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The BD/IA Regulator

Providing securities regulatory, enforcement and litigation trends for broker-dealers, investment advisers and investment funds

Implementing the DOL Fiduciary Rule

Posted in Broker-Dealer Regulation, Investment Adviser Regulation


On June 9, 2017, key provisions of the fiduciary rule adopted by the Department of Labor (DOL) will become applicable for most broker-dealers, as well as many bankers, insurance agents, and others who make investment recommendations to retail retirement investors (the “Fiduciary Rule”).  As discussed below, only a portion of the Fiduciary Rule and related exemptions become applicable on June 9.  The DOL is conducting a re-evaluation of the Fiduciary Rule and related exemptions, as directed by President Trump.  Many expect substantial changes to result from this re-evaluation, although it is impossible to predict the ultimate outcome.  In the meantime, during the transition period starting on June 9, 2017, and expected to continue until at least January 1, 2018 (the “Transition Period”), broker-dealers and others must comply with those provisions that become operative on June 9.

What happens on June 9?

Starting on June 9, you will be deemed a “fiduciary” if, for compensation, you provide advice or recommendations to a retail retirement investor[1] about investments, investment strategies, investment managers or investment account arrangements.[2]  This will be true even if you don’t have discretionary authority over the account and even if the advice is episodic and not part of an ongoing relationship.

What are the responsibilities of a fiduciary?

Generally speaking, fiduciaries are required to act in the best interest of the persons to whom they owe a fiduciary duty.  They owe a duty of undivided loyalty to those persons, and they must exercise the care and skill that a prudent person would use in like circumstances.  Absent an available exemption, ERISA generally prohibits fiduciaries from acting as principals[3] and from receiving commissions or other forms of variable compensation when dealing with retail retirement accounts to whom they owe a fiduciary duty.

Are there available exemptions that would permit me as a fiduciary to receive commissions or act as a principal?

Also becoming applicable on June 9, 2017 are two new prohibited transaction exemptions adopted by the DOL: the Best Interest Contract Exemption (“BIC Exemption”) and the Principal Transactions Exemption (“Principal Transactions Exemption”).  Both the BIC Exemption and the Principal Transactions Exemption contain extensive requirements for compliance.  However, most of the conditions set forth in these new exemptions will not become applicable on June 9.  Rather, during the Transition Period, fiduciaries need only comply with the impartial conduct standards described in the exemptions (the “Impartial Conduct Standards”).  By complying with the Impartial Conduct Standards, fiduciaries may use the BIC Exemption during the Transition Period to receive commissions or other forms of variable compensation for transactions effected on an agency or riskless principal basis.[4]  By complying with the Impartial Conduct Standards, fiduciaries may use the Principal Transactions Exemption during the Transition Period to sell investment products to retail retirement accounts on a principal basis, provided that the transaction involves financial instruments that are within the limited scope of the Principal Transactions Exemption.[5]

What are the Impartial Conduct Standards?

The Impartial Conduct Standards require fiduciaries to:

  • Act in the “best interest” of the client.
  • Charge only reasonable compensation.
  • Avoid any misleading disclosures regarding investment products and fees and any material conflicts of interest that might affect the fiduciary.

Does compliance with FINRA suitability requirements satisfy my obligation to act in the best interest of the client?

Not necessarily.  The best interest standard is a rigorous standard that requires the fiduciary to recommend investment products that are in the “best interest” of the client without regard to the financial interests of the fiduciary.  While a range of investment products may be “suitable” for an investor, only a subset of the suitable products may meet the best interest standard.  The guidance issued by FINRA in Regulatory Notice 12-25 narrows the gap between “suitability” and “best interest” by providing that recommendations must be “consistent” with a customer’s “best interests.”  However, in adopting the Fiduciary Rule, the DOL declined to rely on the FINRA suitability standard, observing that the DOL requires fiduciaries to make investment recommendations that are guided solely by what is best for the retirement investor.  To meet this standard, a fiduciary should conduct thorough diligence on all investment products, comparing product features and fees with comparable products in order to evaluate which products are in the best interest of the client.  The basis of this conclusion should be documented.

What else should I do to meet the Impartial Conduct Standards?

In addition to thorough product diligence, fiduciaries relying on the Impartial Conduct Standards should:

  • Train sales personnel and supervisors to understand the differences between a “suitability” standard and a “best interest” standard.
  • Meet with their retail retirement investors on a regular basis, seeking an adequate understanding of the client’s current circumstances and objectives.
  • Evaluate the reasonableness of all compensation received by the firm for each investment product.
  • Evaluate internal compensation arrangements and revise if necessary to ensure that they do not improperly incentivize sales personnel to recommend products that are not in the best interest of retail retirement investors.
  • Monitor account activity with a view to detecting potential deviations from the new best interest standard.
  • Be certain to provide full and timely disclosure of material conflicts of interest.

As our readers know, many market participants commenced these processes at the time the DOL first announced its final rules.

