Skip to main content

Publications

Apr 2015
22
April 22, 2015

Department of Labor Proposes New Fiduciary Rule . . . Again


The U.S. Department of Labor (DOL) proposed a new fiduciary rule that would expand the types of retirement investment advice covered by fiduciary protections, requiring any advisor (including brokers, registered investment advisors and insurance agents) to put their clients' best interests first. The DOL’s rule would not only apply to retirement plans within its ERISA jurisdiction, but would be broadened to also apply to individual retirement accounts governed by the Tax Code.

The DOL’s proposed rule is unrelated and in addition to the anticipated fiduciary duty harmonization rulemaking anticipated from the Securities and Exchange Commission (SEC) under the Dodd‑Frank Wall Street Reform and Consumer Protection Act of 2010. Today, investment advisors and their representatives are already deemed to be fiduciaries for purposes of federal and state securities laws, but broker‑dealers and their representatives are subject to a different “suitability” standard, even though often providing similar investment advice. Under the suitability standard, broker‑dealers are not required to put their clients' interests above their own. So long as the investment is suitable for the client, based on the client’s financial needs, objectives, and unique circumstances, it can be purchased for the client, even if the investment pays the broker-dealer a higher fee or commission.

Background

The DOL originally issued a proposed update to the current fiduciary rule in 2010. Both the financial industry and many members of Congress (from both parties) strongly opposed the 2010 proposal, so it was subsequently withdrawn in 2011. Concerns primarily centered on the potential loss of investment advisory services to small retirement plan account holders. Despite the criticism, the DOL vowed to issue a new proposal.

The current fiduciary rule, issued in 1975, relies on a five-part test that narrowly limits fiduciary status. Since that time, there has been a dramatic shift away from traditional defined benefit plans to self-directed 401(k) plans and IRAs. Today, most individuals are managing their own retirement savings and relying on professional investment advice to guide them. Under the current regulations, however, some advisors are not treated as fiduciaries for purposes of ERISA and are not subject to the prohibited transaction rules for accepting conflicted compensation. The new rule is meant to deal with these issues and update the 1975 rule to reflect the current retirement savings environment, as well as the substantial growth of IRA‑held investments.

Highlights of New Rule
  • Fiduciary Definition: The proposed new definition of fiduciary investment advice generally covers specific recommendations on investments, investment management, appraisals in connection with investment decisions, and the selection of persons to provide investment advice or investment management.
    • Recommendations would include advice on rollovers or distributions from a plan or an IRA.
    • Persons who provide such advice would fall within the general definition of a fiduciary if they either (1) represent or acknowledge they are acting as a fiduciary, or (2) provide advice pursuant to a written or oral agreement or understanding that the advice is individualized.
    • This new rule would apply the same fiduciary standard to both investment advisors and broker-dealers, effectively eliminating the broker‑dealer suitability standard.
  • Carve-Outs: The new proposal includes several carve‑outs for persons who do not represent that they are acting as fiduciaries. The provision of advice in conformance with one of these carve‑outs would not cause the person providing the advice to be treated as a fiduciary.
    • Sales Pitches to Plan Fiduciaries with Financial Expertise – selling products or services to plans with more than 100 participants or $100 million in assets.
    • Swaps – recommendation of a swap or security-based swap to a plan fiduciary.
    • Employees of Plan Sponsor – advice to a plan fiduciary by a plan sponsor’s employees as long as they receive no additional compensation beyond their normal salary.
    • Platform Providers – marketing or making available a “platform” or selection of investment vehicles to participant‑directed individual account plans.
    • Selection and Monitoring Assistance – in connection with an investment platform, identifying investment alternatives that meet objective criteria specified by the plan fiduciary (e.g., stated parameters concerning expense ratios, size of fund, type of asset, credit quality) or providing objective financial data and comparisons with independent benchmarks to plan fiduciary.
    • Financial Reports and Valuations – providing an appraisal, fairness opinion, or statement of value to an ESOP, collective trust, or for plan or IRA reporting purposes.
    • Investment Education – providing (1) general information about the plan, and general financial, investment, and retirement information; (2) asset allocation models (not including or identifying any specific investment product or specific alternative available under the plan or IRA); and (3) interactive investment materials (e.g., questionnaires, worksheets, software and similar materials).
Prohibited Transaction Exemptions

Under ERISA and the Tax Code, advisors are not permitted to receive payments creating conflicts of interest without a prohibited transaction exemption (PTE). The proposal creates two new PTEs and modifies several existing PTEs.

Here is a summary of the new proposed Best Interest Contract PTE (BIC PTE). This is not an exemption from the new fiduciary duty obligations, just an exemption allowing receipt of fully disclosed conflicted compensation under specified conditions.
  • It would apply to investment fiduciaries providing advice to plan participants and beneficiaries, IRAs, and nonparticipant‑directed retirement plans with less than 100 participants (“retail investors”).
  • It would allow investment fiduciaries to continue their current fee practices (including commissions, 12b-1 fees, and revenue sharing), provided they adhere to certain basic standards set forth in the BIC PTE. 
  • To qualify for the BIC PTE, the advisor and the firm would be required to enter into a written contract with the client. The contract would have to: (1) affirmatively state the advisor and the firm are fiduciaries; (2) commit the firm and the advisor to providing advice in the client’s best interest; (3) warrant the firm has adopted policies and procedures designed to mitigate conflicts of interest; and (4) clearly and prominently disclose any conflicts of interest (e.g., hidden fees buried in fine print or backdoor payments). In addition, the contract could not contain any exculpatory provisions disclaiming or otherwise limiting liability of the firm or advisor for violation of the contract’s terms.
  • It would also require the firm to provide clients with a chart before execution of the purchase showing the total cost of the investment.
  • On an annual basis, the client would have to receive a summary of the investments purchased and sold and the advisor and firm’s total compensation from those investments.
  • Before receiving any compensation in reliance on the BIC PTE, the advisor would have to notify the DOL of the intention to rely on the BIC PTE. The notice would remain in effect until revoked in writing. The notice would not need to identify any plan or IRA.
Effective Date

The proposal includes a public comment period, which ends July 6, 2015. The DOL plans to hold a public hearing within 30 days after the close of the comment period. The rule would become effective 60 days after it is published in final form in the Federal Register, but would not become applicable until eight months after the publication date.

Still, it is not clear when the proposal could become final; the DOL has not committed to any specific time frame.

The full text of the proposal and the exemptions is available on the DOL website at: http://visit.wnj.com/e/4002/-regs-conflictsofinterest-html/3782j8/706113691.

NOTICE. Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you.

By clicking the ‘ACCEPT’ button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you.

Please click the ‘ACCEPT’ button if you understand and accept the foregoing statement and wish to proceed.

ACCEPTCANCEL

Text

+ -

Reset