As you may recall, the Fiduciary Rule’s BIC Exemption and Principal Transaction Exemption became applicable on June 9, 2017, with transition relief through January 1, 2018. However, recently the Department of Labor announced the delay of the second implementation of the Fiduciary Rule, amending it from January 1, 2018 to July 1, 2019. Due to this amendment, Financial Institutions and Advisers will only have to comply with the Impartial Conduct Standards during the transition phase. The Impartial Conduct Standards requires an Adviser to seek to obtain the best execution reasonably available under the circumstances with respect to the transaction, and charge no more than reasonable compensation.
Although the Department of Labor continues to delay the full implementation of the Fiduciary Rule, financial institutions and advisers should prepare to comply with all of its requirements by July 1, 2019. One of the requirements includes a Best Interest Contract (“BIC”). Financial Institutions will be required to enter into a contract with IRA investors. Specifically, the contract must include an enforceable promise to adhere to the Impartial Conduct Standards, an express acknowledgement of fiduciary status, and a variety of disclosures related to fees, services, and conflicts of interest. The BIC Exemption also requires the implementation of policies and procedures that meet specified conflict-mitigation criteria. In addition to the implementation of policies and procedures, the contract must include a warranty that specifically states that the Financial Institution will comply with the required policies and procedures.
Financial Institutions should also prepare to comply with the Principal Transaction Exemption by July 1, 2019. Under this exemption, investment advice fiduciaries are permitted to sell to and purchase from plans or IRA’s “principal traded assets” through “principal transactions” and riskless principal transactions. Similar to the BIC exemption, the Principal Transaction Exemption requires a contract and a policies and procedures warranty. It does have several conditions that are different from the BIC Exemption. The Principal Transaction Exemption includes credit and liquidity standards for debt securities sold to plans and IRAs, as well as additional disclosure requirements.