The Department of Labor (DOL) last week published a final rule extending the transition period of the Fiduciary Rule and delaying the second phase of implementation from January 1, 2018 to July 1, 2019. The DOL stated that the primary reason for delaying the rule was to give the DOL necessary time to review the substantial commentary it has received under the criteria set forth in the Presidential Memorandum issued in February of this year, as well as to consider possible changes or alternatives to the Fiduciary Rule exemptions and to seek input from the SEC and other securities regulators.

The Fiduciary Rule was enacted in April 2016, with its applicability date originally set for April 10, 2017. It also provided for a transition period through January 1, 2018 for compliance with certain new and amended Prohibited Transaction Exemptions (PTEs), including the new Best Interest Contract (BIC) exemption. The full requirements of the BIC exemption, including the written contract requirement for transactions involving IRA owners, are not required until the end of the transition period. Continue reading

The Department of Labor (DOL) recently published its proposal to extend the transition period of the Fiduciary Rule and delay the second phase of implementation from January 1, 2018 to July 1, 2019. Currently only adherence to the impartial conduct standards is required for compliance with the Best Interest Contract (BIC) exemption during the transition period, as well as for certain other prohibited transaction exemptions issued or revised in connection with the Fiduciary Rule. Compliance with the full provisions of the BIC exemption and the other related exemptions is not required until the second phase of implementation of the Fiduciary Rule, which is currently set for January 1, 2018.

If adopted, the same requirements in effect now for compliance with the BIC exemption and related exemptions would remain in effect for the duration of the extended transition period. The DOL stated that the primary purpose for seeking to extend the transition period was to allow the DOL sufficient time to review the substantial commentary it has received and consider possible changes or alternatives to the Fiduciary Rule exemptions. The DOL noted its concern that without a delay in the applicability date, financial institutions would incur expenses attempting to comply with certain conditions or requirements of the newly issued or revised exemptions that are ultimately revised or repealed.

The DOL stated that it anticipates it will propose in the near future a “new and more streamlined class exemption built in large part on recent innovations in the financial services industry.” These recent innovations include the development of “clean shares” of mutual funds by some broker-dealers, which the DOL discussed approvingly in its first set of transition period FAQ guidance. “Clean shares” would not include any form of distribution-related payment to the broker, but would instead have uniform commission levels across different mutual funds that would be set by the financial institution. In this way, the firm could mitigate conflicts of interest by substantially insulating advisers from the incentive to recommend certain mutual funds over others. However, these types of innovations will take time to develop.

The Department of Labor (DOL) recently indicated in a court filing that it has submitted a proposed rule to the Office of Management and Budget (OMB) to extend the transition period of the Fiduciary Rule and delay the second phase of implementation from January 1, 2018 to July 1, 2019. This proposal is currently under review by the OMB.

The DOL also recently released a new set of FAQ guidance regarding compliance with the Fiduciary Rule during the transition period when providing advice to IRAs, plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), and other plans covered by section 4975 of the Internal Revenue Code (Code). Most of the questions dealt specifically with the prohibited transaction exemption under ERISA section 408(b)(2) for service providers to ERISA plans. Continue reading

The Department of Labor (DOL) recently released a final rule delaying by 60 days the implementation date of the DOL Fiduciary Rule from April 10th to June 9th. This is in response to President Trump’s February memorandum asking the DOL to review the impact of the DOL Fiduciary Rule and assess whether it negatively effects the ability of retirement investors to gain access to retirement information and financial advice. The DOL Fiduciary Rule seeks to assign fiduciary duties to all advisers to retirement investors by expanding the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code) to cover a wider array of advice relationships.

Under the DOL’s final delay rule, the revised definition of fiduciary investment advice and certain provisions of the Best Interest Contract (BIC) exemption will be implemented on June 9th. At that time, advisers acting as fiduciaries and engaging in transactions covered by the exemption must comply with the impartial conduct standards of the BIC exemption. The impartial conduct standards include providing investment advice in the best interest of the retirement investor, receiving only reasonable compensation, and not making any materially misleading statements. Continue reading

The Securities and Exchange Commission (SEC) recently issued new guidance regarding the Custody Rule and inadvertent custody of client assets in the form of a No-Action Letter on standing letters of authorization (SLOAs) and a Guidance Update on custodial contract authority. This guidance comes in the wake of the recent SEC Risk Alert identifying most frequent compliance issues found in examinations of registered investment advisers and listing custody as one of these most frequent compliance issues.

