He called it a “dramatic expansion” of the definition of fiduciary advice. Fortunately, he added, the Department of Labor said that it will not enforce that definition retroactively and will grant limited relief for the next year; for instance, if the advice is in the participant’s best interest, and the advisor’s compensation is not more than reasonable.
“The exemption will apply to conflicted recommendations made to plans, participants, and IRA owners,” Reish explained. “A recommendation is ‘conflicted’ if it increases the compensation of the advisor and his or her supervisory entity (eg. broker-dealer or RIA).”
Examples of conflicts would include commissions, 12b-1 fees and revenue sharing. To obtain the exemption’s relief, though, an advisor will need to comply with a number of what he called “fairly demanding requirements.”
Comparable with the June proposal
“It looks to me like the final rule is substantially similar to the [June] proposal. In other words, while there are changes, they do not materially alter the conditions to obtain relief from the prohibited transaction resulting from conflicted fiduciary advice.”
He concluded with an additional comment; the rule is “Economically Significant,” which means that it cannot become effective until 60 days after it is published in the Federal Register.
“As a result, the effective date is after Biden’s January 20 inauguration, and the new administration will, as all do, pull it back for further study and possible changes.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
