Contents

The Department of Labor has published its final regulation on the definition of a fiduciary, along with new and revised prohibited transaction exemptions for those providing investment products and services to pension and other retirement plans and individual retirement accounts (IRAs).

The final regulation significantly broadens the circumstances in which a person or entity will be a fiduciary as a result of providing investment advice. As a result, when the regulation becomes effective in April 2017, those who market investments to retirement plans and IRAs must either qualify for an exception from fiduciary status provided by the new regulation or be subject to ERISA’s strict fiduciary duty and prohibited transaction rules. A new best interest contract exemption is intended to accommodate investment recommendations and sales to smaller plans, individual plan participants and beneficiaries, and IRAs. However, this exemption is subject to several conditions, including a requirement to act in the best interest of the plan or IRA.

In response to extensive comments from those in the financial industry and investor advocates, the DOL made significant changes from the proposed regulation and exemptions that were issued in 2015. For example, the changes to the regulation include simplifying the disclosure and data collection requirements, deleting appraisals from the definition of fiduciary advice (to be covered separately in the future), clarifying when a fiduciary “recommendation” has been made, allowing asset allocation models and interactive materials to refer to specific products (but not in the case of IRAs), and expanding the “seller’s exception.”

The final version of the best interest contract exception eliminates the limited asset list, removes the requirement of a written contract for ERISA plans, and permits the written contract with IRAs and non-ERISA plans to be signed upon completion of the investment transaction.

For a detailed explanation of the new regulations and new and revised exemptions, see our alert.