DOL Re-Issues Proposed Regulation Defining “Fiduciary”

April 2015ERISA Alert

On April 14, 2015, the U.S. Department of Labor (the "DOL") announced its decision to re-propose a change to the rule defining fiduciary for pension plans and IRAs under the Employee Retirement Income Security Act (ERISA). The decision was preceded by significant Congressional and marketplace opposition to the first proposal made in 2010, resulting in a promise by the DOL to conduct further analysis on the impact of the rule change.

Existing Fiduciary Definition
In 1975, the existing definition of fiduciary was established.1 According to the DOL, that definition was developed prior to the use of participant-directed 401(k) plans and IRAs. In making its changes to the definition, the DOL noted that many investment professionals, consultants and advisers to IRAs currently have no obligation to adhere to ERISA's fiduciary standards or its prohibited transaction rules. Under the existing definition, to be considered a fiduciary, an individual must provide advice:

(a) regarding the value or advisability of investing in, purchasing or selling securities or other property;

(b) on an ongoing basis;

(c) pursuant to a mutual agreement;

(d) as the primary basis for investment decisions; and

(e) on an individualized basis, taking into account the particular needs of the plan.

2015 Proposed Regulation
Under the new proposed regulation, a "fiduciary" for investment advice purposes is defined as an individual that:

(a) provides investment recommendations or appraisals to an employee benefit plan, a plan fiduciary, participant or beneficiary, or an IRA owner or fiduciary, including recommendations to: (i) purchase or sell investments; (ii) take a distribution; (iii) execute a rollover; or (iv) retain a particular investment manager;

(b) acknowledges the fiduciary nature of the advice or, in the absence of an acknowledgment, provides advice with the formal or informal understanding that it is individualized to the recipient and will be considered when making investment decisions; and

(c) receives compensation, directly or indirectly, for that advice.

Carve-Outs
The 2015 proposed regulation provides carve-outs for certain types of investment-related communications that would not be considered fiduciary investment advice. These carve-outs include: (1) general educational communications regarding retirement which are provided to plan participants and IRA owners; (2) sales presentations to fiduciaries of large plans who have financial expertise and recognize the conflicted advice being provided; and (3) communications addressing the value of stock in employee stock ownership plans (ESOPs).

Prohibited Transaction Exemptions
Since the new definition will include broker-dealers, insurance agents and other investment advisers under the umbrella of fiduciary, the DOL has concurrently proposed changes to several existing prohibited transaction exemptions in order to accommodate the new definition.

The DOL has also proposed an entirely new prohibited transaction exemption, known as the "Best Interest Contract Exemption." This exemption would provide a fiduciary substantial relief from the conflict of interest provisions of ERISA's prohibited transactions so that existing compensation arrangements could be maintained. To qualify for the Best Interest Contract Exemption, the fiduciary must enter into a written contract with the plan or individual to whom investment advice is given as well as satisfy specific conditions which include:

(a) informing the DOL of its intention to rely on the Best Interest Contract Exemption; (i) acknowledging its fiduciary status; (ii) providing investment advice in the client's best interest with the care, skill, prudence and diligence that a prudent person would exercise based on current circumstances; (iii) warranting that it has identified possible conflicts of interest or compensation structures that could encourage improper investment advice and has adopted measures to prevent financial harm to the client; and (iv) disclosing actual conflicts of interest, such as hidden fees.

What's Next?
There is a 75-day period for the public to submit comments on the newly proposed change to the rule. Like the 2010 proposal, significant comments from the financial services industry and other interested parties are expected and the DOL may modify their proposal in response to such comments. If approved, the newly proposed definition of fiduciary will not be effective until 60 days after the regulation is published in final form in the Federal Register and the requirements of the regulation (e.g., compliance with prohibited transaction rules) will generally become effective eight months after the final regulation is published. The Best Interest Contract Exemption and the modifications to the other prohibited transaction exemptions are also expected to be effective eight months after publication of the final regulation.

1 DOL Regulation §2510.3-21(c).


For more information on this Alert or other ERISA matters, please contact:

Fred R. Green at +1 212 592 5910 or [email protected]

Copyright © 2015 Herrick, Feinstein LLP. ERISA Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.