Skip to Main Content

Publications

Investment Advice Fiduciaries Eagerly Await Definitive Guidance Concerning the DOL’s Proposed Fiduciary Rule


The Department of Labor’s (DOL’s) proposed fiduciary rule aimed at preventing conflicts of interest in the provision of retirement investment advice broadens the category of individuals and entities viewed as investment advice fiduciaries to ERISA (Employee Retirement Income Security Act of 1974) retirement plans and individual retirement accounts (IRAs). The pending release of the DOL’s fiduciary rule has financial advisers and plan sponsors questioning what measures should be taken proactively to ensure compliance.

The proposed rule was received by the Office of Management and Budget (OMB) on January 28. A rule review by the OMB’s Office of Information and Regulatory Affairs is generally limited to 90 days, though a 30-day extension is permissible and Shaun Donovan, Director of the OMB, can extend it indefinitely. This means that the final rule could be sent back to the DOL by the end of April for public release. However, on February 3, the House Ways and Means Committee approved a bill that would prevent the DOL’s fiduciary rule from taking effect unless Congress approved it. We anticipate that the proposed
rule will be adopted with limited revisions, but we are unable to speculate on the timeframe. Once final, there will be an implementation period of at least eight (8) months.

Summary of the Proposed Rule

Under the proposed DOL fiduciary rule, the rendering of fiduciary investment advice with respect to ERISA plan assets or IRA assets is defined as a person’s providing to a plan, plan fiduciary, plan participant, or plan beneficiary, or IRA or IRA owner, any of the following four types of advice for a fee or other compensation:

  • A recommendation about the advisability of acquiring, holding, disposing, or exchanging securities or other property, including a recommendation to:
    • Take a distribution of benefits; or
    • Roll over securities or other property from a plan or IRA.
  • A recommendation regarding the management of securities or other personal property, including a recommendation regarding the management of assets in a rollover or distribution.
  • An appraisal, fairness opinion, or similar statement (verbal or written) concerning the value of securities or other property that are the subject of a particular transaction or transactions by a plan
    or IRA.
  • A recommendation of a person who will also receive a fee or other compensation for providing the types of advice described above. This does not include (i) general qualitative and quantitative criteria to consider in hiring an investment manager, (ii) trade journal endorsements of an investment manager, or (iii) recommendations of administrative service providers, property managers, or other providers who do not provide investment services.

In addition, to be a fiduciary, the person must either:

  • Represent or acknowledge that it is acting as a fiduciary within the meaning of ERISA or the Code
    regarding this advice; or Render the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is individualized or specifically directed to the recipient for consideration in making investment or management decisions regarding securities or other property of the plan or IRA.

Potential Impact of the Proposed Rule

This reclassification has significant implications for our clients. Primarily, the proposed rule treats
recommendations on the selection of investment managers and advisers as fiduciary investment advice, provided that they are made for a fee and satisfy certain other requirements. However, absent an exemption, receipt by a fiduciary adviser of commissions paid by the plan, a participant, or a beneficiary
or by an IRA, or its receipt of commissions, sales loads, 12b-1 fees, revenue sharing, or other payments from third parties that provide investment products would violate the prohibited transaction provisions of ERISA due to a conflict of interest.

Fiduciaries who engage in a prohibited transaction may be subject to:

  • Civil penalties under ERISA Section 502 of up to 5% of the amount involved for each year (or part of a year) that the prohibited transaction continues.
  • Criminal penalties.
  • Excise taxes under the Code.

Together with the proposed rule, the DOL proposes certain administrative class exemptions and proposed amendments to existing exemptions. The intent of these exemptions is to allow broker-dealers and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation that would otherwise violate the prohibited transaction rules of ERISA and trigger excise taxes under the Code.

Considerations for Investment Advisers

Our investment adviser clients will likely need to structure their business arrangements to fall within the
proposed Best Interest Contract Prohibited Transaction Exemption (PTE). The PTE would allow investment advice fiduciaries (for example, broker-dealers and insurance agents) to receive what would otherwise constitute prohibited compensation when plan participants or beneficiaries, IRA owners, or plan sponsors of small non-participant-directed plans purchase, hold, or sell certain investment products as advised by those fiduciaries, if certain conditions are met. The DOL states in the proposed fiduciary rule that the cornerstone of the PTE is the requirement that the investment advice fiduciary
enter into a contract with the retirement investor that satisfies the conditions of the PTE before the fiduciary provides advice that constitutes a recommendation under the PTE. For a complete discussion of the proposed rule and the PTE, please refer to our alert Is a Universal Fiduciary Standard on the Horizon?

