The U. S. Department of Labor (DOL) issued its final fiduciary rule on April 6. Under this rule, the definition of “fiduciary” is expanded and ERISA’s fiduciary standards and remedies become applicable to many of the investment and asset management recommendations given by broker-dealers, banks, and other financial institutions to owners of individual retirement accounts (IRAs) or to plan sponsors or participants of qualified retirement plans.

Although the final rule is viewed as offering concessions, its impact is nevertheless widespread. Under the final rule, the key determining factor is whether the advice given rises to the level of being a recommendation. A recommendation is a communication that, based on its content, context, and presentation, would reasonably be viewed as suggesting that the individual receiving the advice engage in or refrain from a particular course of action. The intention of the adviser when providing the advice is not relevant to the determination of recommendation. The more individually tailored the communication is to the particular customer or customers about a specific security or investment strategy, the more likely the communication will be viewed as a recommendation.

For example, under the final rule, a person is deemed to render fiduciary investment advice with respect to ERISA plan assets or IRA assets if the person provides to a plan, plan fiduciary, plan participant, or plan beneficiary, or IRA or IRA owner, any of the following three types of advice for a fee or other compensation: (i) a recommendation about the advisability of acquiring, holding, disposing of, or exchanging securities or other property, including a recommendation to take a distribution of benefits or to roll over securities or other property from a plan or IRA; (ii) a recommendation regarding the management of securities or other personal property, including a recommendation regarding the management of assets in a rollover or distribution; or (iii) a recommendation of a person who will also receive a fee or other compensation for providing the types of advice described above.

The final rule eliminates the proposal’s inclusion of 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.

Although the proposed rule will have the greatest impact on investment professionals, it will affect plan sponsors as well. Plan sponsors act as consumers of investment advice and in some cases may be deemed investment advice fiduciaries. Plan sponsors who work with advisers who have not acted as fiduciaries will be approached by these advisers as they begin to define a new working relationship, which will likely result in a different fee structure. If the adviser is utilizing the Best Interest Contract (BIC) exemption, there will also be additional paperwork to sign that describes their fiduciary responsibilities and limitations. Further, if a health savings account has an investment component, anyone giving advice about those investments will need to enter into a BIC with the plan sponsor or participant. 403(b) plans that are not subject to ERISA (i.e., governmental plans, church plans, and elective deferral-only plans utilizing the DOL safe harbor) are not subject to the final fiduciary rule at all. However, rollover IRAs from these plans could be caught in these rules. Finally, employees of the plan sponsor will not become fiduciaries solely due to the fact that they provide advice to a plan fiduciary or an employee if the person receives no fee or other compensation in connection with the advice beyond the employee’s normal compensation for work performed for the employer (i.e., finance department employee discussion with plan sponsor investment committee member in passing will not be deemed a fiduciary).

We are available to assist our clients in determining whether they will be classified as investment advice fiduciaries under the final rule and in determining whether existing business models and advice provided falls within any of the DOL’s proposed exemptions. We are also available to review or provide suggested language for inclusion in minutes documenting a plan sponsor’s compliance with the rule, or to review and draft BIC exemption agreements.

The rule will become applicable to financial institutions and the investment advice fiduciaries employed by them on April 10, 2017. Compliance with the BIC and principal transaction exemptions is further delayed until January 2018.

What’s next? Investment advisers and other individuals who prior to the final rule were not considered fiduciaries should review their current processes and determine whether under the final rule they will be deemed to be investment advice fiduciaries and whether any exemptions are applicable. Compliance with any applicable exemption requires considerable planning and documentation. Similarly, plan sponsors should ask each of their advisers the following: (i) whether the adviser is a fiduciary under the new rule, and (ii) what the adviser is doing to maintain compliance. This process should be documented, to furnish evidence of the plan sponsor’s due diligence with respect to this matter.