After nearly five years of waiting, the Department of Labor has finally released its re-proposal to amend the regulation governing ERISA’s fiduciary definition. It is not an exaggeration to say this is the most closely watched retirement regulation for the benefit adviser community in decades. It is also the only ERISA regulation that I can think of important enough to merit a full speech by the president, which happened when President Obama announced on Feb. 23 at AARP his strong support for this rule. This speech began a long public roll out by the DOL, culminating in yesterday’s release.

The documents DOL released in connection with the re-proposal are available here

Like many of us in the ERISA community, I spent the evening parsing through the re-proposal and associated class exemptions (hundreds of pages) to get a sense of what DOL is seeking to accomplish. I’m not done — and there are many documents supporting DOL’s economic analysis still to be digested. There are a number of interesting questions that the adviser community will consider as it thinks about the new re-proposal and puts together comments.

So what follows are nine initial reactions on the contours of the re-proposal.

1)      Like the 2010 proposal, which was withdrawn by DOL in 2011 after intense scrutiny, this proposal would amend DOL’s 1975 regulation governing what constitutes providing “investment advice for a fee, direct or indirect.” When a person provides investment advice for a fee, that person is a fiduciary, subject not only to ERISA’s high standard of prudence, care, and loyalty, but also to the prohibited transaction rules in ERISA and the Internal Revenue Code. Publicly, the Obama Administration has rebranded the proposal the “conflict of interest” rule, but, as before, its key feature is amending the regulation governing fiduciary status.

2)      There are many nuanced ways in which the new proposal’s basic rule differs from the 2010 proposal. But the structure is similar in that the rule sets forth a general test for an investment advice fiduciary and a series of exceptions.

3)      Under the general test, a person is treated as rendering investment advice if, for a direct or indirect fee, the person (a) provides a recommendation with respect to a security, the value of a security, the management of securities, or recommends another investment adviser and (b) either represents fiduciary status or renders the advice pursuant to an agreement (which need not be in writing) that the advice will be individualized to the recipient or specifically directed to the advice recipient for consideration in making decisions. That is a pretty broad test.

4)      The proposal contains a series of exceptions — called “carve-outs” — that are not treated as advice. Like the prior proposal, there is a carve-out for investment education, which plan advisers to plans should note has been expanded to cover investment education to fiduciaries. On the other hand, the education exception has been cut back because it no longer covers asset allocation education when a specific security is listed as associated with the asset allocation.

5)      In addition, there are carve-outs for (a) counterparty transactions with sophisticated fiduciaries, (b) employees of the plan sponsor, (c) investment platform providers, (d) objective criteria and data assistance, and (e) ESOP appraisals and other limited valuations. Interestingly, one of the main goals of the 2010 proposal was to reach ESOP valuations, and DOL has dropped that from this new proposal. (DOL has said it may pursue a separate rulemaking on this issue.)

6)      As was widely anticipated, a recommendation to take a distribution from a plan and/or roll that distribution into an IRA is covered by the proposal (if it otherwise meets the test for investment advice). Note that the re-proposal no longer contains a “seller’s exception,” which would have been relevant for IRA rollovers. Instead the “seller’s exception” is limited to sales to sophisticated fiduciaries.

7)      As expected, DOL released a series of new proposed prohibited transaction exemptions and amendments to existing exemptions, most importantly a new “Best Interest Contract Exemption.” In many ways, this “Best Interest Contract Exemption,” or “BICE,” is as important as the rule itself with respect to advice to individuals. The BICE is intended to provide relief from the prohibited transaction rules of ERISA and the Code for investment advice fiduciaries whose advice may affect the fiduciary’s compensation (or the compensation of the adviser’s firm or related party). The BICE comes with detailed conditions, including a requirement to act with ERISA’s high standard of care (even if the advice is provided to an IRA customer) and furnish detailed disclosure to the advice recipient. Readers that primarily serve as advisers to plans should note that the BICE is not available to advice given to plan sponsors, except plan sponsors of non-participant-directed plans with less than 100 participants. The BICE is available for advice directly to participants and IRA owners.

8)      Let me reiterate that the new exemption is not available for one of the key activities of retirement benefit plan advisers — helping plan sponsors put together a 401(k) plan menu. Thus, an adviser cannot rely on this new exemption to receive “differential” compensation, if the adviser will be an investment advice fiduciary under the new rule. 

9)      DOL is proposing to make the new rules effective eight months after final rules are published. Given the scope of the proposal, I expect many commenters will say that this is not enough time to restructure their business.

This is clearly the beginning of a long conversation about what it means to be an investment advice fiduciary. My own personal hope is that any final rules result in more access to quality advice, not less.

Comments are due within 75 days after publication of the proposal in the Federal Register, which is expected in the next few days. There will also be a public hearing scheduled within 30 days of the end of the comment period.

Michael Hadley is a partner in the law firm Davis & Harman LLP, located in Washington, D.C. He practices in the area of employee benefits, advising clients on the full range of tax, ERISA, and other laws affecting benefit plans. He has a particular focus on helping financial institutions that sell products and services to defined contribution and defined benefit plans, IRAs and similar plans navigate the special rules that govern those plans.

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