March 21, 2017

March 21, 2017

Subscribe to Latest Legal News and Analysis

March 20, 2017

Subscribe to Latest Legal News and Analysis

New Rule, Old Rule - What Should Advisers Do Now?: Interesting Angles on the DOL’s Fiduciary Rule #40

This is my 40th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

Now that it seems clear that the applicability date of the new fiduciary regulation will be delayed, many advisers (including broker-dealers and RIA firms) may heave a sigh of relief. However, while some relief is justified, that does not mean that their services are not governed, in many cases, by the “old” fiduciary regulation. (By “old” rule, I refer to the DOL regulation that defines fiduciary advice and that has been in effect for decades.) With all the attention that has been devoted to fiduciary status and prohibited transactions, it is possible, perhaps even probable, that the old rule will be applied more vigorously. As a result, advisers need to understand its provisions and need to review their practices to determine whether they are currently acting as fiduciaries under the old rule. To properly discuss that issue, advisory services need to be divided into four categories: advice to plans; advice to participants; advice to IRAs; and recommendations of plan distributions and rollovers. This article will discuss the first of those categories . . . advice to retirement plans.

Briefly stated, the old—and current–fiduciary rule has a five-part test:

  • A recommendation of an investment, insurance product, investment manager, and/or investment strategy or policy.

  • The advice must be given on a regular basis, that is, on an ongoing basis.

  • There must be a mutual understanding between the adviser and the plan fiduciaries.

  • The understanding is that the advice will be a primary basis for decision-making.

  • The advice is individualized and based on the particular needs of the plan.

With regard to qualified retirement plans (for example, 401(k) plans), those conditions will likely be satisfied in many cases. For example, it is common, perhaps even typical, for an adviser to meet with plan fiduciaries quarterly or annually. As a result, the advice is given on a regular basis. Similarly, when an adviser provides a list of investments, it is difficult to say that they are not individualized to the plan, because of the suitability requirements that apply to broker-dealers, RIAs, and insurance agents. In any event, there is a significant risk that an adviser who provides a list of investments to plan fiduciaries will be considered to have made fiduciary recommendations.

As a result, and with likely heightened scrutiny of advisers’ recommendations and fiduciary status, broker-dealers and insurance agents should consider whether they are willing to run the risk of being a fiduciary. (As this suggests, RIA’s probably are fiduciaries for ERISA plans.) And, if they are willing to be fiduciaries, there should be a formal program in place for that purpose. For example, a broker-dealer might establish a fiduciary advisory program under its corporate RIA and allow its most experienced retirement plan advisers to participate in that program. For those advisers who won’t be allowed to be fiduciaries under the RIA program, those broker-dealers should consider requiring that the advisers only recommend 401(k) providers who have platform fiduciaries. For example, a recordkeeping platform might offer a 3(21) non-discretionary fiduciary investment adviser and/or a 3(38) discretionary fiduciary investment manager. In that case, the platform fiduciary would recommend or select the investments, while the adviser would provide other services to the plan, for example, assistance with plan design, coordination with the recordkeeper, participant education meetings, and so on.

My point is that, now that we are more aware of the fiduciary definitions and the impact of fiduciary status, advisers need to be more attentive to their services and to whether those services result in fiduciary status. Correspondingly, their supervisory entities (for example, broker-dealers) need to make decisions about how those services will be offered, including whether some of the registered representatives can be 401(k) fiduciaries under the corporate RIA.

The views expressed in this article are the views of Fred Reish.


Part 1- Interesting Angles on DOL’s Fiduciary Rule #1

Part 3 - Hidden Preamble Observations: Interesting Angles on the DOL’s Fiduciary Rule #3

Part 4 - TV Stock Tips and Fiduciary Advice: Interesting Angles #4

Part 5 - Level Fee Fiduciary Exemption: Interesting Angles on DOL’s Fiduciary Rule #5

Part 6 - Fiduciary Regulation And The Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #6

Part 7 - Fiduciary Regulations And The Exemptions : Interesting Angles on the DOL’s Fiduciary Rule #7

Part 8 - Designated Investment Alternatives: Interesting Angles on the DOL’s Fiduciary Rule #8

