By Doug Baxley, AVP – Assistant Director of Compliance
On April 20, 2015, the Department of Labor (DOL) published its proposed rule regarding retirement investment advice, conflicts of interest, and the definition of the term “fiduciary” with regards to the Employee Retirement Income Security Act of 1974 (ERISA). The proposed rule would institute a broad new definition of the term “fiduciary” for the purposes of ERISA. The DOL definition of “fiduciary” is not the same as the standard enforced by the Securities and Exchange Commission (SEC). Under this new proposed definition, an individual who provides investment advice or recommendations to an employee benefit plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner (collectively referred to as “Plans and IRAs”) would be treated as a fiduciary in a wider array of advice relationships than under current requirements. This is a much more expansive definition and it will mean that more advisors will be considered fiduciaries when providing services to Plans and IRAs. The changes are also not just a broker-dealer issue. These changes will have an impact on investment advisory activities as well. Under the proposal, investment adviser representatives who currently follow the SEC “fiduciary” standard would be forced to comply with two separate fiduciary rules, one for the SEC and one for the DOL.
When acting as a DOL fiduciary, an advisor may not engage in a “prohibited transaction.” Under the proposed rules, it is considered to be a prohibited transaction for a fiduciary advisor to receive non-level compensation. This is in direct conflict with the compensation that most of our advisors receive. To preserve the ability of advisors to offer products to their clients, the DOL also proposed a Best Interest Contract Exemption (BICE) relative to a prohibited transaction. Under BICE, advisors and firms could continue to receive non-level compensation if they contractually agree to act in the client’s best interest, disclose conflicts of interest, and make certain fee and compensation disclosures.
At this point in the rulemaking process, the DOL is reviewing comment letters and revising the proposed rule. We anticipate the DOL will issue a final rule during the latter part of Q1 2016, with an effective date no later than the end of Q4 2016. Because we do not yet have a final rule from the DOL, there are too many unknowns to take tangible actions in response to changes we might need to make to our processes, agreements, websites, etc. However, this does not mean that SSN is sitting idly by awaiting a final rule.
Working in close concert with our sister broker/dealers under Ladenburg Thalmann Financial Services, Inc. (LTS), we have formed an internal, enterprise-wide, task force to ensure that our advisors are best positioned to react quickly and efficiently to a final DOL rule. We are also talking with product sponsors and custodians about compensation options and disclosure information. We are determining the best sources of information to provide expense and revenue disclosures to clients. We are identifying conflicts of interest and beginning to craft a model best interest contract.
Both SSN and LTS are actively involved with the Financial Services Institute (FSI), the industry organization leading the charge on the proposal. Richard Lampen, CEO of LTS, is the Chairman Elect for FSI. Mr. Lampen, as well as other executives from LTS, SSN, and our sister broker/dealer companies, are fully engaged in the FSI working group that is providing comments directly to the DOL. Executives from the various LTS legal and compliance functions are involved in multiple industry roundtable groups that continue to discuss the rule and its potential impacts, and we are working closely with industry-leading law firm experts.
We are acutely aware of the impact that the proposed DOL fiduciary rule will have on firms, advisors, and clients. The DOL rule will require an implementation period, during which firms, sponsors, law firms, and other experts will be providing advice and guidance for compliance with the rule. We are working tirelessly to ensure our advisors are well positioned to continue to provide high quality investment advice and service to clients.
Please email Doug Baxley if you have any questions at