On April 6, 2016, the Department of Labor ("DOL") issued final regulations redefining the term "fiduciary" for purposes of the Employee Retirement Income Security Act ("ERISA"). After receiving extensive comments to the proposed regulations that were issued in 2015, the DOL made significant changes to the final fiduciary rule but retained the general approach of treating a broad scope of services and activities that could result in fiduciary status. The final regulations, among other things, extends the term fiduciary to someone providing investment advice to individual retirement accounts ("IRAs") as well as benefit plans covered by ERISA.
New Fiduciary Definition
Consistent with the definition of fiduciary set forth in the DOL's proposed regulations, the final regulations define a "fiduciary" as someone who provides the following types of advice for a fee or other compensation to a plan, plan fiduciary, plan participant or beneficiary, IRA or IRA owner:
(i) a recommendation as to the advisability of acquiring, holding or disposing of an investment or how an investment should be handled after it is rolled over, transferred or distributed from a plan or IRA; or
(ii) a recommendation on investment policies or strategies, selection of investment managers or with respect to rollovers, transfers or distributions from a plan or IRA.
In addition, to constitute fiduciary advice, the recommendation must be made by a person who:
- represents or acknowledges that it is acting as a fiduciary;
- renders the advice pursuant to an agreement, arrangement or understanding that the advice is based on the particular investment needs of the recipient; or
- directs the advice to a specific recipient regarding the advisability of a particular investment decision.
Modifications from Proposed Regulations
The final regulations made significant modifications to the carve-outs for types of investment-related communications that will not be considered to be fiduciary investment advice. These include: (i) clarifying what constitutes 'investment education' instead of investment advice; (ii) excluding appraisals from the definition of investment advice; [1] and (iii) expanding the exclusion for advice to independent fiduciary of plans with assets of at least $50 million who have financial expertise and recognize the conflicted advice being provided.
Best Interest Contract Exemption
Concurrent with issuing the final fiduciary regulations, the DOL has finalized the new prohibited transaction exemption known as the "Best Interest Contract Exemption" ("BICE") that was first proposed with the 2015 proposed regulations. The purpose of the BICE is to provide a fiduciary with relief from the prohibited transaction conflict of interest provisions so that existing compensation arrangements can be maintained. Under the BICE, among other things, a financial institution's contractual arrangement with employee benefit plans and IRAs must acknowledge the financial institution's fiduciary status and that it agrees to provide investment advice in the best interest of the client which will include an agreement to act with the care, skill, prudence and diligence that a prudent person acting in a like capacity would use under the circumstances. A financial institution must also warrant that it has adopted policies and procedures reasonably and prudently designed to insure compliance with the impartial conduct standards and prevent conflicts of interest and disclose how it is paid and material conflicts of interest.
Effective Date
The final fiduciary regulations will become effective one year after publication of the final regulations in the Federal Register (i.e., April 10, 2017). While transitional exemptive relief under the BICE becomes available on April 10, 2017, full compliance with the disclosure, policies and procedures and contract requirements of the BICE does not go into effect until January 1, 2018.
What to Do
Financial institutions providing services to employee benefit plans or IRAs must carefully review the final rules to determine if any of their services or activities will be considered to confer fiduciary status on the institution; even if such services or activities did not previously do so. Financial institutions should also review their contractual arrangements with clients as well as their policies and procedures to determine what changes are needed to comply with the new rules, including the need to comply with the conditions of the BICE.
[1] The DOL has reserved the treatment of appraisals for future rulemaking.
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