In April 2016, the Department of Labor (DoL) announced a new fiduciary rule addressing conflicts of interest in retirement planning and related investment advice, intended to help ensure that Americans receive retirement investment advice that is in their best interest. This rule would obviously affect the financial services industry and even a part of banking and accounting as well.
The new rule fundamentally changes the definition of a “fiduciary”. Currently, there is a five-part test to determine if a person or organization is acting in a fiduciary capacity, which requires them to act impartially and provide advice that is in their clients' best interest. In addition, fiduciaries are not permitted to receive payments creating conflicts of interest, unless they comply with conditions designed to minimize the potential effects of a conflict.
That five-part test considers whether the person or organization:
Makes recommendations to invest in securities;
Provides recommendations on a regular basis;
Gives advice pursuant to a mutual agreement with the plan;
Provides recommendations that serve as the primary basis for investment decisions; and
Customizes recommendations for the individual needs of the plan.
The new rule removes the five-part test. Now, according the DoL, a fiduciary recommendation is considered any “communication that, based upon its content, context and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” It also requires that individuals giving advice act in the best interest of the investor (client) without regard to the advisors own financial interests.
The new rule is spelled out in more than 1,000 pages of detail, which means it will take some time to understand how it applies in every situation. Further guidance is expected from the Department of Labor. The rule generally takes effect in two stages: an applicability (compliance) date of April 10, 2017, with a further transition period for certain exemption requirements to January 1, 2018.
The current administration is considering if and how it might attack this rule.
For this discussion, consider the following questions:
- What ethics theories could apply and how (deontology, relativism, ethics of care, virtue ethics, situational ethics)?
- Ethically, how should the relationship between the professional and client be addressed?
- What impact do you think this rule has on the financial services, banking and accounting industries?
- Shouldn't financial professionals follow the highest standards possible in their dealings with clients anyway, regardless of what the various "standards" are?
- How could you use some of the theories of professional liability from Chapter 11 to hold a financial professional liable even without a rule such as this?