DOL’s 2015 Proposed Fiduciary Rule on Investment Advice
November 12, 2015
DOL’s 2015 Proposed Fiduciary Rule on Investment Advice
On April 20, 2015, the Department of Labor (DOL)
selection and monitoring assistance if an individual is
proposed redefining the term investment advice within
identifying alternatives that meet objective criteria
pension and retirement plans. Currently, under the
specified by the plan fiduciary or is providing objective
Employee Retirement Income Security Act of 1974
financial data and benchmarks;
(ERISA; P.L. 93-406), a person who provides investment
advice has a fiduciary obligation to provide the advice in
marketing by platform providers who market to a plan
the sole interest of plan participants. Thus, redefining the
without regard to the individual needs of the plan or the
term investment advice could affect who is subject to this
plan’s participants;
fiduciary standard. More detailed information about the
proposal is available in CRS Report R44207, Department of
appraisals for Employee Stock Ownership Plans
Labor's 2015 Proposed Fiduciary Rule: Background and
(ESOPs), though DOL might issue additional
Issues.
regulations for appraisals of ESOPs; and
Current Regulation
provision of investment education, such as information
Regulations issued in 1975 define investment advice using
about the plan, general financial, investment, and
a five-part test. To be held to ERISA’s fiduciary standard
retirement information.
with respect to his or her advice, an individual must (1)
make recommendations on investing in, purchasing, or
The proposal provides that certain individuals would not be
selling securities or other property, or give advice as to the
subject to the fiduciary standard. These include swaps
value (2) on a regular basis (3) pursuant to a mutual
dealers; employees of the plan sponsor or employee
understanding that the advice (4) will serve as a primary
organization provided they do not receive compensation for
basis for investment decisions, and (5) will be
the advice beyond their normal compensation; and
individualized to the particular needs of the plan.
individuals who engage in executing securities transactions.
Proposed Regulation
Best Interest Contract Prohibited
DOL proposed broadening the term’s definition to capture
Transaction Exemption
activities that currently occur within pension and retirement
In addition to requiring plan fiduciaries to adhere to certain
plans, but do not meet the existing definition of investment
standards of conduct, ERISA prohibits fiduciaries from
advice. The proposed rule would replace the current five-
engaging in transactions deemed likely to injure a pension
part test with a more inclusive definition. The following are
plan. A number of prohibited transaction exemptions
the types of activities that would constitute investment
(PTEs) have been issued, both in statute and via DOL-
advice under the proposed rule, if they are done for a fee or
issued exemptions, which allow individuals or classes of
other compensation:
individuals to engage in specified transactions that would
otherwise be prohibited under ERISA.
investment recommendations and recommendations (1)
as to the advisability of taking a distribution from a
Accompanying the 2015 proposed rule, DOL has proposed
pension plan or Individual Retirement Account (IRA);
or modified a number of PTEs. DOL has proposed a best
(2) for the investment of securities or other property that
interest contract (BIC) exemption so that certain broker-
are rolled over from a plan or an IRA; (3) for the
dealers and others who act as plan fiduciaries would be able
management of securities or other property, including
to continue to receive compensation that would otherwise
rollovers from a plan or IRA;
be prohibited. For example, absent the exemption,
fiduciaries would not be able to receive commissions, load
the appraisal or a fairness opinion of the value of
fees, or other fees as a result of their advice.
securities or other property if connected with a specific
transaction by a plan or IRA; or
The proposed BIC exemption would require compliance
with certain conditions, including that the financial
a recommendation of a person to provide investment
institution must
advice for a fee or other compensation.
acknowledge fiduciary status in a contract with the
The following activities would not constitute investment
retirement investor.
advice under the proposal:
adhere to impartial conduct standards, which include
recommendations made to a plan fiduciary if the plan
acting in the best interest of the retirement investor and
has 100 or more participants or at least $100 million in
not accepting more than reasonable compensation.