The Custody Rule, or Rule 206(4)-2, provides that it is a fraudulent, deceptive, or manipulative act within the meaning of section 206(4) of the Investment Advisers Act of 1940 for a registered investment adviser to have custody of client assets unless certain requirements are met. One of these requirements is an annual surprise examination requirement, although this requirement does not apply if the investment adviser solely has custody as a result of its authority to make advisory fee deductions. Continue reading

The Department of Labor (DOL) recently issued two new sets of FAQ guidance regarding the revised definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code), as well as the new prohibited transaction exemptions (PTEs). The first set of guidance is directed to retirement investors, not advisers, and answers basic questions investors may have regarding the new rule and how it will work. The second set of guidance is aimed at financial service providers and focuses mainly on the revised definition of fiduciary investment advice and the situations in which fiduciary duties will or will not attach under the new rule.

While the first set of FAQ guidance is not necessarily aimed at financial service providers, it did provide a few useful insights that I will briefly discuss here. The DOL stated that the new rule does not require advisers to indiscriminately move clients from commission-based accounts to fee-based accounts, and instead requires advisers to act in the client’s best interest when deciding what type of account to recommend. Regarding the best interest requirement, the DOL clarified that providing investment advice in a client’s best interest does not mean that advisers have a duty to find the best possible investment product for clients out of all the investments available in the marketplace. Continue reading

The U.S. Circuit Court of Appeals for the District of Columbia recently denied a motion brought by the National Association for Fixed Annuities (NAFA) to enjoin the implementation of the new Department of Labor (DOL) fiduciary rule. This is the first court decision on a legal challenge to the rule. There are currently several other lawsuits against the DOL seeking to overrule the new DOL fiduciary rule that await decision.

NAFA is an insurance trade association that represents insurance companies, independent marketing organizations, and individual insurance agents. NAFA has been very vocal in its opposition to the new DOL fiduciary rule, stating that the new rule will have “catastrophic consequences for the fixed indexed annuities industry” and that meeting the April 2017 deadline is “almost an impossibility for the industry.” Along with other opponents to the rule, NAFA believes the rule will lead to higher compliance costs and will greatly increase litigation risk.

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The Department of Labor (DOL) recently released its first set of rolling FAQ guidance regarding its new rules expanding the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code), adopting new prohibited transaction exemptions (PTEs), and amending certain previously existing PTEs. The DOL answered questions regarding the new PTEs and the amendments to existing PTEs under ERISA and the Code. The DOL also reaffirmed the applicability date of April 10, 2017, stating that this date provided adequate time for financial service providers to adjust to the rule changes.

One common area of confusion regarding the new rules was the extent to which the new Best Interest Contract (BIC) exemption would be available for use by discretionary investment managers. One of the conditions to use of the BIC exemption is that the fiduciary not have any discretionary authority or control with respect to the recommended transaction. This excludes a large portion of investment advisers that serve as discretionary investment managers. However, there are limited circumstances in which they can receive protection under the BIC exemption.

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The F-Squared Investments matter continues to have far-reaching consequences for those investment advisers who used F-Squared’s falsely inflated and improperly labeled backtested performance results in advertisements. As discussed previously, in November of 2015 Virtus Investment Advisers was fined $16.5 million for including the false and misleading performance results in its own advertisements and filings with the Securities Exchange Commission (“SEC”). More recently, the SEC charged Cantella & Co. (“Cantella”), a Boston-based investment adviser that licensed F-Squared’s Alpha Sector strategy, with securities violations for employing F-Squared’s false track record in its marketing materials.

F-Squared is an investment adviser that creates and markets index products using exchange-traded funds (“ETFs”). It sub-licenses these indexes to various unaffiliated investment advisers who manage assets pursuant to those indexes. In 2014 F-Squared admitted in a settled SEC administrative proceeding that it had materially misrepresented the performance results of its largest ETF strategy, AlphaSector, by labeling these results as actual results from a seven-year period when they were in fact hypothetical results derived through backtesting. In addition, F-Squared claimed that the strategy had outperformed the S&P 500 Index from 2001 to 2008 when in fact the hypothetical data contained a calculation error that falsely inflated results by 350 percent. F-Squared agreed to pay disgorgement of $30 million and a penalty of $5 million to settle the claim.

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The U.S. Circuit Court of Appeals for the District of Columbia recently denied a petition to review an order of the Securities Exchange Commission (“SEC”) imposing sanctions against Raymond J. Lucia and investment adviser Raymond J. Lucia Companies, Inc. (“Lucia Companies”) for violations of the Investment Advisers Act of 1940 and the advertising rule thereunder, Rule 206(4)-1. In denying the motion, the DC Circuit affirmed the SEC’s broadened views on the use of back-tested performance in marketing and advertising materials.

As discussed previously, this case involves the improper use by an investment adviser of back-tested performance data in retirement-planning seminars. Raymond J. Lucia, and Lucia Companies allegedly used a hypothetical inflation rate that was lower than actual historical rates to make their performance results more favorable. In addition, the performance data allegedly failed to reflect the deduction of advisory fees and was not calculated in a manner fully consistent with the advertised investment strategy. As a result, the SEC barred Raymond J. Lucia from the securities industry and imposed civil penalties of $300,000.

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