DOL Fiduciary Rule

On behalf of the Financial Planning Coalition – comprised of Certified Financial Planner Board of Standards, Inc. (CFP Board), the Financial Planning Association® (FPA®) and the National Association of Personal Financial Advisors (NAPFA) – we are pleased to provide you with a detailed description of the Department of Labor's (DOL) final conflict of interest rule (Final Rule), which amends the definition of "fiduciary investment advice” under the Employee Retirement Income Security Act of 1974 (ERISA).       

As you may know, the Coalition has been active in support of the DOL fiduciary rulemaking – seeking a final rule that both protected retirement investors and could be implemented by our stakeholders within their practices.  We filed two comment letters, met with the DOL and Members of Congress, testified before the DOL, testified before a congressional committee, and participated, at the invitation of Secretary of Labor Tom Perez, in the release of the Final Rule on April 6, 2016.  While we supported the DOL fiduciary rulemaking, the Coalition also suggested modifications, clarifications and changes that we believed would ensure and enhance protections for retirement investors and make the rule more operational across business models.

We are very pleased to report that the DOL made significant improvements in the Final Rule, addressing many of the recommendations included in the Coalition’s comment letters and testimony.  Basically, the Final Rule closes loopholes in a 40 year old rule to extend a fiduciary obligation to a wider range of financial advice related to tax-preferred retirement plans and assets. Under the Final Rule, financial advisors and institutions who provide advice to retirement plans and IRAs must provide advice in the customer’s best interest, avoid misleading statements, ensure their compensation is reasonable, and disclose to clients basic information about conflicts of interest and costs. 

The fiduciary standard and disclosure requirements in the Final Rule are similar to requirements CFP Board has established for CFP® professionals when providing financial planning services.  Because of this, the Coalition is confident that CFP®professionals can be leaders in embracing the fiduciary obligations embodied in the DOL’s Final Rule.  We believe the Final Rule maintains core principles of a strong fiduciary standard while making important changes that address practical concerns raised by us and others.

Below is a summary of the significant changes made by the DOL in the Final Rule. We hope this summary provides our stakeholders with a broad based understanding of the Final Rule.    

  • Best Interest Contract (BIC) Exemption: The Final Rule continues to provide for an exemption for advice or recommendations compensated by unlevel fees or commissions on sales of products. Firms and advisors must adhere to an enforceable standard of fiduciary conduct (known as the Best Interest Standard), adopt policies and procedures reasonably designed to mitigate any harmful impact of conflicts of interest, and disclose basic information about their conflicts of interest and the cost of their advice. To qualify for this new "Best Interest Contract (BIC) Exemption" the company and the advisor providing retirement investment advice must enter into a contract with the client. The DOL has made significant changes in the requirements to qualify for a BIC Exemption, which include the following:  

    • The contract requirement does not apply when interacting with a plan governed by ERISA or a participant in such a plan. A written contract is only required when providing advice to IRA investors and other non-ERISA plans.

    • The contract can be entered into between the client and the firm; there is no need for a separate contract between each advisor and the client. However, any conduct on the part of an individual advisor will be subject to the Best Interest Standard found in the separate contract. 

    • For existing clients: (i) notification by a firm or an advisor will be sufficient; (ii) no signature is required; and (iii) clients will be deemed to provide negative consent after 30 days of notification if they do not terminate the relationship.

    • For new clients, the contract can be executed by the client concurrent with normal account opening agreements. The advisor can market his or her services to a prospective client without the need for a contract as long as the marketing communications do not involve a recommendation or advice. If the advisor has provided fiduciary advice or recommendations prior to the execution of the contract, the contract will apply retroactively to any advice or recommendations.

    • Restrictions on asset classes that can be covered by the BIC Exemption are eliminated. The BIC Exemption may be used with any asset class. 

    • The requirement to comply with all state and federal laws as a condition of the BIC Exemption has been removed.

  • Covered CommunicationThe Final Rule clarifies the distinction between “covered investment advice” that triggers a fiduciary obligation and communications that are not covered investment advice.  

    • The Final Rule clearly defines “covered investment advice” as a recommendation to a plan, plan fiduciary, plan participant or beneficiary or an IRA owner:

      • as to the advisability of buying, holding, selling or exchanging securities or investment property;

      • as to the management of securities or investment property; or

      • with respect to rollovers into or distributions from IRAs.

