April 27, 2015

Sweeping New DOL Proposal on Fiduciary Investment Advice

Arnold & Porter Advisory

The long-anticipated proposed "fiduciary" regulation was released by the Department of Labor (DOL) on April 14, 2015.  Specifically, the proposal details the circumstances under which a person who renders investment advice to a plan covered by the Employee Retirement Income Security Act (ERISA) or to an IRA becomes a fiduciary for purposes of Section 3(21) of ERISA and Section 4975(e) of the Internal Revenue Code (Code).  Comments are due on or before July 6, 2015.

Simultaneously with the issuance of the proposed regulation, the DOL proposed two new prohibited transaction class exemptions and proposed amendments to a number of existing class exemptions.  The proposed new exemptions and amendments would, subject to certain requirements, allow investment advice fiduciaries to receive a variety of forms of compensation that would otherwise be prohibited.

The regulation, if adopted in its proposed form, will expand the number and types of firms that are deemed to be "fiduciaries" to employee benefit plans and IRAs, cause other firms to change their service and product offerings to meet the requirements of new carve-outs and exemptions, require new disclosures to clients, require newly-covered "fiduciaries" to alter some of their service and product offerings and fee structures, and require providers to IRAs and employee benefit plans to implement new policies, procedures and controls to conform to the new rule.  Securities broker-dealers and banks would be particularly affected by the proposal.  Small and medium-sized IRA accounts may experience some dislocations if product offerings are changed and narrowed to address the requirements of the final rule.

Definition of Fiduciary

The new regulation generally defines a fiduciary as anyone who both:

·  Provides one of the four following types of advice to a plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner for a fee or other direct or indirect compensation:

  • Recommendations as to the advisability of acquiring, holding, disposing of or exchanging securities or other property, including a recommendation to take a distribution or a recommendation as to the investment of securities or other property to be rolled over or otherwise distributed from the plan or IRA;
  • Recommendations as to the management of securities or other property, including recommendations as to the management of securities or other property to be rolled over or otherwise distributed from the plan or IRA;
  • An appraisal, fairness opinion or similar statement concerning the value of securities or other property if it is provided in connection with a specific transaction involving the plan or the IRA;
  • Recommendations of a person who will receive a fee or other compensation for any of the types of advice listed above; and

·  Directly or indirectly, either:

  • Represents or acknowledges that it is acting as a fiduciary within the meaning of ERISA with respect to the advice described above;or
  • Renders the advice under a written or verbal agreement or understanding that the advice is individualized or directed to the recipient of the advice for consideration in making investment or management decisions with respect to securities or other property of the plan or IRA.

This is a sweeping definition that encompasses a broad range of activities.  In short, any person who provides investment advice for a fee to an ERISA plan, plan fiduciary, plan participant or beneficiary, IRA, or IRA owner would be an investment advice fiduciary, unless a carve-out exception, as discussed below, applies.

Of special significance is the fact that the proposed regulation applies to investment advice to IRAs and IRA owners, including IRA rollovers.  The proposed regulation also applies to advice regarding distributions from IRAs and plans, which has historically not been considered a fiduciary function.  Rather unexpectedly, health savings accounts (HSAs) and certain other deferral vehicles are included within the scope of the regulation.  The DOL has specifically requested comments as to whether HSAs and similar accounts should be treated the same as IRAs for this purpose.


In recognition of the breadth of the proposed fiduciary definition, the DOL has provided a number of carve-outs.  If a person renders advice or provides communications in conformity with the conditions of a carve-out, then that person is deemed not to be a fiduciary for purposes of giving investment advice.  The carve-outs are generally as follows:

·  Counterparties to a plan:

  • A person acting as a counterparty to a plan in a transaction with a plan fiduciary with financial expertise (applies only to certain plans with more than 100 participants, not to IRAs);
  • A person who is a counterparty to a swaps and securities-based swap transactions with a plan (applies only to plans, not to IRAs).

·  Employees of the plan sponsor who provide advice to a plan fiduciary and who do not receive a fee or other compensation, direct or indirect, for the advice other than the normal compensation for work for the plan sponsor (applies only to plans, not to IRAs).

