Preparing for Compliance with the Fiduciary Rule

By KBS Direct

As you may already know, the Department of Labor’s Fiduciary Rule rule has been postponed until July 1, 2019. But recently, Securities and Exchange Commission Chairman Jay Clayton publicly stated that the SEC has plans to enact its own fiduciary standard.

In other words, momentum for transparency between advisers and their clients continues to grow.

That’s why it’s not a bad idea to conduct an assessment of your firm sooner rather than later to determine what, if any, new processes you may need to implement.

Five Assessment Recommendations

So how can you approach an assessment of your firm?

The Harvard Law School Forum on Corporate Governance and Financial Regulation published several recommendations from two Mayer Brown attorneys to help companies prepare for the compliance process. These recommendations can benefit most financial professionals regardless of specialty.

  1. Conduct a thorough review of the roles and responsibilities of your employees, communications plans, and general operating procedures.
  2. Ensure your firm has enough fiduciary liability insurance to cover additional employees who will operate as fiduciaries.
  3. Confirm that all service providers know their new roles under the Rule and determine what they must know to comply with ERISA (Employee Retirement Income Security Act of 1974). The process may look a bit different for different vendors. It all depends on how much their roles will change. The largest affected group will be those employees who were not previously required to act as fiduciaries.
  4. Your current service agreements need to be reviewed and corrected if necessary with the new title of any advisor. This includes any changes that might take place in regards to covenants and standards of care, representations and warranties, even indemnity and exculpation.
  5. Develop a clear and easily understandable plan to address compensation structures. Advisors may feel uncomfortable discussing compensation with clients. By developing a communication plan that emphasizes the value of these services, advisors can better communicate with their clients.

A Reminder

This current period, prior to the Rule going live, is what the Department of Labor considers “transitional”. This means that certain provisions have taken effect, but most have not. One of those provisions in effect is that advisors must use the transitional version of the Best-Interest Contract Exemption (BICE), if they have a conflict of interest. The transitional BICE is in effect until July 1, 2019.

It requires advisors to conduct business by “Impartial Conduct Standards.” These include: putting investors’ best interests first, receiving “reasonable” compensation, and refraining from making deceptive statements. Moreover, advisors need to have policies in place—including ones that address compensation—to make sure their firms are aligned with the Impartial Conduct Standards.  

Do you have any questions? Speak with an Investor Relations Representative.

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