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The Department of Labor’s Fiduciary Rule

Guest Bloggers Winget, Spadafora & Schwartzberg, LLP have published a white paper about the new rule.

May 11 ,2016

The Department of Labor (“DOL”) recently issued its long-anticipated rule amending the regulatory definition of fiduciary investment advice. The Rule replaces the previous five-part test used to determine whether an individual is rendering investment advice for a fee with a new definition of “fiduciary” that, according to the DOL, better comports with the statutory language in the Employee Retirement Income Security Act of 1974 (“ERISA”) and the IRS Code.  The DOL promulgated the Rule due to its perception that the market for retirement advice has changed dramatically since ERISA was enacted. According to the DOL, individual advisers, rather than large employers and professional managers, have become increasingly responsible for managing retirement assets as IRAs; and participant-directed plans, such as 401(k) plans, have supplanted defined benefit pensions.

At the heart of the change is the DOL’s belief that financial products have become too complex for individuals managing retirement assetsMay 11, 2016, and that retirement advice is potentially conflicted due to various compensation structures. The DOL believed advisors have been recommending investments based on their own self-interest (e.g., products that generate higher fees for the adviser even if there are identical lower-fee products available), giving imprudent advice and engaging in transactions that otherwise would be prohibited by ERISA and the IRS Code.  The DOL attributes the advisers’ conduct, in part, to the outdated definition of fiduciary.

In contrast to the multipart test set forth in the 1975 regulation, the Rule now explicitly describes the kinds of communications and the types of relationships that constitute investment advice that give rise to fiduciary responsibilities. The DOL’s stated goals are to guarantee that investment advice be in the consumers’ best interest, and eliminate excessive fees and substandard performance.

This white paper outlines the new definition of fiduciary; explains what types of communications are considered recommendations covered by the Rule; addresses the effect of the fiduciary duty standard; and summarizes the various exemptions promulgated by the DOL, including the Best Interest Contract Exemption (“BICE”).  The paper is meant to assist broker-dealers, registered investment advisers and their insurers better understand the Rule and its implementation. Continue reading.


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