Apr 15, 2015

DOL Expands the Definition of Fiduciary

On April 14, 2015, the United States Department of Labor (the “DOL”) publicly announced a proposed rule expanding who is a “fiduciary” under the Employee Retirement Income Security Act of 1974 (“ERISA”) as a result of giving investment advice. The rule was originally proposed in 2010, but was withdrawn in 2011 amid heavy protests from the financial industry.

The proposed rule would expand the number of investment advisers who are subject to ERISA’s fiduciary standards when providing retirement investment advice and would expand the definition of “fiduciary” under Section 4975 of the Internal Revenue Code of 1986, as amended, (the “Code”) which would include advice to individual retirement account (“IRA”) owners.

For example, it would require investment advisers (including brokers, registered investment advisers, and insurance agents who get paid to provide retirement investment advice) to adhere to a fiduciary standard that puts client interests ahead of all other considerations when making investment recommendations.

Investment advisers would not be able to accept any payments that could create conflicts of interest, such as fees earned for recommending certain financial products, unless they fall under one of the many exemptions listed in the proposed rule.  However, investment advisers will still have discretion in their payment structures and be able to receive commissions, revenue sharing, and 12b-1 fees.

Therefore, under the proposed rule, any investment adviser being paid to provide individualized investment advice (e.g., what assets to purchase or sell, whether to roll over a 401(k) plan balance into an IRA, etc.) would be a fiduciary and have to put clients’ interests first.

As mentioned above, the proposed rule also includes proposed exemptions allowing investment advisers to continue to receive payments that could otherwise create conflicts of interest if certain conditions are met.  Exemptions include:

  • “Best interest contract exemption” which permits commissions and revenue sharing so long as they are disclosed to the client.
  • “Principles-based exemption” that would allow investment advisers to recommend certain fixed-income securities and sell them to their clients from their own inventory.
  • “Low-fee exemption” that would allow brokerage firms to accept payment that would otherwise be deemed conflicted when recommending the lowest-fee products in a given class of products.

After the proposed rule is published, it enters a 75-day period for written comments. Within 30 days after the comment period ends, the DOL’s Employee Benefits Security Administration plans to host a public hearing, after which more written comments will be accepted before finalization of the rule.

To view our past client alert discussing the withdrawn 2010 fiduciary rule guidance, click here.

For more information regarding the DOL’s proposed fiduciary rule, contact your Executive Compensation and Employee Benefits Counsel at Smith, Gambrell & Russell, LLP.

This client alert is intended to inform clients and other interested parties about legal matters of current interest and is not intended as legal advice.