May I sell proprietary products during the Transition Period?

Yes, but you should proceed with caution.  The BIC Exemption and guidance from the DOL contemplate that proprietary products may be sold.  However, the inherent conflicts of interest associated with proprietary products pose a challenge under the best interest standard.  A broker-dealer seeking to sell proprietary products to a retail retirement account should be certain that (i) the product compares favorably in terms of benefits and costs with competing products and (ii) the financial benefits to the firm, its affiliates, and its representatives are not incentivizing the selection of proprietary products over other products that would be better for the client.

Documentation of this analysis is particularly important for proprietary products.  In addition, timely disclosure should be made of the potential conflicts of interest relating to the recommendation of a proprietary product.

What are my obligations if I only charge a fee based on the value of assets in the account?

Broker-dealers or others who charge a fee based on assets under management or a similar standard are deemed “level fee fiduciaries.”  Their fee arrangements are permissible under ERISA, and they are generally not required to comply with an exemption.  However, they are fiduciaries and, while not technically subject to the Impartial Conduct Standards, they are expected to act in the best interest of their clients and to avoid any unreasonable compensation.

Level fee fiduciaries may not receive any kind of transaction-based compensation, nor may they effect transactions on a principal basis with accounts that they service on a level-fee basis.

In addition, level fee fiduciaries advising clients on rollovers or other changes in the status of accounts will need to comply with the BIC Exemption, given the possibility that such advice may result in higher fees for the fiduciary.  Therefore, level fee fiduciaries should carefully analyze a client’s options before making any recommendations on rollovers or similar actions and be certain to document the rationale for their recommendations.

What happens if I make mistakes during the Transition Period?

The DOL and the IRS have both indicated that they intend to focus on compliance assistance, rather than enforcement actions, during the Transition Period.  In this regard, the DOL has noted the difficulty of adjusting long-standing business practices to the new requirements.  The DOL is also aware of the variety of interpretative questions that have arisen under the rules.

While this approach is welcome, there are two important caveats.  First, the DOL position is premised on the fiduciary making good faith efforts to comply with the Fiduciary Rule.  Firms that ignore the requirements or are cavalier about their compliance efforts may be subjected to enforcement actions.  Secondly, the DOL position is not binding on private parties.  As pointed out by many commentators, broker-dealers who become fiduciaries on June 9 will be potentially vulnerable to customer complaints alleging breach of their fiduciary responsibilities.

[1] “Institutional” retirement accounts managed by banks, investment managers, broker-dealers, insurance companies, and other fiduciaries with at least $50 million under management should generally be exempt from the requirements of the Fiduciary Rule.

[2] General educational materials would not be deemed the type of advice that would trigger the fiduciary duty.

[3] Under the Investment Advisers Act of 1940, investment advisers (who are subject to a fiduciary duty) may not enter into principal transactions with their clients absent full disclosure and client consent on a transaction-by-transaction basis, subject to an opt-out right.

[4] The BIC Exemption is not available for transactions in which the fiduciary is acting on a principal basis, including transactions effected for the account of an affiliate.

[5] The Principal Transactions Exemption only covers Government and agency securities, CDs, UITs, and certain debt securities issued by U.S. companies in registered offerings.  The exemption is not available to underwriters.

Living with the DOL Fiduciary Rule: Be Prepared for the June 9 Implementation Date

Posted in Broker-Dealer Regulation, Investment Adviser Regulation

The first phase of the Department of Labor’s (“DOL”) new fiduciary rule (“Fiduciary Rule”) is scheduled to be implemented on June 9, 2017.  The Fiduciary Rule greatly expands the categories of persons who are deemed fiduciaries when dealing with retail retirement investors.  It was adopted by the DOL in April 2016 together with new prohibited transaction exemptions:  the Best Interest Contract Exemption (“BIC Exemption”) and the Principal Transactions Exemption (“Principal Transactions Exemption”).

To date, the Fiduciary Rule has survived all challenges.  In response to an executive order issued by the President directing the DOL to re-evaluate the rule, the DOL postponed implementation of the more complex provisions of the BIC Exemption and the Principal Transactions Exemption until January 1, 2018, in order to afford the DOL more time to conduct the mandated re-evaluation.  However, certain provisions were only delayed for 60 days and are scheduled to be implemented on June 9, 2017.

On May 22, 2017, the DOL announced it did not intend to seek any further delays of the June 9 implementation date.  With less than three weeks to go before June 9, it appears unlikely that the initial phase of the Fiduciary Rule will be derailed.  For those market participants who have not yet prepared for implementation, the time has come to act.

Read our client alert.

FINRA T+2 Rules Are Approved

Posted in Broker-Dealer Regulation

In May 2017, in Regulatory Notice 17-19, FINRA announced the SEC approval of a variety of its proposed rule amendments relating to the upcoming move of the U.S. securities markets to the T+2 settlement cycle.

