On April 14, 2015, the U.S. Department of Labor (DOL) issued new proposed regulations that changed the definition of “fiduciary investment advice” as currently found in DOL Regulation 2510.3-21(c). These proposed rules also formally withdraw the prior proposed regulations issued in 2010. According to the DOL, these latest proposed rules will improve the protections provided for persons saving for retirement by ensuring that fiduciaries provide advice that is in their clients’ best interests.
Under the proposed regulations,
a person renders investment advice by (1) providing investment or investment management recommendations or appraisals to an employee benefit plan, a plan fiduciary, participant or beneficiary, or an IRA owner or fiduciary, and (2) either (a) acknowledging the fiduciary nature of the advice, or (b) acting pursuant to an agreement, arrangement, or understanding with the advice recipient that the advice is individualized to, or specifically directed to, the recipient for consideration in making investment or management decisions regarding plan assets. When such advice is provided for a fee or other compensation, direct or indirect, the person giving the advice is a fiduciary.
The DOL believes the proposed regulations will require retirement investment advisers to act in their clients’ best interests first. In trying to accomplish this goal, the DOL has cobbled together a very broad test of fiduciary status. To attempt to minimize the sweeping nature of the definition, the DOL has created six exceptions to the new rule (referred to in the regulations as “carve-outs”). These exceptions will apply to all investment advisers except for those advisers who specifically acknowledge their fiduciary status. These exceptions are as follows:
- Counterparty Transactions: advice given to an independent sophisticated plan fiduciary when the counterparty’s status is acknowledged in advance and the counterparty is not compensated for the advice.
- Employee Advice: advice given by an employee of the plan sponsor where the employee is not compensated beyond his or her normal remuneration.
- Platform Providers: advice given to a plan, without regard to individualized needs, through a platform (or similar mechanism) whereby a plan fiduciary will select or monitor plan investments.
- Selection and Monitoring Assistance: in connection with platform provider advice, the adviser merely identifies investment alternatives that meet criteria specified by a plan fiduciary, or (b) provides objective financial data and comparisons with independent benchmarks.
- Financial Reports and Valuations: the provision of an appraisal, fairness opinion, or statement of value to (a) an employee stock ownership plan (ESOP) regarding employer securities; (b) a collective investment fund or pooled separate account; or (c) an advice recipient for the purpose of any required legal reporting or disclosure compliance.
- Investment Education: the provision of investment-related information and materials.
The proposed regulations confirm that an adviser who is a fiduciary under these regulations will not be considered a fiduciary with respect to any plan assets over which the fiduciary has no discretionary authority and for which the adviser does not render advice for a fee. Finally, a person who merely executes transactions for a fee in accordance with instructions provided by a fiduciary will not be a fiduciary.
As expected by most Employee Retirement Income Security Act (ERISA) professionals, the proposed regulations provide that a recommendation to take a distribution from a retirement plan, and/or roll that distribution into an IRA, is considered the provision of fiduciary investment advice if it otherwise falls within the definition above.
Concurrent with the issuance of these proposed regulations, the DOL also proposed certain class exemptions from ERISA’s prohibited transaction provisions. Of the exemptions proposed, the “best interest contract exemption” will likely be the most useful to advisers, as it would allow advisers to continue to set their own compensation practices so long as they commit to putting their clients’ best interests first and disclose any conflicts of interests. The “principal transactions exemption” would allow advisers to recommend certain fixed-income securities and sell them directly from advisers’ own inventory, so long as the adviser adheres to the exemption’s consumer-protection conditions.
So what’s next? The public has 75 days to provide comments on these proposed regulations. The DOL plans to hold an administrative hearing within 30 days after the comment period has closed. After reviewing all of the comments and the information gathered during the hearing, the DOL will decide what to include in the final regulations. The DOL indicated in the preamble to the proposed regulations that even after the final regulations are issued, they would not become applicable until eight months after issuance, giving time for investment advisers to comply with the final regulations.
When these regulations are finalized, the DOL expects that it will be much easier for plan sponsors to determine whether their investment adviser is a fiduciary.