Considerations for Plan Sponsors

Although the proposed rule will have the greatest impact on investment professionals, plan sponsors might be affected as well. Plan sponsors act as consumers of investment advice and in some cases may be deemed investment advice fiduciaries. Specifically, plan sponsors will need to determine whether an exemption from the proposed rule is applicable with respect to (1) advice received regarding the selection and monitoring of investments and fund menu investment options; (2) advice to (and education for) participants about plan investments; and (3) advice to participants about plan distributions/rollovers.

The following are the key exemptions for plan sponsors:

  • Seller’s carve-out for plans with at least 100 participants. This carve-out excludes from the definition of investment advice fiduciary a counterparty (the “seller”) that provides advice to an independent plan fiduciary (e.g., a plan sponsor), in connection with an arm’s length sale, purchase, loan, or bilateral contract if, before the transaction, one of the following two alternatives is met:
    • Alternative 1 (knowledge that the plan fiduciary has expertise) – this alternative is satisfied if:
      • Plan fiduciary representations. The plan fiduciary represents (1) that it “exercises authority or control with respect to the management or disposition of” plan assets; (2) that the plan has 100 or more participants; and (3) that it “will not rely on the [seller] to act in the best interests of the plan, to provide impartial investment advice, or to give advice in a fiduciary capacity.”
      • Seller representation. The seller informs the plan fiduciary of “the existence and nature of the [seller’s] financial interests in the transaction.”
      • No fee for advice. The seller “[d]oes not receive a fee or other compensation directly from the plan, or plan fiduciary, for the provision of investment advice (as opposed to other services) in connection with the transaction.”
      • Plan fiduciary expertise. The seller “[k]nows or reasonably believes that the independent plan fiduciary has sufficient expertise to evaluate the transaction and to determine whether the transaction is prudent and in the best interest of the plan participants ….” The seller may rely on a written representation made by the plan or plan fiduciary for this purpose.
    • Alternative 2 (plan fiduciary manages at least $100 million) – this alternative is satisfied if:
      • $100 million in plan assets. The seller “[k]nows or reasonably believes that the independent plan fiduciary has responsibility for managing at least $100 million in employee benefit plan assets.” For this purpose, the seller may rely on the information in the plan’s most recent Form 5500. In the case of an independent plan fiduciary that is acting as an asset manager for multiple plans, the seller may rely on representations from the independent plan fiduciary.
      • Seller representation. The seller informs the plan fiduciary that it “is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity.”
      • No fee for advice. The seller “[d]oes not receive a fee or other compensation directly from the plan, or plan fiduciary, for the provision of investment advice (as opposed to other services) in connection with the transaction.”
  • Sponsor employees. Under the proposed rule, an employee of the plan sponsor is excluded from the definition of advice fiduciary so long as he “receives no fee or other compensation, direct or indirect, in connection with the advice beyond the employee’s normal compensation for work
    performed for the employer or employee organization.”
  • Platform Providers/Selection and Monitoring Assistance. With respect to, for example, a participant-directed 401(k) plan in which a plan fiduciary must choose investment alternatives
    available in the fund menu, a person may, without becoming an investment advice fiduciary, market or make available “such investment vehicles, without regard to the individualized needs of the plan or its participants and beneficiaries, as long as they disclose in writing that they are not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.”
  • Education. The proposed rule would treat “advice or recommendations as to specific investment products, specific investment managers, or the value of particular securities or other property” as investment advice (triggering fiduciary status).

Additionally, plan sponsors should note that the proposed rule inclusively defines an IRA to include a true individual retirement account or a health savings account (HSA).

Next Steps

We are available to assist our clients in determining whether they will be classified as fiduciaries under the proposed rule and in determining whether their business model and advice provided falls within any of the DOL’s proposed exemptions, and to draft agreements that satisfy the Best Interest Contract Prohibited Transaction Exemption requirements. We are also available to review or provide suggested language for inclusion in minutes documenting a plan sponsor’s compliance with the rules once finalized.

For any questions or greater clarity on the proposed rules, please contact one of the following members of our Employee Benefits and Executive Compensation group.