·  Platform providers who merely make available to a plan, without regard to the individualized needs of the participants or beneficiaries, securities or other property through a platform or similar mechanism from which a plan fiduciary may select or monitor investment alternatives (applies only to plans, not to IRAs).  A written disclaimer that the provider is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity is required for this carve-out to apply.

·  Selection and monitoring assistance provided by a person, in connection with a platform, that merely identifies investment alternatives that meet object criteria specified by the plan fiduciary or merely provides objective financial data and comparisons with independent benchmarks (applies only to plans, not to IRAs).

·  An appraisal, fairness opinion or statement of value provided by a person to:

  • An ESOP;
  • An investment fund in which more than one unaffiliated plan has an investment or which holds the assets of more than one unaffiliated plan under the DOL's "plan asset" regulations; or
  • A plan, plan fiduciary, a participant or beneficiary, an IRA or an IRA owner solely for purposes of complying with certain legally required reporting and disclosure obligations.

·  Investment education provided by a person that merely provides:

  • Plan information;
  • General investment and retirement information;
  • Asset allocation information; or
  • Interactive investment materials.

None of the carve-outs are available for a person who acknowledges that it is acting as a fiduciary.

New Proposed Prohibited Transaction Class Exemptions and Amendments

In conjunction with the proposed regulation on fiduciary investment advice, the DOL is also proposing two new prohibited transaction class exemptions and various amendments to certain existing exemptions.  The new exemptions and amendments would allow broker-dealers and insurance agents who act as investment advice fiduciaries and who meet the requirements of the proposed new and amended exemptions to continue to receive compensation that would otherwise violate applicable prohibited transaction rules.

The most significant of the new proposed exemptions and amendments is the Best Interest Contract exemption.  This proposed exemption would provide relief from restrictions on certain compensation received by investment advice fiduciaries that would otherwise result in a self-dealing prohibited transaction, such as transaction-based commissions or the receipt of 12b-1 fees.  The exemption is generally available for transactions with (i) participant-directed ERISA plans, (ii) IRAs, and (iii) non-

participant directed ERISA plans with fewer than 100 participants.  The conditions of the exemption generally include, among others, that the adviser and the firm that employs or contracts with the adviser must:

·  Contractually acknowledge fiduciary status;

·  Commit to adhere to basic standards of impartial conduct;

·  Warrant compliance with applicable federal and state laws governing advice;

·  Warrant that they have adopted policies and procedures designed to mitigate the harmful impact of conflicts of interest;

·  Disclose basic information on their conflicts of interests and the cost of their advice;

·  Not limit the right of a participant to bring or participate in a class action; and

·  Not include any limitation on liability in the applicable service contract.

The DOL's stated intent in proposing the Best Interest Contract exemption is to permit certain compensation that creates conflicts of interest while simultaneously minimizing the costs borne by investors for such conflicts.  In making the standards part of the Best Interest Contract exemption, the DOL would effectively extend, by contract, ERISA's fiduciary duty standards to advisers of IRAs and IRA owners and provide for an enforcement mechanism for IRA owners through breach of contract claims.

The second new proposed prohibited transaction class exemption is the Principal Transactions exemption.  This exemption generally would allow principal transactions in certain debt securities between an investment advice fiduciary and a plan or IRA, subject to the satisfaction of certain conditions. 

As noted above, the DOL is also proposing amendments to various already existing class exemptions.

Proposed Effective Date

The DOL proposes to make the final rule effective 60 days after publication in the Federal Register.  It further proposes that the requirements of the final rule would generally become applicable eight months after publication.  The DOL also proposes to make the Best Interest Contract exemption available on the date the final rule for fiduciary investment advice becomes applicable:  that is, eight months after the publication of the final rule. 


Viewed as a whole, the proposed changes to the definition of fiduciary and the new and amended prohibited transaction class exemptions are a striking departure from the existing rule and exemptions.  The new proposals seek to apply principle-based standards to transactions between investment advice fiduciaries and plans, plan fiduciaries, participants, beneficiaries, IRAs and IRA owners.  The new proposals, if adopted in their current form, will require significant changes to the way persons who provide investment related advice, and sell financial products, to ERISA plans and IRAs operate in the marketplace.

Subscribe Link

Email Disclaimer