By: Joelle Sharman
LEWIS BRISBOIS BISGAARD & SMITH
Effective June 9, 2017, the Department of Labor expanded the definition of fiduciary to include any professional, including but not limited to insurance agents and brokers, who makes covered investment advice, recommendations, or solicitations to a retirement plan, plan fiduciary, plan participant and beneficiary, Individual Retirement Account, or IRA owner in exchange for direct or indirect compensation. The Fiduciary Rule subjects these professionals and other service providers to retirement plans and IRAs to the standards of conduct required of fiduciaries under the Employee Retirement Income Security Act of 1974, the prohibited transaction rules of ERISA, and the Internal Revenue Code.
More specifically, during the transition period from June 9, 2017, through Jan. 1, 2018, persons and entities providing advice or making solicitations covered by the Fiduciary Rule and who receive commissions or financial incentives in connection with their advice or solicitations must adhere to “Impartial Conduct Standards.” These standards require the professional: to comply with the fiduciary duties of loyalty and prudence; to receive only reasonable compensation in exchange for advice or services rendered; and to not make any misleading statements to clients about fees, assets or conflicts of interest.
Beginning Jan. 1, 2018, these professionals also must provide clients with a specific disclosure agreement tracking the Department of Labor’s newly promulgated Best Interest Contract Exemption to the Prohibited Transaction Rules under ERISA. The BIC Exemption requires professionals to ensure that their contracts contain, among other things: an acknowledgement of the professional’s fiduciary duty to the investor; disclosure of direct and indirect compensation and other fee information; and a list of the steps the professional will adopt to avoid or help mitigate potential conflicts of interest. The contract must be signed by the professional, the retirement investor, and each financial institution whose products or services the professional discusses before any specific product or service is mentioned.
In short, professionals subject to the new Fiduciary Rule will be held to a higher standard of care. No longer must professionals simply find “suitable” investments for their clients. Rather, such professionals now must act in the best interests of their clients, just as a fiduciary under ERISA would.