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DOL Expands Definition of Who is a Fiduciary

The DOL has re-proposed a rule, first offered in October 2010, regarding who is an investment advice fiduciary under ERISA. That 2010 proposed rule was withdrawn in 2011 after much feedback from many corners, but in particular Congress and the investment provider community, and was re-proposed in April 2015. The re-proposed rule uses the same framework as the 2010 proposal, but differs markedly from the original by:

1. Backing away from the 2010 proposal to treat the valuation of an employee stock ownership program’s (ESOP) stock as a fiduciary activity.

2. Greatly expanding the definition of when broker-dealers, investment advisers, insurance agents, plan consultants, and others would be considered fiduciaries to ERISA plans and IRA account holders. The expansion of who is a fiduciary to include those who advise IRA account holders for a fee may cause the most controversy.

3. Defining the four types of advice regarding investments that could trigger fiduciary status when such advice is provided for a fee:

     a. Recommendations to invest, buy, sell, or hold, including recommendations to take a distribution or a rollover, and recommendations on investing such distributions or rollovers;

     b. Investment management recommendations;

     c. Verbal or written appraisals or fairness opinions provided in connection with a specific investment transaction; and

     d. Recommendations to provide investment advice or to manage plan assets for a fee.

In any of those circumstances, under the proposed rule the fiduciary would be required to represent that they were a fiduciary with respect to the advice given, and provide the advice under a written or verbal agreement that outlined that individual advice would be given for a fee when making investment or fund management decisions. Several exceptions to this new rule (called “carve-outs” in the rule) include investment advice given to large plans with financial expertise, employees of the plan sponsor, investment platform providers, and guidance given for “investment education,” a distinction made within the proposed rule in comparison to “investment advice.”

The re-proposed rule also introduces a series of new prohibited transaction exemptions (PTEs), which allow investment providers to receive otherwise prohibited compensation such as commissions, revenue sharing, and 12b-1 fees. The most significant of these new exemptions is for what the rule calls “Best Interest Contract Exemptions” if the investment provider contractually acknowledges their fiduciary status, commits to basic standards of impartial conduct, adopts policies and procedures designed to minimize the harmful impacts of conflicts of interest, and discloses information to the plan participant or IRA account holder on such conflicts and on fees.

In the end, this re-proposed rule is likely to receive significant consideration on Capitol Hill, but in the meantime is slated to take effect later in 2015.

Posted on April 22, 2015 by GARY B. KUSHNER, SPHR, CBP, PRESIDENT AND CEO

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