The Department of Labor’s (DOL’s) recently reproposed rule “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule – Investment Advice” deals with the part of the definition of “fiduciary” under ERISA that causes a person or entity to be a fiduciary as a result of providing investment advice for a fee. As a general matter, the rule — if adopted — would make more types of service providers and services fiduciary in nature, especially in the context of IRAs and rollovers.
Here are some critical, threshold questions and issues that we are seeing:
- Questions about the scope of the definition of investment advice. The definition relies heavily on terms such as “understanding,” “specifically directed to,” “for consideration,” and “recommendation.” It is not clear in some cases how these concepts apply in practice.
- Questions about the carve-outs from fiduciary status. The proposed rule includes six carve-outs from fiduciary status. There is a carve-out for “counterparties” to contracts with larger plans (more than 100 participants) or independent plan fiduciaries (with at least $100 million in assets). The DOL staff has indicated informally that this carve-out is intended to apply to contracts for services (as well as purchases, sales, loans, etc.), but clarification on this point would be helpful. There are also questions about how to address plans that fall below the “large plan” thresholds during the term of a contract. Carve-outs also exist for “platform providers” in participant-directed plans, but it is not clear whether these carve-outs apply to brokerage windows or managed accounts. The carve-out for valuations raises issues regarding valuations for “white label” or other custom, institutional funds. Finally, with respect to carve-outs in general, do they function as a “safe harbor” or are they the only avenues to avoid fiduciary status in these circumstances?
- Questions about the prohibited transaction exemptions, especially the “best interest” contract exemption. A key feature of the proposed rule is a new prohibited transaction exemption that would allow brokers and other service providers to continue to receive compensation in the form of commissions (or other forms that may otherwise be prohibited for a fiduciary to receive) if numerous conditions are satisfied. Questions exist about how the “best interest” interacts with other legal standards of conduct potentially applicable to the same parties. There are numerous technical questions as well, including the extent to which contracts with retail customers can effectively define the scope of the service provider’s fiduciary duties.
We continue to follow developments on this proposal closely. There will likely be a lot to digest after the comment deadline (when the DOL first proposed this rule in 2010, hundreds of comments were received). The DOL has announced public hearings the week of August 10.