The headline, “Define ‘Best Interest’ Before A Judge Does” misses one of the key goals of the rule, namely transferring burden of responsibility from the client (the standard in a rules-based suitability regime) to the advisor (the standard in a principles-based fiduciary regime).
The Department’s intent also is to ensure that persons holding themselves out as fiduciaries with respect to investment advice to retirement investors cannot deny their fiduciary status if a dispute subsequently arises, but rather must honor their words. There is no one formulation that must be used to trigger fiduciary status in this regard, but rather the question is whether the person was reasonably understood to hold itself out as a fiduciary with respect to communications with the plan or IRA investor. If a person or entity does not want investment-related communications to be treated as fiduciary in nature, it should exercise care not to suggest otherwise.
Moreover, inclusion of the standards in the exemption’s conditions adds an important additional safeguard for ERISA and IRA investors alike because the party engaging in a prohibited transaction has the burden of showing compliance with an applicable exemption, when violations are alleged. In the Department’s view, this burden shifting is appropriate because of the dangers posed by conflicts of interest, as reflected in the Department’s Regulatory Impact Analysis and because of the difficulties retirement investors have in effectively policing such violations. One important way for financial institutions to ensure that they can meet this burden is by implementing strong anti-conflict policies and procedures, and by refraining from creating incentives to violate the Impartial Conduct Standards. Thus, treating the Impartial Conduct Standards as exemption conditions creates an important incentive for financial institutions to carefully monitor and oversee their advisors’ conduct for adherence with fiduciary norms.
Moreover, as noted repeatedly, the language for the Impartial Conduct Standards borrows heavily from ERISA and the law of trusts, providing sufficient clarity to alleviate industry concerns. Ensuring that fiduciary investment advisors adhere to the Impartial Conduct Standards and that all retirement investors have an effective legal mechanism to enforce the standards are central goals of this regulatory project.
The DOL did very consciously provide appropriate principles-based guidance. To develop “best practices” will be counter productive to the principle-based rule. As an example, a best practice might well include standards such as “the advisor must “reasonably believe” that any statements made to the client are not misleading or that “the standard is violated only if the client reasonably relied on the advisor’s statement.” The DOL recognized the risk of such limiting rules and rejected their inclusion.