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A Look Back at the 2016 Fiduciary Rule

Jeremi Karnell
Dec 20, 2016

In 2016, the Department of Labor passed new rules that will hold brokers who advise on retirement plans to the same fiduciary standard as investment advisors and fee-only financial planners. Brokers will be limited to "reasonable" compensation and will no longer be permitted to factor in this compensation when recommending plans to their clients.

A Recent History of the "Fiduciary Rule"


In the wake of the financial crisis, the Treasury Department publishes a report recommending "establishing a fiduciary duty for broker-dealers offering investment advice and harmonizing the regulation of investment advisers and broker-dealers."


President Obama signs the the Dodd-Frank Wall Street Reform and Consumer Protection Act, giving the Securities and Exchange Commission the power to enact a fiduciary standard that applies consistently to retail investment advisors. Later that year, the Department of Labor passes a rule designed to limit conflicts of interest for financial advisors managing retirement accounts for clients. 


In light of serious criticism from the financial services industry, the Department of Labor withdraws the conflicts of interest rule passed in 2010.


The Department of Labor once again proposes a rule that requires brokers to be held to a fiduciary standard, with the intention of limiting conflicts of interest from affecting retirement plan advice. Legislation introduced by Republicans attempts to block this rule.


The Department of Labor passes the long-expected, now revised fiduciary rule and allows for a gradual phase-in. 


The "fiduciary rule" is fully phased-in on April 10, 2017.

Major Provisions

New rules and limitations

  • Brokers are required to act in the "best interest" of each client when providing retirement investing advice.
  • Firms have to publish compensation information on a webpage. They must also ensure customers know they have a right to full fee information.
  • Firms have to remove any financial incentive for advisers to not act in the best interest of each client.
  • Although advisers can talk to clients prior to signing a contract, they must eventually provide a written contract to each client specifying that they are acting in the client's best interests. Any advice provided before signing this contract needs to be covered by the contract and comply with the "best interest" standard. 

Still permitted:

  •  Firms and advisers can continue receiving common types of compensation for making investment advice available to retail clients and sponsors of small plans, including commissions.
  • Brokers can provide products and services to small businesses with 401(k) plans.
  • Firms can continue to invest in a variety of types of assets, with no new asset restrictions imposed.
  • Firms can continue selling insurance products such as variable and indexed annuities.
  • Firms and advisers can suggest proprietary products.

Summary of Non-Fiduciary Activities

Activities that have not traditionally been thought of as fiduciary are still considered non-fiduciary under the new set of rules. In practice, this mostly covers communications with clients. According to the Department of Labor, "if the communications do not meet the definition of a 'recommendation,' the communications will be considered non-fiduciary."

These non-fiduciary communications and other types of activities include:

  • Providing plan information.
  • Providing basic financial, investment, retirement, and asset allocation information.
  • Providing interactive investment materials (e.g. questionnaires, software).
  • Communicating investment alternatives.
  • Sales relationships.
  • Swap transactions.
  • Platform provider services.
  • Recommendations made by employees of plan sponsors.

Prohibited Transaction Exemptions

The Department of Labor issued and amended two prohibited transaction exemptions to prevent fiduciaries from violating ERISA rules, as summarized below.

Best Interest Contract Exemption 

This exemption lets firms determine their own compensation systems, which may include commission-based and revenue sharing systems, if they pledge to prioritize each client's best interest and disclose any conflicts of interest. To qualify, the firm and adviser providing retirement advice need to enter a contract with each client that includes the following:

  • An agreement to provide advice that is in the client's best interest.
  • An assertion that the firm has enacted policies and procedures to mitigate any conflicts of interest.
  • A disclosure of any conflicts of interest that could affect an adviser's ability to provide advice that is in the best interest of the client. 

Principal Transaction Exemption

The Principal Transaction Exemption permits firms to receive a mark-up, mark-down, or similar type of payment when buying or selling some types of assets in "principal transactions" (occurring when the firm buys or sells principal traded assets for its own account) and "riskless principal transactions" (occurring when a firm reacts to an order from a retirement investor to buy or sell a principal traded asset by buying or selling the asset for its own account to offset the transaction with the retirement investor).

 This exemption does not apply if any of the following are true:

  • The firm or one of the firm's advisers "has or exercises discretionary authority over the assets of, or administers" the plan in question.
  • The plan in question is covered under ERISA and the firm employs covered employees or is a fiduciary or administrator of the plan. 

Ultimately, this new fiduciary rule is an extension of the increasing amounts of responsibility placed on all players in the financial advice and asset management field. As Dr. Gregory Kasten of Unified Trust Company quipped when the Department of Labor's then-proposed fiduciary rule was being discussed in 2015, it seems "everyone is a fiduciary" now. Given the increasing importance of retirement plans for an aging population, this change may be for the better.

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