Part 9 - Best Interest Standard and the Prudent Man Rule: Interesting Angles on the DOL’s Fiduciary Rule #9

Part 10 - FINRA Regulatory Notice: Interesting Angles on the DOL’s Fiduciary Rule #10

Part 11-ERISA and the Internal Revenue Code: Interesting Angles on the DOL’s Fiduciary Rule #11

Part 12- Potential Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #12

Part 13-Investment Policies: Interesting Angles on the DOL’s Fiduciary Rule #13

Part 14- Investment Suggestions: Interesting Angles on the DOL’s Fiduciary Rule #14

Part 15- Best Interest Contract Exemption: Interesting Angles on the DOL’s Fiduciary Rule #15

Part 16 - Adviser Recommendations: Interesting Angles on DOL’s Fiduciary Rule #16

Part 17 - Level Fee Fiduciary: Interesting Angles on DOL’s Fiduciary Rule #17

Part 18- Best Interest Contract Exemption and IRA Advisor Compensation: Interesting Angles on the DOL’s Fiduciary Rule #18

Part 19- Interesting Angles on the DOL’s Fiduciary Rule #19: Advisors' Use of "Hire Me" Practices.

Part 20- Three Parts of "Best Interest Standard of Care": Interesting Angles on the DOL’s Fiduciary Rule #20

Part 21- Retirement Plan Documentation and Prudent Recommendation: Interesting Angles on the DOL’s Fiduciary Rule #21

Part 22-Banks and Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #22

Part 23-Prohibited Transactions: IRA and RIA Qualified Money: Interesting Angles on the DOL’s Fiduciary Rule #23

Part 24 - Differential Compensation Based on Neutral Factors

Part 25-Reasonable Compensation Versus Neutral Factors: Interesting Angles on the DOL’s Fiduciary Rule #25

Part 26- Interesting Angles on the DOL’s Fiduciary Rule #26- Reasonable Compensation for IRAs: When and How Long?

Part 27 - Definition of Compensation

Part 28 - What About Rollovers that Aren’t Recommended?: Interesting Angles on the DOL’s Fiduciary Rule #28

Part 29- Interesting Angles on the DOL’s Fiduciary Rule #29- Capturing Rollovers: What Information is Needed?

Part 30- Three Kinds of Level Fee Fiduciaries . . . and What’s A “Level Fee?”: Interesting Angles on the DOL’s Fiduciary Rule #30

Part 31 - Interesting Angles on the DOL’s Fiduciary Rule #31: “Un-levelizing” Level Fee Fiduciaries

Part 32 - What “Level Fee Fiduciary” Means for Rollover Advice: Interesting Angles on the DOL’s Fiduciary Rule #32

Part 33- Discretionary Management, Rollovers and BICE: Interesting Angles on the DOL’s Fiduciary Rule #33

Part 34- Seminar Can Be Fiduciary Act: Interesting Angles on DOL’s Fiduciary Rule #34

Part 35- Presidential Memorandum on Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #35

Part 36 -Retirement Advice and the SEC: Interesting Angles on the DOL’s Fiduciary Rule #36

Part 37 - SEC Retirement-Targeted Examinations: Interesting Angles on the DOL’s Fiduciary Rule #37

Part 38- SEC Examinations of RIAs and Broker-Dealers under the ReTIRE Initiative: Interesting Angles on the DOL’s Fiduciary Rule #38

Part 39- FINRA Regulatory Notice 13-45: Guidance on Distributions and Rollovers: Interesting Angles on the DOL’s Fiduciary Rule #39

©2017 Drinker Biddle & Reath LLP. All Rights Reserved

TRENDING LEGAL ANALYSIS


About this Author

Fred Reish, Partner, Drinker Biddle,  Employee Benefits & Executive Compensation
Partner

C. Frederick Reish is a partner in the firm's Employee Benefits & Executive Compensation Practice Group, Chair of the Financial Services ERISA Team and Chair of the Retirement Income Team.  His practice focuses on fiduciary issues, prohibited transactions, tax-qualification and DOL, SEC and FINRA examinations of retirement plans and IRA issues.

Fred's experience includes advising insurance companies and investment managers of the development of products and services that are consistent with ERISA's...

(310) 203-4047