Regulatory change is coming: What to do now

Barring any last-minute change coming from the new Administration or Congress, the Department of Labor’s fiduciary requirement for advisers dealing with qualified retirement accounts will become effective April 10, 2017.

Since the requirement’s adoption last April, greater clarity has emerged over how the rule will affect day-to-day operations of advisory businesses. While many gray areas remain, speakers in several regulation-related sessions at the recent IMPACT conference offered practical steps for advisers to take between now and spring.

In a session with Christopher Gilkerson, senior vice president and general counsel of Charles Schwab & Co., Inc., Kristina M. Zanotti, a partner at K&L Gates LLP, offered a “next steps” checklist for independent RIAs.

First, she advised RIAs to review their business model and pre-contract activities. They should distinguish between discretionary and non-discretionary “investment advice,” because advisers now will be considered fiduciaries under ERISA if they provide recommendations about any of the following to holders of qualified accounts: investment management services, a rollover, movement from commission-based to asset-based accounts, or a proposed allocation involving specific mutual funds, ETFs, stocks or bonds.

“Fiduciary conduct extends back to the pre-agreement and pre-investment discussions,” Zanotti said.

Second, confirm that you are a level-fee fiduciary by making sure that you charge only an asset-based or flat fee (with no varying fees on different asset classes or indirect compensation from third parties or for affiliates), that prior to or at the same time as executing a recommended transaction you state you are acting as an ERISA fiduciary when providing non-discretionary and discretionary investment advice, that you comply with the Impartial Conduct Standards and that you document that you are acting in the client’s best interest.

Finally, review your new-client onboarding process and make sure your counsel has or can access ERISA experience.

In an overview of the rule, Zanotti provided an all-important description of what constitutes a “recommendation,” since that is central to when an adviser becomes a fiduciary under the new standard.

She said that a recommendation broadly includes statements that would “reasonably be viewed as suggestions to take or refrain from taking a particular course of action.” A recommendation also would include the content, context and presentation that inform the determination. As a result, the more individually tailored the communication, the more likely it is to be a suggestion.

She also suggested that advisers review their promotional activities in light of the new rule. Generally, “hire me” discussions in which no investment advice is given are outside the scope of the rule, although recommending another adviser is considered fiduciary advice. General communications and investment education, which can include newsletters, comments on talk shows, remarks at conferences and general marketing materials are not considered advice.

In discussing the new requirement, Jeff Brown, Schwab’s senior vice president and head of office of legislative and regulatory affairs, said that Schwab was influential in persuading the DOL that level-fee RIAs are in compliance with the new fiduciary standard.

“But there are changes that affect RIAs,” Brown noted, citing how discussions about 401(k) rollovers into IRAs now fall outside the purview of the fiduciary standard but will be considered fiduciary advice once the new rules go into effect.

While RIAs will find compliance with the new rule much less onerous than will broker-dealers and registered representatives, Brown said that even those firms that have always operated as fiduciaries will have to review and possibly change their procedures.