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Is the New Fiduciary Rule Enforceable During the Transition Period?

Among the “myths” surrounding the fiduciary rule is that the rule will not be enforced during the transition period. But that’s not the whole story, Fred Reish notes in a recent blog post.

Reish notes that the Department of Labor (DOL) has said that “during the phased implementation period from June 9, 2017 to July 1, 2019, the Department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the Fiduciary Rule and applicable provisions of the PTEs [Prohibited Transaction Exemptions] or treat those fiduciaries as being in violation of the Fiduciary Rule and PTEs.”

“At first blush, that could be interpreted to be a free pass for compliance until the transition period ends on July 1, 2019,” he writes, stating that “it would be a mistake to read it that way,” since the DOL also has emphasized that “firms and advisers should work ‘diligently and in good faith to comply’ with their fiduciary obligation during the Transition Period,” and that the “basic fiduciary norms and standards of fair dealings” are still required of fiduciaries during the Transition Period.

Reish acknowledges that this means that there is a “line in the sand” and that crossing that line could result in DOL enforcement, but “we don’t know quite where the line is.” He cautions that there is an inherent risk in providing “investment advice to plans, participants and IRAs (‘retirement investors’) without having adopted appropriate policies, procedures and practices … and then supervising compliance with those policies, procedures and practices” — in other words, by not viewed as working “diligently and in good faith” to comply with the rule.

Reish posits that there are expectations about good faith efforts to comply with the Impartial Conduct Standards and about the adoption and application of policies, procedures and practices to mitigate the effects of conflicts of interest and incentive compensation, and that private claims by investors can be made under the fiduciary rule and the PTEs.

Moreover, he notes the recent claims by the Commonwealth of Massachusetts against Scottrade citing violation of policies and procedures governing sales contests that the firm adopted in anticipation of the fiduciary rule. “The claim was not that [Scottrade] violated the Impartial Conduct Standards, but instead it violated its own policies and procedures, which were developed in order to comply with those [Impartial Conduct] Standards,” Reish explains.

Ultimately Reish reminds the reader that “the fiduciary ‘waters’ are treacherous,” and that “advisors and their financial institutions should redouble their efforts to provide documented advice that is in the best interest of retirement investors.”

More simply, he concludes that, “The easiest way to avoid difficulties is to comply with the new rules.”