The Evolving DOL Fiduciary Rule: Impact on Mutual Fund Distribution and Broker-Dealers Generally

October 06, 2016

The U.S. Department of Labor (DOL) issued the final version of its “fiduciary investment advice” regulation (Final Rule) on April 6, 2016, following a lengthy proposal and re-proposal process. Although the Final Rule reflects various changes from the proposals in response to industry concerns, the Final Rule is nonetheless expected to have a significant impact on the market for retirement investment advice. 

The Final Rule expands the universe of those considered to be “fiduciaries” under the Employee Retirement Income Security Act of 1974 (ERISA) through the provision of investment advice. Those newly classified as fiduciaries under the Final Rule will now be subject to the various duties and prohibitions applicable to ERISA fiduciaries, potentially resulting in significant operational changes. For a comprehensive discussion of the Final Rule, please refer to Dechert OnPoint, The Brave New Fiduciary World Has Arrived – The DOL Tries to Find a More Ideal Balance in the Final "Investment Advice" Rules. 

The Final Rule has been subject to various challenges. The U.S. Congress passed a resolution that would have nullified the Final Rule, although President Obama vetoed such resolution on June 8, 2016, and there was not enough support for the resolution to override the veto. Nonetheless, legislators continue to seek a repeal through a recently introduced financial industry regulatory reform bill. In addition, there are several pending lawsuits seeking to invalidate the Final Rule, although the outcome of these lawsuits remains uncertain. In the meantime, financial services industry participants are evaluating their current operations and considering what changes are necessary to comply with the Final Rule. 

The following provides an overview of the impact of the Final Rule on two particular segments of the financial services industry: mutual fund complexes and broker-dealer firms. Note that investment companies, their boards of directors/trustees and investment advisers are not, and will not be deemed to be, fiduciaries under ERISA by virtue of their management of mutual fund assets. 

Impact on Mutual Fund Distribution 

While the Final Rule generally does not directly impact U.S. registered funds or their primary service providers, the Final Rule will impact common mutual fund distribution channels including direct distribution, unaffiliated and affiliated broker-dealers, and 401(k) plans. For a detailed discussion, please refer to Dechert OnPoint, The New DOL Fiduciary Rule: Impact on Mutual Fund Distribution. 

While the direct distribution channel will likely experience relatively limited changes, platform providers and distributors of fund shares will be more heavily impacted. Further, the sale of mutual fund shares to 401(k) plans and participants in many cases will also require compliance with the Final Rule, particularly when third-party administrators and broker-dealers are involved. Notably, mutual funds are among the most widely-used 401(k) plan investment options. Many plan sponsors, particularly for larger plans, rely on a third-party administrator to make available an array of options. Such third-party administrators may be able to rely on the platform provider exception to the definition of “recommendation.” 

Impact on Broker-Dealers Generally 

As detailed in Dechert OnPoint, Navigating the DOL’s New Fiduciary Rules: A Game Plan for Broker-Dealers, the Final Rule will generally impact broker-dealers that are deemed to provide fiduciary investment advice to retirement plans and individual retirement accounts (IRAs) and their participants and beneficiaries. The types of advice covered by the Final Rule are broad and specifically include all aspects of plan or IRA rollovers, including whether to roll over, transfer, or take a distribution from a 401(k) or other retirement plan or an IRA. Although the DOL retained its existing rule that broker-dealers that merely execute securities transactions (purchases and sales) in the ordinary course of business where a plan/IRA fiduciary provides specified instructions will not be considered fiduciaries, this long-standing exception is not expected to reduce the number of broker-dealers subject to the Final Rule. 

Broker-dealers may qualify for certain exemptions, and an exemption known as the “Best Interest Contract” Exemption (BIC Exemption) is anticipated to be the most widely used. The BIC Exemption is designed to ensure that the “Impartial Conduct Standards,” which incentivize intermediaries not to pay differential compensation, apply to broker-dealers advising IRAs and non-ERISA plans. Broker-dealers that only recommend proprietary products may rely on the BIC Exemption, provided that certain requirements are satisfied. 

A subset of the BIC Exemption is the “level fee” – or “BIC Lite” – exemption, which is available to broker-dealers receiving a flat fee in exchange for providing advisory or investment management services. Specifically, a level fee is defined as a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets, or a set fee that does not vary with the particular investment recommended. Examples of fee arrangements that are not level fee arrangements include commissions and other transaction-based compensation. This exemption is referred to as “BIC Lite” because it imposes less onerous requirements than the general BIC Exemption. 

Broker-dealers subject to the Final Rule are already grappling with their new compliance requirements, including: making additional disclosures for broker-dealers offering only proprietary products; providing written notices to the DOL; amending customer agreements; and adding disclosures in marketing and other client-facing materials. 


It is predicted that several industry trends will result from the Final Rule, some of which are already starting to surface. Such trends include: broker-dealers reducing the availability of certain product offerings to IRA and plan accounts, whether due to changes in the fees they are able to charge or the risks associated with a particular investment; the potential bleed-over effect from IRAs to non-IRAs as broker-dealers weigh whether to apply the same measures and disclosures to non-IRAs as well as IRAs; and intermediaries requiring fund share classes without distribution charges or 12b-1 fees. 

The Final Rule became effective on June 7, 2016, but the applicability date has been delayed until April 10, 2017. Further, full compliance with the BIC Exemption will not be required until January 2018. During the transition period (from April 10, 2017 to January 1, 2018) broker-dealers will be able to rely on the exemption by complying with a limited subset of requirements. The DOL has indicated that it will provide further guidance on a rolling basis in the form of FAQs.

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