The final rule, while expanding the types of retirement investment advice covered by fiduciary protections, especially for IRAs, also provides carveouts for retirement education, order-taking by brokers and sales pitches to certain plan fiduciaries. The DOL has also finalized new exemptions. One exemption is the so-called “best interest contract” exemption or “BIC” exemption that generally requires an adviser providing retirement investment advice to:
- provide advice in the client’s best interest,
- adopt policies and procedures designed to mitigate conflicts of interest,
- clearly and prominently disclose any conflicts of interest, like hidden fees, that might prevent the adviser from providing advice in the client’s best interest, and
- enter into a written agreement contractually committing to these requirements in the case of clients that are IRAs or otherwise not subject to ERISA. The intention of the written agreement requirement is for an IRA and other non-ERISA-governed clients to have a contractual cause of action against the adviser if the client suffers financial harm as a result of the adviser’s conflict of interest.
The DOL made a number of modifications to the April 2015 proposal, but generally did not materially alter its structure or scope. Key modifications include:
- clarifying what is “education” versus what is “advice”
- removing appraisals entirely, and not just ESOP appraisals, although the DOL reserved this provision for future rulemaking
- expanding the so-called seller’s carve-out, including by reducing the plan size to $50 million from $100 million
- expanding the BIC exemption to cover all asset types and not just a limited number of asset types
- providing more flexibility on the timing of entering into a written agreement (if required), including by providing that the agreement may generally be entered into at the time of the implementation of the advice
- clarifying that the agreement may cover the firm and all of its agents, rather than requiring each individual agent to be party to the contract
- limiting the agreement requirement to IRAs and other non-ERISA plans
- reducing the disclosure requirements and eliminating the requirement to show projections
- confirming that proprietary products are allowed to be included under certain circumstances
- providing that variable annuities are not covered by PTE 84-24 but rather fall under the BIC exemption; fixed rate annuity contracts are still covered by the so-called “insurance exemption”
- including provisions on level fee arrangements
There are also grandfather rules for existing clients, including providing that existing IRA clients are not required to enter into a new contract but instead may receive a notice and be deemed to agree by “negative consent.”
The final rule is generally effective on April 10, 2017, but several aspects and requirements (including the written contract requirement) will not be effective until January 1, 2018. It is not clear whether the next president will, or will have the ability to, suspend the final rule before it becomes effective.
For questions, please contact Scott Webster, Jamie Fleckner or Alison Douglass, any member of Goodwin’s ERISA & Executive Compensation Practice or ERISA Litigation Practice, or your regular Goodwin contact.