by Douglas J. Ellis

After numerous fits and starts, and some awkward backtracking, the Department of Labor (DOL) proposed its new revised fiduciary definition rule on April 14, 2015. Labor Secretary Thomas Perez stated that the new rule is intended to force advisers and consultants working with retirement plan sponsors, plan participants or other fiduciaries and IRA owners to put their clients' best interest ahead of their personal interest and curb the "corrosive power of fine print and high fees." The proposed rule has the potential to significantly increase the scope of who would qualify as a "fiduciary" under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code), and consequently would be subject to the duties and obligations, not to mention the liabilities, of a fiduciary (including being subject to lawsuits) under those laws.

ERISA generally defines a "fiduciary" as one who has discretionary authority or control over plan assets or administration, or who renders investment advice with respect to a plan's assets for a fee or who has authority or responsibility to do so. Prior to the proposed rule, the DOL generally had applied fiduciary status to investment advisers or consultants who met a five-part test, requiring (i) the adviser to render advice as to the value of securities or other property or make recommendations as to the advisability of an investment, (ii) on a regular basis, (iii) pursuant to an agreement or arrangement with the plan or a plan fiduciary, (iv) where such advice would serve as a primary basis for investment decisions regarding plan assets, and (v) the advice is individualized based on the particular needs of the plan.

The proposed rule revises the definition of fiduciary investment advice to eliminate the five-part test by focusing broadly on the kinds of communications and relationships that the DOL believes would constitute fiduciary activities, and then providing carve-outs or exemptions for specific activities or relationships where fiduciary concerns are not as relevant in the DOL's view. Under the broad scope of fiduciary communications and relationships, the new rule includes investment recommendations, investment management recommendations, appraisals of investments, or recommendations of investment advisers or consultants providing advice for a fee or to manage plan assets, even if such recommendations form only a part of the basis for any decision regarding investment of the assets of a plan or an IRA.

However, the proposed rule provides the following carve-outs for certain activities:

  • statements or recommendations made to a large plan investor with financial expertise by an unaffiliated adviser in an arm's-length transaction;
  • offers or recommendations to ERISA plan fiduciaries to enter into a swap or security-based swap regulated under the securities laws;
  • statements or recommendations provided to an ERISA plan fiduciary by an employee of the plan sponsor if the employee receives no fees beyond his or her normal compensation;
  • marketing or maintaining a platform of investment alternatives to be selected by an ERISA plan fiduciary for a participant-directed account plan;
  • identification of investment alternatives that meet objective criteria specified by an ERISA plan fiduciary or the provision of objective financial data to such fiduciary;
  • provision of an appraisal fairness opinion or a statement of value (i) regarding employer securities to an employee stock ownership plan, (ii) to a collective investment fund holding plan assets, or (iii) to a plan for reporting and disclosure purposes; and
  • provision of information and materials that constitute "investment education" or "retirement education."

The proposed rule also adopts certain new exemptions that are intended to allow investment advisers to receive traditional compensation related to their advice, such as commissions, revenue sharing and 12b-1 fees, that might otherwise be prohibited as a conflict of interest for a fiduciary. However, these exemptions require advisers to comply with numerous administrative procedures and make significant disclosures about fees and business practices that may make compliance with the exemptions burdensome. For example, the "best interest contract exemption" requires investment advisers to enter into written contracts with plan sponsors, IRA owners or plan participants allowing for certain traditional fees and compensation, in exchange for the adviser adopting policies and procedures designed to mitigate conflicts of interest and providing initial and annual disclosures to their clients and the DOL regarding their fee arrangements.

The prior version of the DOL's fiduciary rule met with such stiff resistance that the DOL was forced to pull the regulation and go back to the drawing board. It seems unlikely that it would admit defeat a second time, no matter how deafening opposition to the new rule may be. However, many aspects of the new rule appear to still be under consideration or open to revision and it is possible the DOL will revise the rule to reflect certain suggestions or criticisms. The rule is open for public comment for a period of 75 days and the DOL will then hold a public hearing on the rule.

If you have any questions on this e-alert or the impact of the rule, or you would like to submit a comment on the rule, please contact Doug Ellis at eat0@eau0eav0eaw0 | (412) 394-2367; Ed Hammond at eat1@eau1eav1eaw1 | (248) 988-1821; Kristi Gauthier at eat2@eau2eav2eaw2 | (480) 684-1300; or Nancy Farnam at eat3@eau3eav3eaw3 | (248) 530-6333.