The Wagner Law Group | Est. 1996

Sophisticated Legal Solutions And Boutique-Style Service

DOL Proposes New Fiduciary Rule for Retirement Advisors

On Behalf of | Apr 15, 2015 |

The U.S. Department of Labor (“DOL”) published its long awaited proposed rule addressing conflicts of interest in retirement advice. The new proposal broadens the scope of retirement advisors subject to the DOL fiduciary standard. The proposed rule also includes exemptions that are designed to give brokers and insurance agents (and their firms) the ability to continue to earn transaction-based compensation when advising retirement clients, subject, however, to certain new restrictions.

Broad Coverage of Retirement Advisors. Under the DOL proposal, any individual receiving compensation for providing advice that is specifically directed to a particular plan sponsor, plan participant or IRA owner will be deemed a “fiduciary.” Fiduciary status would be triggered by actions such as recommending which assets to purchase or sell and whether to roll over assets from an employer-sponsored retirement plan to an IRA. The DOL proposal to broaden its “fiduciary” definition potentially applies to brokers, registered investment advisers (“RIAs”), insurance agents, administrative service providers and salespeople. The following individuals, however, would be excluded from fiduciary status:

  1. brokers acting strictly as order-takers for customers instructing the broker exactly what to buy or sell without asking for advice;
  2. financial institutions (intending to act as counterparties) making a “sales pitch” to fiduciaries of large plans with financial expertise;
  3. providers of non-fiduciary “investment education” only to IRA clients who do not identify specific investment products; and
  4. providers of valuations for ESOP stock.

“Best Interest” Fiduciary Standard. As proposed, the rule imposes a duty on all fiduciaries to provide impartial advice in their client’s best interest. Furthermore, a fiduciary cannot accept any payment creating a conflict of interest, unless the fiduciary qualifies for an exemption intended to assure that the customer is adequately protected, such as the newly proposed “Best Interest Contract Exemption.”

Best Interest Contract Exemption. The DOL proposal establishes a new Best Interest Contract Exemption that would give fiduciary advisors the ability to set their own compensation or earn “variable compensation” including commissions.

Written Contract. To qualify for this exemption, the fiduciary advisor would need to enter into a written contract with the client that provides for the following:

  1. the firm commits to following the “best interest” fiduciary standard;
  2. the firm represents and warrants that it has adopted compliance policies designed to mitigate conflicts (and there is no differential compensation or any other incentive that would tend to encourage individual advisors to make improper recommendations);
  3. any conflicts have been identified and disclosed (and provide a web address for a web page containing additional compensation disclosures); and
  4. a private right of action against the firm for contractual breaches (arbitration clauses are permitted so long as the client has the right to bring class action lawsuits).

The failure to adopt appropriate compliance policies would not necessarily result in a violation of this exemption, but may give rise to a private right of action by the customer for the contractual breach.

Customer Disclosures. In addition to the written contract requirement, the Best Interest Contract Exemption would also require various disclosures to be provided to the customer including:

  1. a point-of-sale disclosure to the customer that includes the all-in and ongoing costs of the recommended investment;
  2. annual compensation disclosures that also list the investments purchased or sold during the year;
  3. a web page with disclosures of all direct and indirect compensation; and
  4. notice and other related disclosures if the advisor is unable to recommend a sufficiently broad range of investments due to platform-related or other limitations.

DOL Notice. The advisor would also need to notify the DOL of its intent to utilize the Best Interest Contract Exemption. It is contemplated that such notice would be sent electronically or by mail.

Principal Transactions Exemption. The DOL proposal also includes a new “Principal Transactions Exemption” that would give a financial institution the ability to recommend certain fixed income securities and sell them from the institution’s own inventory.

Potential Low-Fee Exemption. In connection with its proposal, the DOL is asking for comments on whether it should establish a “Low-Fee Exemption” with fewer requirements than the Best Interest Contract Exemption, permitting advisors to earn variable compensation when recommending the lowest-fee product in a given product class.

Anticipated Impact on Retirement Industry. The DOL proposal would effectively create a uniform fiduciary standard for all retirement advisors, including brokers and insurance agents. It would impose on substantially all retirement advisors the same type of disclosure and compliance policy requirements that are already imposed on RIAs under securities law.

Impact on Brokers and Insurance Agents. Under the existing 408(b)(2) fee disclosure rules, there is no obligation requiring advisors to disclose their conflicts of interest. Thus, the DOL proposal would require conflicts-related disclosures from many advisors who are not currently subject to this requirement, and it would also put pressure on broker-dealers and insurance firms to more closely monitor and limit the levels of variable compensation earned by their registered representatives and agents. If adopted, the DOL proposal may significantly increase compliance costs for these firms and their retirement businesses.

Controversy of Compliance Policy Requirement. The Best Interest Contract Exemption is designed to be “principles-based” (i.e., based on general principles rather than “rules-based” with detailed requirements), giving firms the flexibility to adopt their own customized compliance policies and adapt them over time. However, short of levelizing the firm’s payout to its individual advisors, it may be difficult for firms to determine if they have adequately mitigated the conflicts arising from the payment of differential compensation to their individual advisors (which varies with the particular investment product sold to retirement clients). We can expect heavy comments to be submitted to the DOL with regard to this aspect of the exemption.

Impact on Advisor’s Service Models. If the DOL proposal is adopted, some individual advisors may decide to become RIAs (or investment adviser representative of RIAs), on the grounds that they would be subject to the same fiduciary standard anyway. Those who switch to a RIA service model would, of course, have to forfeit their right to receive any commissions. In light of the newly proposed requirements, other commission-based advisors may elect to give up on advising retirement plan clients and going after rollover assets altogether.

Next Steps in DOL Rulemaking Process. The public may now submit comments on the DOL proposal during the current 75-day notice and comment period. After the close of this period, a public hearing will be scheduled and the public record will be reopened for comments. The DOL intends to finalize its rulemaking at the conclusion of this process.

Web Link.

The DOL’s fiduciary proposal is available online at: