Navigating the Department of Labor’s Latest Fiduciary Rule: What Advisors Need to Know

The Department of Labor’s latest fiduciary rule aims to expand the scope of fiduciary activities, according to Washington attorney Scott Sinder. The rule will impact advisors and consumers, as almost everyone will become a fiduciary and must adhere to new standards and compliance requirements.

One of the main changes in the definition of a fiduciary is that it now includes anyone who makes professional investment recommendations on a regular basis as part of their business. This means that almost all advisors will fall under the fiduciary definition and must satisfy a prohibited transaction exemption.

The rule also redefines a fiduciary as someone who provides investment recommendations to a retirement investor for compensation, including specific investments, portfolio composition, and rollovers. Exceptions to the rule include investment information or education made without a recommendation, providing a list of products without a recommendation, and cold calls not based on individual circumstances.

The effective date of the rule is Sept. 23, with a one-year transition period for certain aspects of the rule. Advisors must meet impartial conduct standards and acknowledge their fiduciary status to receive commissions or compensation from third parties. The rule removes restrictions on compensation payments and requires advisors to disclose their compensation upon request.

There are two primary prohibited transaction exemptions (PTEs) that advisors can rely on: PTE 2020-02 and PTE 84-24. PTE 84-24 undergoes significant changes under the new rule, turning insurers into regulators by increasing oversight of independent producers. Insurers must review recommendations, develop a prudent process for authorizing producers, review rollover recommendations, and certify compliance with impartial conduct standards.

Both PTEs have core requirements including impartial conduct standards, disclosures, policies and procedures, and recordkeeping. The rule also introduces a good faith compliance exception and narrows eligibility restrictions for using the PTEs.

Overall, the new fiduciary rule will have a significant impact on advisors and consumers, requiring advisors to adapt their sales, marketing, and customer service procedures to comply with the regulations. The rule aims to level the playing field and address regulatory gaps in the market, ensuring that all advisors act in the best interest of their clients.

In conclusion, the Department of Labor’s fiduciary rule will bring about substantial changes in the financial advisory industry, with a focus on expanding fiduciary activities and ensuring that all advisors act in the best interest of their clients. Advisors must be prepared to meet new standards and compliance requirements to navigate the evolving regulatory landscape.