DOL Finalizes Regulation Defining “Fiduciary”

May 2016

On April 6, 2016, the Department of Labor (the “DOL”) issued final regulations redefining the term “fiduciary” for purposes of ERISA. After receiving extensive comments to the proposed regulations that were issued in 2015, the DOL made significant changes to the final fiduciary rule but retained the general approach of making a broad scope of services and activities sufficient to cause a party to have fiduciary status. The final regulation, among other things, extends the term “fiduciary” to someone providing investment advice to individual retirement accounts (“IRAs”) as well as benefit plans covered by the Employee Retirement Income Security Act (“ERISA”).

New Fiduciary Definition

Consistent with the definition of fiduciary set forth in the DOL’s proposed regulations, the final regulation defines a “fiduciary” as someone who provides the following types of advice for a fee or other compensation to a plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner:

(i) a recommendation as to the advisability of acquiring, holding or disposing of an investment or how an investment should be handled after it is rolled over, transferred or distributed from a plan or IRA; or

(ii) a recommendation on investment policies or strategies, selection of investment managers or with respect to rollovers, transfers or distributions from a plan or IRA.

In addition, to constitute fiduciary advice, the recommendation must be made by a person who:

(i) represents or acknowledges that it is acting as a fiduciary;

(ii) renders the advice pursuant to an agreement, arrangement or understanding that the advice is based on the particular investment needs of the recipient; or

(iii) directs the advice to a specific recipient regarding the advisability of a particular investment decision.

Modifications from Proposed Regulations

The final regulations made significant modifications to the carve-outs for types of investment-related communications that will not be considered to be fiduciary investment advice. These modifications include:

(i) clarifying what constitutes ‘investment education’ instead of investment advice;

(ii) excluding appraisals from the definition of investment advice;1 and

(iii) expanding the exclusion for advice to independent fiduciaries of plans with assets of at least $50 million who have financial expertise and recognize that the party providing investment advice may have conflicting interests.

Best Interest Contract Exemption

Concurrent with issuing the final fiduciary regulations, the DOL has finalized the new prohibited transaction exemption known as the “Best Interest Contract Exemption” (“BICE”), which was first presented with the new regulations proposed in 2015. The purpose of the BICE is to provide a fiduciary with relief from the prohibited transaction conflict of interest provisions so that existing compensation arrangements can be maintained. Under the BICE, among other things, a financial institution’s contractual arrangement with employee benefit plans and IRAs must contain an acknowledgement of the financial institution’s fiduciary status and must provide the institution’s agreement to render investment advice in the best interest of the client, including an agreement to act with the care, skill, prudence and diligence that a prudent person acting in a like capacity would use under the circumstances. The financial institution must also warrant that it has adopted policies and procedures reasonably and prudently designed to ensure compliance with the impartial conduct standards and to prevent conflicts of interest. It must also disclose how it is paid and the existence of any material conflicts of interest.

Effective Date

The final fiduciary regulations will become effective one year after publication of the final regulations in the Federal Register (i.e., April 10, 2017). While transitional exemptive relief under the BICE becomes available on April 10, 2017, full compliance with the disclosure, policies, procedures and contract requirements of the BICE will not go into effect until January 1, 2018.

What to do

Financial institutions providing services to employee benefit plans or IRAs must carefully review the final rules to determine if any of their services or activities might confer fiduciary status on them; even if such services or activities did not previously do so. Financial institutions should also review their contractual arrangements, as well as their policies and procedures, to determine if changes are needed to comply with the new rules, including changes needed to comply with the BICE.

[1] The DOL has reserved the treatment of appraisals for future rulemaking.

This Alert is one in a series on the topic of ERISA and employee benefits. For more information on this Alert or other ERISA matters, please contact:

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

© 2016 Herrick, Feinstein LLP. This alert is published by Herrick, Feinstein LLP for informational purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.