In order to coincide with the effective date for the revisions to SEC Rule 15c6-1(a), these amendments will become effective on September 5, 2017, and relate to the following FINRA rules:

  • Rule 2341 (Investment Company Securities);
  • Rule 11140 (Transactions in Securities ‘‘Ex-Dividend,’’ ‘‘Ex-Rights,’’ or ‘‘Ex-Warrants’’);
  • Rule 11150 (Transactions ‘‘Ex-Interest’’ in Bonds Which Are Dealt in ‘‘Flat’’);
  • Rule 11210 (Sent by Each Party);
  • Rule 11320 (Dates of Delivery) (this provision includes the definition of “Regular Way,” and refers to the new two business day delivery cycle);
  • Rule 11620 (Computation of Interest);
  • Rule 11810 (Buy-In Procedures and Requirements); and
  • Rule 11860 (COD Orders).

We previously discussed these amendments in December 2016, at the time of their proposal.

FINRA has also issued an investor alert, entitled “T+2 is Coming,” to help explain to investors the impact of the upcoming market-wide changes.

FINRA Retrospective Rule Review: Outside Business Activities and Private Securities Transactions

Posted in Broker-Dealer Regulation

The Financial Industry Regulatory Authority (“FINRA”) is conducting a retrospective review of the rules that govern outside business activities and private securities transactions to assess their effectiveness and efficiency.  FINRA posted the following release on the subject.

A retrospective review involves FINRA looking back at a significant rule after a period of time to determine whether it effectively serves its intended objective.  According to FINRA President and CEO Robert Cook, “Successful self-regulation requires continuous renewal and improvement.  Meaningful dialogue with stakeholders is essential to that process.”  FINRA invites public comment during the review process.  The comment period for this review is scheduled to expire on June 29, 2017.

If the ultimate assessment from the retrospective review is a recommendation to modify the rule, FINRA will use its ordinary rulemaking process to propose amendments to the rule based on the findings.

Currently, FINRA is conducting a retrospective review of Rule 3270, which relates to outside business activities of registered persons, and Rule 3280, which relates to private securities transactions of an associated person.  These rules govern firm employees’ business and investment activities that occur outside the scope of their employment with the firm.  While the ability of firm employees to engage in activities may help some investors, this ability may also result in risks to both the investors and the firm.  The goal of these rules is to ensure that FINRA-member firms have adequate oversight with respect to such outside activities.  Only through such oversight can member firms ensure that their associated persons are not engaging in unlawful or improper trading or in risky activities that could be wrongly perceived as firm sponsored.

FINRA is seeking input on the efficacy of the rules in addressing the problems they were intended to mitigate, potential ambiguities in the rules, challenges in compliance with the rules, the economic impact of the rules, and actions that FINRA might take to improve the rules.  In addition to comments responsive to their enumerated questions, FINRA also invites comments on any other aspects of the rules that commentators would like to address.

Complimentary Teleconference – The New Benchmark for Financial Transactions

Posted in Events

Tuesday, June 6, 2017
12:00 p.m. – 1:00 p.m. EDT
5:00 p.m. – 6:00 p.m. BST

The date for implementation of the new EU Regulation on indices used as benchmarks in financial instruments is January 1, 2018, which is rapidly approaching. The new Regulation will have a major impact on securities or other financial contracts in the EU that reference a financial benchmark (which is likely to include some customized proprietary indices).

Our speakers will be joined by representatives of IHS Markit who will share their perspectives and address issues facing industry participants.

Topics Will Include:

  • The principal features of the new Regulation and issues that need to be addressed by market participants;
  • The effect on benchmarks administered outside the EU; and
  • The relevant provisions of the Regulation and its practical implications for benchmark administrators, users and contributors.


For more information, or to register, please click here.

CLE credit is pending for California and New York.

Presidential Actions on Regulatory Rollback: The Order of the Orders

Posted in Broker-Dealer Regulation, Investment Adviser Regulation

Since his inauguration on January 20, 2017, President Trump has issued a number of presidential orders and memoranda relating to the reduction of regulation.  Among these include the “two-fer” order, a memorandum to the Department of Labor relating to the delay of its Fiduciary Duty Rule and an order to identify and reduce tax regulatory burdens.  For additional relevant orders, see our Timeline of Recent Presidential Actions.

IFLR Webinar: Fintech 2017 – Models, Charters and More

Posted in Events

Thursday, May 25, 2017
10:00 a.m. – 11:30 a.m. EDT

The webinar will discuss the current state of fintech services in the US, including state licensing requirements, bank partnership arrangements, and the potential for special purpose bank charters at both the state and federal levels.

The presenters will also discuss the benefits and potential difficulties of these arrangements. Finally, the discussion will touch on fintech enhancements to existing bank services, including distributed ledger technology. Topics Will Include:

  • An update on the state of fintech services;
  • Lending and payments models;
  • Bank partnerships;
  • State licenses;
  • Bank Charters;
  • True Lender; and
  • Madden.


CLE credit is pending for California and New York.

For more information, or to register, please click here.