  • The DOL’s definition of a recommendation is consistent with that used by FINRA.

  • The Final Rule specifically describes the types of communications that are not “covered investment advice” including, but not limited to:

    • Education about retirement savings and general financial and investment information;

    • General communications such as newsletters, commentary in publicly broadcast talk shows, widely attended speeches; and

    • Reference to specific investment funds in asset allocation models in ERISA governed plans so long as the investment alternatives are selected or monitored by an independent plan fiduciary and other conditions are met. References to specific investment funds in asset allocations in the IRA context where there is no independent plan fiduciary to review and select the options are not treated as education and thus would be Covered Investment Advice. 

  • Small Businesses / Plans: The Final Rule permits a wide range of options for firms and advisors to provide advice to retirement plans for small businesses. Advisors to small participant-directed plans can:

    • Provide advice and receive level compensation. No exemption is necessary.

    • Provide advice to plans under $50M in assets and receive commission-based compensation subject to the requirements of the BIC Exemption.

    • Provide advice under the “seller’s carve-out” if the plan is represented by an independent fiduciary with financial expertise that satisfies specified criteria or has $50M in assets.

  • Lifetime Income Products: The Final Rule makes it clear that advisors may recommend insurance products and includes revised disclosure provisions to better reflect how insurance products are sold in today’s marketplace.

    • Recommendations of “fixed rate annuity contracts” can be made under the streamlined Prohibited Transaction Exemption 84-24; and

    • Variable and indexed annuity products can be recommended under the BIC Exemption.

  • Proprietary Products: Advisors may continue to sell proprietary products under the BIC Exemption. The Final Rule contains specific guidance on how proprietary product providers can satisfy the Best Interest Standard under the BIC Exemption.

  • Level Fee Advice for Rollovers: The BIC Exemption contains a special provision for level fee advisors. They are not required to implement a contract for rollover advice; instead, level fee advisors are required to keep documentation reflecting why a recommendation to roll over from a plan or IRA to a level fee arrangement or to switch from a commission to a level fee arrangement was in the customer's best interest.

  • Conversion to “Fee-Based Accounts”: A recommendation to switch from a low activity commission-based account to an account that charges a fixed percentage of assets under management will be considered a non-exempt prohibited transaction if it is not in the customer's best interest.

  • Disclosure and Record-Keeping: The Final Rule streamlined the disclosure and record-keeping requirements for the BIC Exemption. Specifically, the DOL:

    • Eliminated the requirement for one, five and ten year projections on earnings and eliminated the annual disclosure requirement. The Final Rule does require disclosure of material conflicts of interest, fees or charges paid by the investor, and the types of compensation the firm or advisor expects to receive from third parties. Advisors must respond to customer requests for additional information. 

    • Removed the requirement to retain detailed information on inflows and outflows; instead firms must retain data sufficient to show compliance with the rule.

    • Allows firms and advisors to correct minor disclosure violations without penalties.

  • Enforcement: The Final Rule allows for the use of pre-dispute mandatory arbitration agreements and allows firms to disclaim rescission and punitive damages.

  • Grandfather Clause: The Final Rule allows for additional compensation based on investments that were made prior to the applicability date of the Final Rule, which includes compensation from recommendations to hold as well as systemic purchase agreements. The Final Rule requires that additional advice after the effective date must satisfy the Best Interest Standard requirements.

  • Implementation Date: The DOL extended the implementation period from eight months to one year and provided for a phased-in enforcement period. The applicability date for the Final Rule will be April 10, 2017. Full compliance with the BIC Exemption will be required as of January 1, 2018.

We are very pleased to have played a significant role in supporting the DOL’s efforts to update its fiduciary rule to ensure that retirement savers receive advice in their best interests. Our focus throughout this rulemaking was to provide DOL constructive input to clarify, streamline and improve its proposal and help fashion a balanced Final Rule that is operational across business models.

Please don’t hesitate to contact us at [email protected] if you have specific questions or comments.


Kevin R. Keller, CAE
Chief Executive Officer
CFP Board

Lauren M. Schadle, CAE
Executive Director/CEO

Geoffrey Brown, CAE
Chief Executive Officer