By Justine Lara Konicki and Ray Junaid
On June 9, 2017, the Department of Labor’s “Fiduciary Rule” went into effect, despite several dissenting opinions from House Republicans, and a two-month delay and review by the Trump Administration. The rule is expected to be fully implemented by January 1, 2018, and applies to all investment advisors that provide advice to a plan, plan participants or beneficiaries under the Employee Retirement Income Security Act of 1974 (ERISA), including financial advisors to persons who own Individual Retirement Accounts (IRAs).
The Fiduciary Rule mandates that persons providing investment advice act as a fiduciary for their clients by acting in their clients “best interest.” Put simply, the Fiduciary Rule requires that those deemed a fiduciary, now must meet a “professional standard of care.” To do so, brokers must make decisions in their client’s “best interest,” and not just provide them with “suitable” options. The Fiduciary Rule, as currently implemented, relies on FINRA’s Regulatory Notice 12-25 Suitability to differentiate between what is “suitable” and what is in “the best interest” of a client.
During this current “transition period,” advisors can continue to operate under two exemptions known as “The Best Interest Contract Exemption (BIC)” and “The Principal Transaction Exemption.” Moreover, during the transition, the DOL is primarily focused on compliance rather than enforcement, implying companies should take “good faith efforts” to comply with the Fiduciary Rule. Investment advisors and businesses that do not take efforts to comply with the Fiduciary Rule put themselves at risk of customer complaints and are vulnerable to class action claims in court.
During the transition, all businesses with employees subject to the Fiduciary Rule should undergo an internal evaluation, and seek guidance from legal counsel concerning best practices moving forward.
Justine Lara Konicki is a senior litigation associate, with a breadth of experience in a variety of business and commercial litigation, including securities litigation and shareholder and derivative actions. She can be reached at 216-736-7211 or email@example.com.
Ray Junaid is an incoming senior at Gilmour academy. He is currently working as a summer intern at KJK, and assists in researching, analyzing, and summarizing current events involving the legal practice. He has an interest in both law and business, and is currently focused on achieving a future career in the legal field.