On April 6, 2016, the U.S. Department of Labor (DOL) released the final version of the investment advice fiduciary regulations that were proposed last April. The rule is aimed at addressing conflicts of interest in retirement advice by redefining fiduciary investment advice and expanding its application to include investment advice provided to plan sponsors and participants of retirement plans, including 401(k) plans, and individual retirement accounts (IRAs). Labor Secretary Thomas Perez indicated that the DOL had received more than 300,000 comments since the proposed version of the rule was release last April and, ultimately, the final rule provides significant concessions to the financial industry.
Under the expanded final rule, it is a fiduciary function to render the following types of investment advice for a fee or other compensation: (1) a recommendation as to the advisability of buying, selling or holding investments; (2) a recommendation as to the advisability of taking a distribution and the investment of the distributed assets; (3) a recommendation as to the management of investments; and (4) a recommendation on the selection of other persons to provide investment advice or investment management services. Thus, the rule may significantly affect rollovers from 401(k) and other defined contribution plans to IRAs, as the recommendation of a distribution or a rollover to an IRA will now be considered a fiduciary act.
Because the provision of investment advice is a fiduciary function under the final rule, absent a specific exception, receipt by a fiduciary adviser of commissions, revenue sharing or other payments is a prohibited transaction section 406(b) of ERISA. Under the new regulatory scheme, fiduciary advisers will be allowed to receive such "conflicted compensation" only if their compensation arrangement meets the specific requirements of one of the series of prohibited transaction exemptions issued in conjunction with the regulations.
The new set of prohibited transaction exemptions and amendments to existing exemptions are designed to permit receipt of compensation for the covered investment advice, albeit under more narrowly prescribed requirements. Advisers providing such covered investment advice to retirement plan participants and beneficiaries, IRA owners and non-institutional fiduciaries are expected to utilize the "best interest contract" exemption, which has been significantly modified from the original proposal. In essence, the exemption requires giving advice that is in their clients' "best interests" and requires disclosure of any potential conflicts of interest, and limits the fiduciary's remuneration to no more than "reasonable compensation." The adviser must also enter into contracts with clients that acknowledge the adviser's fiduciary status.
Primarily as a result of the extensive comments, activities such as marketing, investment education, appraisals, ESOP valuations and fairness opinions, and advice to health and welfare plans have generally been carved out from the definition of covered investment advice and, thus, are not considered fiduciary functions under the new rule.
Another major concession by the DOL to the retirement community is that the effective date for the final rule has been delayed. The proposed rule called for an eight-month compliance period. The new rule, however, calls for compliance of certain provisions by April 2017, and total compliance by January 1, 2018. Accordingly, we expect to see continued comments and potentially some clarifications or modifications on the final rule in the coming months.
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