On April 6, 2016, the Department of Labor (the "DOL") released the long-awaited final version of its controversial fiduciary rule, which expands definition of "investment advice fiduciary" under the Employee Retirement Income Security Action of 1974 ("ERISA"). The final rule is a substantially revised version of the proposed regulations issued in 2015 and appears to address the thousands of comments received by the DOL from the financial services industry. For the past year, the financial services industry has lobbied against the rule, while, at the same time, bracing itself for changes that the new rule, had it been adopted in proposed form, would have ushered in. Although industry insiders are still in the process of analyzing the new, finalized rule, the initial responses range from muted to favorable.
While the new rule has been streamlined, it still effects important and significant changes by expanding the definition of a fiduciary under ERISA and the Internal Revenue Code to more broadly describe when a person is a fiduciary by reason of rendering investment advice regarding the assets of a plan or an IRA for a fee or other compensation. This expanded definition will include advisers to plan sponsors, plan fiduciaries, plan participants, beneficiaries, IRAs and IRA owners. The new rule also contains accompanying prohibited transaction class exemptions allowing certain broker-dealers, insurance agents and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation as long as they adhere to certain standards and rules that are directed to ensuring that the advice is in the best interests of their customers. These standards and rules include the requirement that firms and individual advisers acknowledge their status as "fiduciaries," make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer, charge only reasonable compensation, and make no misrepresentations to their customers regarding recommended investments.
The final rule details the kind of communications that constitute investment advice, which give rise to fiduciary status. Critical to the definition is the concept of "recommendation" and whether a "recommendation" occurred. Importantly, the final rule also addresses certain types of communications which are non-fiduciary communications. These include education, general communications (newsletters, commentary, research, etc.), platform providers, transactions with independent plan fiduciaries with financial expertise, swap and security based transactions, employees of plan sponsors and plan fiduciaries who prepare routine reports and recommendations who do not receive a fee or compensation beyond their normal compensation.
The final rule and the prohibited transaction exemptions become effective June 7, 2016, but they will have a phased-in implementation period. The broader definition of fiduciary will be applicable on April 10, 2017. However, in order to take advantage of the best interests contract (BIC) exemption, a standard-based exemption applying to the receipt of compensation by advisers and their financial institutions for investment advice provided to retirement investors, firms will only be required to comply with more limited conditions, including acknowledging their fiduciary status, adhering to the best interest standard, and making basic disclosures of conflicts of interest. The other requirements of the exemption will go into full effect on January 1, 2018.
The full impact of these new rules on qualified plans and arrangements with service providers is not yet clear. However, it is likely that the rule will result in additional documentation and disclosures and will possibly impact fees and costs as the plans and advisers define their new working relationship.