The DOL Fiduciary Rule: Managing the Transition Period

Like it or not, the Department of Labor's new fiduciary rule is here. Much ink has been spilled analyzing the rule for every possible contingency, and that will not be rehashed here. Rather, it is critical for advisors to be aware of the sometimes convoluted timeline and compliance requirements of the rule. This will serve as a high-level guide to the rule's requirements and when they will become applicable to different firms.

The rule can be cleanly broken out into two distinct phases of implementation: the transition period and the effective date. Each period will have differing requirements and, depending on the firm's fee and compensation structures, will have different implications for each firm.

Transition Period

The transition period was the subject of the rule's delay. Originally marked to begin on April 10, the transition period's start date was pushed back to June 9.

During the transition period, the compliance requirements under the rule are fairly straightforward. The advisor is required to: adhere to the Impartial Conduct Standards; provide a written fiduciary acknowledgment; and designate a person responsible for addressing material conflicts of interest and monitoring advisors' adherence to the Impartial Conduct Standards.

Impartial Conduct Standards

According to the DOL, the Impartial Conduct Standards are "consumer protection standards that ensure that advisors adhere to fiduciary norms and basic standards of fair dealing." The standards require advisors to:

Give advice that is in the best interest of the retirement investor. This includes the prudence standard, which holds that advice must meet a professional standard of care. It also includes the loyalty standard, meaning advice must be based on the interests of the customer, rather than the competing financial interests of the advisor.
Charge no more than reasonable compensation
Make no misleading statements about investment transactions, compensation and conflicts of interest

Fiduciary Acknowledgment

The fiduciary acknowledgment is a flexible requirement. Per the terms of the DOL, the advisor must "affirmatively state in writing that it … act[s] as a fiduciary under ERISA, the Code, or both with respect to any investment advice provided by the … advisor … with respect to any investment recommendations regarding the plan or participant or beneficiary account."

There is no clear limitation on the form that this notice can take. As such, many advisors are simply incorporating the acknowledgment into existing documents, such as their Form ADV and investment advisory agreements. This works fine for new clients, as the requirement is easily met through delivery of the ADV and the agreement at the time of engagement.

Existing clients, however, necessitate a bit more legwork. Since the ADV and agreements are presumably already in the clients' hands, amendments to such documents would not be sufficient to deliver the required acknowledgment. Instead, the best practice to ensure that every client receives the required acknowledgment would be to send a separate acknowledgment letter to existing clients, informing them of the advisor's newfound role as an ERISA fiduciary.

Designated Person

For most firms, this aspect of the rule will be the easiest to satisfy, as advisors should already have an individual in place to address conflicts of interest. Through their statuses as Investment Advisers Act fiduciaries, advisors are likely already adhering to the Impartial Conduct Standards.

To the extent an advisor is not already observing these standards, compliance policies and procedures must be implemented, and the CCO must be tasked with ensuring their effectiveness.

Next month, we'll cover the rule's post-transition period.

— Read SEC Moving Forward on Fiduciary Rule, Clayton Says on ThinkAdvisor.