DOL’s 2016 Fiduciary Rule on Investment Advice

DOL’s 2016 Fiduciary Rule on Investment Advice

July 5, 2017
DOL’s 2016 Fiduciary Rule on Investment Advice
Under the Employee Retirement Income Security Act of
In addition, the person who makes a recommendation as
1974 (ERISA; P.L. 93-406), a person who provides
listed above must (1) represent or acknowledge that the
investment advice has a fiduciary obligation to provide the
person is acting as a fiduciary, (2) provide a written or
advice in the sole interest of plan participants. Thus,
verbal understanding that the advice is based on the
redefining the term investment advice could affect who is
particular needs of the advice recipient; or (3) direct the
subject to this fiduciary standard. More detailed information
advice to a specific recipient.
about the rule is available in CRS Report R44884,
Department of Labor’s 2016 Fiduciary Rule: Background
The 2016 rule specifies that certain activities do not
and Issues.
constitute investment advice. These activities include
marketing by platform providers who market without
On April 8, 2016, DOL issued a final rule that redefined the
regard to the needs of individual plans or participants;
term investment advice within pension and retirement plans.
making available general communications, such as general
On April 7, 2017, DOL delayed the applicability date by 60
circulation newsletters; providing investment advice;
days to June 9, 2017, of (1) the expanded definition of
providing advice to independent fiduciaries with financial
investment advice and (2) the Impartial Conduct Standard
expertise (as defined in the regulations); and executing
of the Best Interest Contract (BIC) exemption. While these
securities transactions. In addition, individuals who are
two aspects of the rule are currently in effect, other aspects
employees of a plan sponsor or employee organization and
of the exemptions become applicable on January 1, 2018.
do not receive compensation for the advice beyond their
normal compensation are not considered to be providing
Prior Regulation From 1975
investment advice.
Regulations issued in 1975 defined investment advice using
a five-part test. To be held to ERISA’s fiduciary standard
Prohibited Transaction Exemptions
with respect to his or her advice, an individual must have
In addition to requiring plan fiduciaries to adhere to certain
(1) made recommendations on investing in, purchasing, or
standards of conduct, ERISA prohibits fiduciaries from
selling securities or other property, or give advice as to the
engaging in transactions deemed likely to injure a pension
value (2) on a regular basis (3) pursuant to a mutual
plan. A number of prohibited transaction exemptions
understanding that the advice (4) would serve as a primary
(PTEs) have been issued, both in statute and via DOL-
basis for investment decisions, and (5) would be
issued exemptions, which allow individuals or classes of
individualized to the particular needs of the plan regarding
individuals to engage in specified transactions that would
such matters as, among other things, investment policies or
otherwise be prohibited under ERISA. Accompanying the
strategy, overall portfolio composition, or diversification of
2016 final rule, DOL has issued or modified a number of
plan investments.
PTEs.
2016 Investment Advice Regulation
Best Interest Contract Exemption
DOL’s 2016 rule broadened the term’s definition to capture
DOL issued a best interest contract (BIC) exemption so that
activities that occurred within pension and retirement plans,
certain broker-dealers and others who act as plan fiduciaries
but did not meet the prior definition of investment advice.
are able to continue to receive compensation that is
The rule replaces the five-part test with a more inclusive
otherwise prohibited. For example, absent the exemption,
definition. The following recommendations constitute
broker-dealers acting as fiduciaries would not be able to
investment advice under the rule, if they are done for a fee
receive commissions, load fees, or other fees as a result of
or other compensation:
their advice.
 the advisability of buying, selling, holding, or
The final BIC exemption requires compliance with certain
exchanging investments;
conditions, including the following:
 how investments should be invested after being rolled
 The financial institution must acknowledge fiduciary
over, transferred, or distributed from an IRA;
status with the retirement investor.
 the management of investments; or
 The financial institution must adhere to Impartial
Conduct Standards, which include acting in the best
 IRAs, including whether, in what form, in what amount,
interest of the retirement investor, not accepting more
and to what destination rollovers, distributions from
than reasonable compensation, and not making
IRAs and transfers from IRAs should be made.
misleading statements about investment transactions,
compensation, and conflicts of interest.
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DOL’s 2016 Fiduciary Rule on Investment Advice
 The financial institution must warrant that it has adopted The Regulatory Impact Analysis (RIA) issued by DOL with
written policies to adhere to the Impartial Conduct
the proposed rule made the following points:
