EBIA Weekly Newsletter

It’s Final: DOL Fiduciary Rule on Conflicts of Interest in Investment Advice

   April 14, 2016

Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice, 29 CFR Parts 2509, 2510, and 2550, 81 Fed. Reg. 20945 (Apr. 8, 2016)

Regulations, Exemptions, and Related Materials

The DOL has finalized regulations and related prohibited transaction exemptions (PTEs) expanding who is an ERISA fiduciary when providing investment advice for a fee to a retirement or other employee benefit plan or its participants. The guidance also applies to individual retirement account (IRA) and health savings accounts (HSA) owners through application of the Code’s prohibited transaction rules. The regulations were proposed in 2010 (see our Checkpoint article) and re-proposed in 2015 (see our Checkpoint article) to update 1975 regulations for today’s marketplace. The expanded definition of fiduciary is intended to better protect plans and participants from conflicts of interest in the investment advice they receive for a fee. The DOL has also issued a fact sheet, a chart summarizing the changes, a set of frequently asked questions (FAQs), and videos of the DOL’s announcement. Here are some highlights for 401(k) plans and HSAs:

  • Investment Advice. The final regulations offer detailed explanations and examples of what constitutes investment advice.

    • Types of Advice. Under the final regulations, two types of advice will trigger fiduciary status when provided for a fee or other compensation: (1) recommendations to buy, sell, hold, or exchange securities or other investment property, or regarding how to invest securities or other property following a rollover, transfer, or distribution; and (2) recommendations on managing securities or other investment property, including investment policies, portfolio composition, selection of other persons as investment advisers or managers, selection of account type (e.g., brokerage versus advisory), or recommendations about rollovers, transfers, and distributions (including whether to make, amount, form, and destination). For this purpose, “investment property” does not include health, disability, and term life insurance policies that do not contain an investment component. [EBIA Comment: Unlike the proposed regulations, the final regulations do not address valuations; instead, the DOL intends to address this topic in separate regulations.]
    • Advice Providers. The person providing the recommendation will be a fiduciary if, either directly or indirectly (e.g., through an affiliate), the person (1) represents or acknowledges status as an ERISA fiduciary (or, if applicable, status as a fiduciary under the Code—e.g., for HSAs); (2) provides the advice under a written or verbal agreement, arrangement, or understanding that the advice is based on the “particular investment needs” of the investor (e.g., plan, participant, or HSA owner); or (3) directs the advice to a specific investor about the advisability of a particular investment or management decision. The final regulations, with some modifications, retain exceptions from fiduciary status for certain recommendations involving expert plan investors (e.g., independent fiduciaries managing assets of at least $50 million), swap dealers, and the plan sponsor’s employees.
    • Recommendation. As in the proposed regulations, a “recommendation” is a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from a particular course of action. The final regulations explain that the more individualized a communication is, the more likely that it is a recommendation. They also describe the kinds of communications and activities that constitute recommendations and those that do not. Examples of activities that are not investment advice recommendations include marketing and providing investment platforms to a plan fiduciary, investment selection and monitoring assistance, general communications (e.g., newsletters, marketing materials, market data, and similar communications), and certain types of investment education. [EBIA Comment: The preamble notes that determining whether a recommendation has occurred is the first step in determining whether investment advice has occurred.]
    • Effective and Applicability Dates. The final regulations are effective June 7, 2016, but most of the provisions do not apply until April 10, 2017. A temporary provision applies between June 7, 2016 and April 10, 2017.
  • Best Interest Standard. Also finalized are two new and several amended PTEs that allow the now-expanded group of fiduciaries providing investment advice to receive compensation (e.g., commissions, revenue sharing, and 12b-1 fees) otherwise prohibited under the fiduciary rules.

    • Best Interest Contract (BIC) Exemption. The final BIC exemption provides relief for common compensation practices if the advice provider acknowledges fiduciary status in writing, commits to an impartial conduct standard (i.e., prudent advice in the investor’s best interest, no misleading statements, and reasonable compensation), adopts policies and procedures reasonably designed to minimize conflicts, and discloses conflicts and costs. For certain investors (e.g., HSA owners), the advice must be provided under a written, binding contract. (This requirement does not apply to ERISA plans.) The final exemption permits the provider to recommend proprietary products under the best interest standard and includes a streamlined “level fee” provision.
    • Applicability Date; Phase-In. The new PTEs and amendments are generally applicable to transactions occurring on or after April 10, 2017 (some transition rules have been provided).

EBIA Comment: Since the final regulations and related exemptions confer fiduciary status on service providers that have historically disclaimed that status, plan sponsors and their advisors will want to review service provider contracts and relationships to ensure that affected providers make the required disclosures. For plan participants and HSA account holders, these rules should result in more transparency when engaging advice providers or seeking advice on distributions and rollovers. Finally, providers who work with HSAs (and IRAs) will need to watch for differences in the way the regulations and exemptions apply to those accounts, for example, under the exception for platform providers and the BIC exemption. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.B (“Determining Fiduciary Status”), XXIV.M (“Exemptions to Prohibited Transactions”), and XXVI.I (“Providing Investment Advice to Participants”); see also EBIA’s Consumer Driven Health Care manual at Section XVI.D.2 (“Who Is a ‘Fiduciary’ With Respect to an HSA?”).

Contributing Editors: EBIA Staff.