Insights from the experts in investment fiduciary responsibility.

Your Primer on the DOL's Fiduciary Rule Proposal

Posted by Bennett Aikin on April 15, 2015

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The Department of Labor’s anticipated rule on conflicts of interest (aka, the Fiduciary Rule), is now available. For your convenience, we’ve prepared an executive summary covering the basics of the rule. We’ll have much more information about the rule in the coming days and throughout the comment period. But, for now, here’s your quick guide to the just released rule proposal. 

What is it?

Yesterday’s release is a new rule proposal under ERISA from the Department of Labor. It seeks to expand what constitutes retirement advice and therefore subject to a fiduciary standard of care and under the purview of Department of Labor enforcement. There are still a number of procedural steps that must be completed before it can become an official rule.

What’s notable about the new rule?

A few things really stand out about this version of the rule, which is markedly different than the abandoned attempt at a new rule in 2010.

  • It’s a best interests, principles-based standard – The proposal calls for those offering advice on retirement investment decisions to act in the best interests of their clients, without defining exactly what that means. In concept, this simplifies compliance by being less prescriptive about specific business practices, and instead puts the onus on the adviser to be able to demonstrate the prudence of their investment recommendations. In practice, this likely would shift a considerable portion of the enforcement burden to the court system when breach of fiduciary duty lawsuits begin to percolate up under this rule.  
  • It includes IRAs – The new rule covers any advice “for consideration in making a retirement investment decision.” This includes advice on IRAs or to rollover into an IRA. That’s the most significant change in terms of expanding the breadth of covered advice. A major segment of the investment advice industry would suddenly find itself being subject to new fiduciary regulations pertaining to IRAs.
  • It doesn’t require fee leveling – Compensation has been at the forefront of this debate and a major part of the White House and DOL’s recent PR push behind this rule. While supporters of the proposed rule might have been happier with a ban on certain compensation practices or a requirement for fee-leveling, the new rule allows firms to choose their preferred compensation model (with certain restrictions), as long as they can demonstrate it is in the best interests of their client. Again, this shows a preference by the DOL for a principles-based solution.
  • It segments sales and education from advice – Opponents of the rule have been most concerned with preserving entrenched business practices and keeping low-cost options available to middle-market clients. This proposal explicitly carves out certain sales practices, such as selling to large and/or sophisticated clients and fulfilling sales orders when no advice is given. In addition, general participant education is defined and exempted from fiduciary status.

What happens now?

With the release of the rule, we are now in a 75 day public comment period. Any person or organization can submit their comments to the DOL on how the rule helps investors or misses the mark. Then there will be a public hearing on the rule, an additional public comment period, and potential revisions to the rule based on the comments and hearing. At that point, the rule would theoretically be ready to be implemented.

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