The Department of Labor’s fiduciary rule will make it “more challenging than ever” for advisors and others to recommend rollovers in a non-fiduciary capacity, according to a lawyer, speaking during a panel discussion organized by compliance consulting firm Foreside.
Stephen Wilkes, a partner at the Wagner Law Group, said that the DOL had been fighting “tooth and nail” for years to expand the scope of ERISA’s five-part test that determines whether someone is acting as a fiduciary during a recommendation, and had felt stymied by organizations that structured their communications and activities to escape those five prongs.
“So the takeaway is they’ve come back and reinterpreted the same statute with the same regulation,” he said about the rule, which was passed during the Trump administration and takes full effect next January. “There’s no change in words, (but) their interpretive stance is more expansive than ever, and they’re really tough on it.”
The rule was originally proposed in summer 2020, and meant fiduciaries could partially receive compensation and get an exemption on fiduciary status when recommending certain investments provided they adhered to certain “impartial conduct standards.” The rule was passed shortly before Joe Biden took office as president, and took effect in February of this year. The DOL recently announced it would extend an enforcement relief period, originally scheduled to end on Dec. 20, through the end of January 2022 (with firms having relief on certain requirements of documentation and disclosures concerning rollovers until June of next year).
According to Foreside Managing Director Jacqueline Hummel, the rule’s amendments to rollover recommendations were particularly notable. Previously, DOL rules meant advisors had a tacit “free bite at the apple” in which they could advise a client on a rollover provided it was not part of an ongoing relationship (one of the prongs in the five-part test).
But with the new rule, Wilkes said it’d be hard to “rebut the presumption” that any advisor working on an IRA rollover will require an exemption.
To comply with the rule, fiduciaries must meet the impartial conduct standards, which include acting in clients’ best interests, charging reasonable compensation and not making misleading statements, according to Hummel. As part of the new rule, firms must provide written disclosures documenting why a rollover is in the client’s best interest and must disclose conflicts. A firm’s Form CRS would likely fulfill the latter demand, Hummel said.
But advisors don’t necessarily need to recommend the cheapest option for clients. For example, a client may want an IRA that is professionally managed or have particular preferences that could boost the cost of an IRA rollover, according to Hummel. There could be situations in which an the client demands a rollover without an advisor’s recommendation. But in potentially thorny situations, Hummel stressed that recordkeeping was not only a compliance mandate but a saving grace.
“Ultimately, it’s documentation, documentation, documentation,” she said. “How are you going to prove it to the regulators? The best way is by having records.”
Hummel said she would not be surprised if the Securities and Exchange Commission began asking exam questions about compliance with the rule to registered investment advisors and broker/dealers advising a large number of clients on rollovers.
But Wilkes sought to assure RIAs who have not started preparing for the rule, saying they are likely in better shape than they realize, provided they have a compliance culture in place. Wilkes believed that such advisors and firms would only need to massage and customize specifics to benefit from the exemption.
“Don’t be discouraged,” he said. “You’re probably a lot closer to the finish line than you realize.”