plan assets;
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DOL’s 2015 Proposed Fiduciary Rule on Investment Advice
warrant that it has adopted written policies to mitigate
Perspectives from Stakeholders
the impact of conflicts of interest and must disclose
Support for Best Interest Standard. Professionals in the
whether it offers proprietary products or receives third-
financial services industry have indicated that they support
party payments for the purchase, sale, or holding of any
a best interest standard; that is, they contend that they
asset that it offers.
should be required to operate in the best interests of their
clients. Many have indicated that they already do so.
provide, prior to the execution of a transaction, an
individual disclosure to the retirement investor of the
Restrictions on Firms from Offering Own Products.
acquisition, ongoing, and disposition costs (if any) of
Some firms contend that the proposal could restrict them
the investment.
from offering their own products. Marketing materials
might currently contain information about products that a
provide to retirement investors annual disclosures from
particular financial institution offers. Such communications
the financial institution. Each financial institution
could be prohibited under the proposed rule.
relying on the exemption must maintain a web page that
describes the types of compensation payable to the
Unworkable Disclosures. Some industry professionals
adviser and to the financial institution.
have expressed concern about the BIC exemption. They
indicate that the disclosures required from service providers
notify DOL that it intends to rely on the exemption and
make the BIC unworkable. If firms do not use the BIC
it must maintain records of its compliance with the
exemption, they might be unwilling to service smaller
exemption. DOL may request the records.
retirement accounts because the fee structure could then be
cost prohibitive.
Perspectives from the Administration
DOL argues that the definition of investment advice be
Potential Harm on Small Businesses. Under the proposal,
revised because the nature of how Americans prepare for
small businesses might not receive advice. Advisers to
retirement has changed since 1975, following the enactment
small plans would not be able take advantage of the BIC
of ERISA. Specifically, the number of participants in
exemption and would be fiduciaries. They would generally
traditional defined benefit (DB) plans has decreased,
be required to provide their services for a level fee. Because
whereas the number of participants in defined contribution
of the disruption to the business model, some have
(DC) plans, such as 401(k) plans, has increased.
suggested that some advisers may exit the market rather
Participants in DC plans have more decisions (such as
than try to comply with the new regulations.
contribution amounts, investment allocations, rollovers, and
withdrawals) to make than participants in DB plans and
Support from Some Consumer Advocacy Groups. Some
may be in greater need of or be offered assistance and
consumer advocacy groups (such as the Consumer
advice.
Federation of America, AARP, and the AFL-CIO) are
supportive of the DOL proposal.
The Regulatory Impact Analysis (RIA) issued by DOL with
the proposed rule makes the following points:
Investment Education Definition. Unlike investment
advice, investment education is not held to a fiduciary
The structure of the market in which retirement plans
standard. Some have suggested that the proposed rule
operate creates conflicts of interest that are not
would define investment education too narrowly, which
adequately addressed by current regulations.
could limit the information.
Advisers that offer advice to plans regarding which
Coordination Between DOL and SEC. Some Members of
investment options to include in their plans (platform
Congress and some financial services companies have
providers) might have fee arrangements that create
suggested that the Securities and Exchange Commission
conflicts of interest.
(SEC) and DOL better coordinate their efforts to create a
uniform fiduciary standard for registered investment
DOL has found enforcement challenges because it must
advisers and broker-dealers. Because DOL is further along
demonstrate that an individual meets each element of
in the process than the SEC, some have viewed this
the five-part test.
suggestion as a delaying tactic. DOL noted that under
current law, fiduciary standards are different under ERISA
IRA investors might be particularly vulnerable to
and the IRC compared with the standards under the
advisers’ conflicts of interest, even in the existing
Investment Advisors Act. It also noted that in ERISA,
regulatory framework.
Congress provided higher standards of conduct because of
the importance of retirement plans and IRAs to retirement
The RIA also looked at changes to the investment
income security and because of the tax advantages they
advice regulation in Great Britain (which implemented
receive.
new regulations on financial advisers in January 2013).
The RIA concluded that there had been little impact on
John J. Topoleski, Analyst in Income Security
the ability of small investors to receive advice in Great
Britain.
IF10318
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DOL’s 2015 Proposed Fiduciary Rule on Investment Advice
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