Standards, documented Material Conflicts of Interest,
and does not rely on bonuses, quotas, or contests to
 The structure of the market in which retirement plans
compensate advisors.
operate creates conflicts of interest that were not
adequately addressed by current regulations.
To comply with the BIC exemption, the financial institution
must provide a number of disclosures to the retirement
 Advisers that offer advice to plans regarding which
investor, such as describing the Impartial Conduct
investment options to include in their plans (platform
Standards and any Material Conflicts of Interest. In
providers) might have fee arrangements that create
addition, the financial institution’s contract may not contain
conflicts of interest.
clauses that waive the retirement investor’s right to bring or
participate in a class action in court in a dispute with the
 DOL found enforcement challenges because it had to
advisor or financial institution.
demonstrate that an individual met each element of the
five-part test.
Other Prohibited Transactions Exemptions
DOL issued a Principal Transactions Exemption that allows
Stakeholder Viewpoints
for sales and investment advice from individuals and
Support for Best Interest Standard. Professionals in the
financial institutions that engage in principal transactions,
financial services industry generally indicated that they
which are purchases and sales of assets out of an
support a best interest standard; that is, they contend that
individual’s or financial institutions own inventory. This
they should be required to operate in the best interests of
PTE allows for the sale of debt securities, unit investment
their clients. Many have indicated that they already do so.
trusts, and certificates of deposit to a plan or IRA provided
the institutions and advisor adhere to specified conditions,
Unworkable Disclosures. Some industry professionals
such as following Impartial Conduct Standards.
expressed concerns about the BIC exemption. They
indicated that the disclosures required from service
DOL also amended other PTE’s including PTE 84-24. As
providers could make the BIC unworkable. If firms do not
amended, PTE 84-24 allows individuals who sell fixed
use the BIC exemption, they might be unwilling to service
annuities to receive commissions provided they adhere to
smaller retirement accounts because the fee structure could
certain conditions (such as Impartial Conduct Standards).
then be cost prohibitive.
However, individuals who sell other types of annuities,
such as variable annuities and index annuities need to use
Support from Some Consumer Advocacy Groups. Some
the more stringent BIC exemption if their compensation
consumer advocacy groups (such as the Consumer
includes commissions.
Federation of America, AARP, and the AFL-CIO) are
supportive of the DOL rule.
Changes from the Proposed to the Final
Rule
Actions by the Trump Administration
DOL received over 3,000 comments on the 2015 proposed
On February 3, 2017, the President issued a memorandum
rule and made a number of changes that addressed some
on the fiduciary rule that directed DOL to (1) review the
stakeholders’ concerns. For example, DOL expanded the
rule to determine whether it adversely affects access to
definition of investment education that allow specific
retirement information and financial advice, and if it finds
investment alternatives to be identified, streamlined the
that it does so then (2) publish a proposed rule to rescind or
disclosure requirements, and grandfathered compensation
revise the rule. On March 2, 2017, DOL proposed delaying
arrangements made prior to the applicability date.
the applicability date of the rule by 60 days.
Although the changes were welcome by some, some
On April 7, 2017, DOL issued a delay of the applicability
stakeholders remain opposed to the rule.
date of the final rule while it reviews the effects of the rule
pursuant to the presidential memorandum of February 3,
Rationale for the Rule
2017. DOL delayed the applicability date by 60 days from
The Obama Administration argued that the definition of
April 10, 2017, to June 9, 2017, of (1) the expanded
investment advice needed to be revised because the nature
definition of investment advice and (2) the Impartial
of how Americans prepare for retirement has changed since
Conduct Standard of the BIC exemption. Although these
1975, following the enactment of ERISA. Specifically, the
two aspects of the rule are currently in effect, other aspects
number of participants in traditional defined benefit (DB)
of the exemptions, such as requirements to make specific
plans has decreased, whereas the number of participants in
disclosures and warrant policies and procedures and to
defined contribution (DC) plans, such as 401(k) plans, has
execute written contracts, become applicable on January 1,
increased. Participants in DC plans have more decisions
2018.
(such as contribution amounts, investment allocations,
rollovers, and withdrawals) to make than participants in DB
John J. Topoleski, Analyst in Income Security
plans and may be in greater need of or be offered assistance
and advice.
IF10686

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DOL’s 2016 Fiduciary Rule on Investment Advice

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