The Department of Labor ("DOL") recently issued
its long-anticipated rule amending the regulatory definition of fiduciary
investment advice. The Rule replaces the previous five-part test used to
determine whether an individual is rendering investment advice for a fee with a
new definition of "fiduciary" that, according to the DOL, better
comports with the statutory language in the Employee Retirement Income Security
Act of 1974 ("ERISA") and the IRS Code. The DOL promulgated the Rule due to its
perception that the market for retirement advice has changed dramatically since
ERISA was enacted. According to the DOL, individual advisers, rather than large
employers and professional managers, have become increasingly responsible for
managing retirement assets as IRAs; and participant-directed plans, such as
401(k) plans, have supplanted defined benefit pensions.
At the heart of the change is the DOL's belief that
financial products have become too complex for individuals managing retirement
assets, and that retirement advice is potentially conflicted due to various
compensation structures. The DOL believed advisors have been recommending
investments based on their own self-interest (e.g., products that generate
higher fees for the adviser even if there are identical lower-fee products
available), giving imprudent advice and engaging in transactions that otherwise
would be prohibited by ERISA and the IRS Code.
The DOL attributes the advisers' conduct, in part, to the outdated
definition of fiduciary.
In contrast to the multipart test set forth in the 1975
regulation, the Rule now explicitly describes the kinds of communications and
the types of relationships that constitute investment advice that give rise to
fiduciary responsibilities. The DOL's stated goals are to guarantee that
investment advice be in the consumers' best interest, and eliminate excessive
fees and substandard performance.
This white paper outlines the new definition of fiduciary;
explains what types of communications are considered recommendations covered by
the Rule; addresses the effect of the fiduciary duty standard; and summarizes
the various exemptions promulgated by the DOL, including the Best Interest
Contract Exemption ("BICE").
The paper is meant to assist broker-dealers, registered investment
advisers and their insurers better understand the Rule and its implementation. Continue
reading
By: Winget Spadafora & Schwartzberg, LLP
All information provided in this blog is for informational
purposes only. The sources used are presumed accurate. CalSurance Associates,
Brown & Brown Program Insurance Services, Inc. and Brown & Brown, Inc.
will not be liable for any errors, omissions, losses, injuries or damages
arising from its display or use and will not assume responsibility for any
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