Kaplan University School of Professional and Continuing Education Kaplan University School of Professional and Continuing Education

Point of View: The DOL's Proposed Fiduciary Rule

Point of View: The DOL's Proposed Fiduciary Rule

Posted By: Chuck Lowenstein
Updated: July 28, 2017 

This article no longer has the latest information on the previously proposed DOL Fiduciary Rule. For the latest news and information on the rule, read our article DOL Fiduciary Rule DOA, SEC Steps Up.

DISCLAIMER: Chuck Lowenstein is a Senior Editor at Kaplan Financial Education. The opinions expressed in this article are solely those of the author based upon personal research and observations. They should not be viewed as legal advice.

Many of our clients at Kaplan have inquired about the potential impact on their licensing and registration procedures if and when the U.S. Department of Labor (DOL) fiduciary rule proposal goes into effect. Specifically, the question posed most often revolves around the need to acquire the Investment Adviser Representative registration through the passage of the Series 65 (or Series 66) exam.

Let’s start at the beginning. The Employee Retirement Income Security Act of 1974 (ERISA) is the statute that governs the non-tax aspects of the implementation and operation of an employee pension benefit plan as defined in ERISA section 3(2). The Employee Benefits Security Administration (EBSA) division of the U.S. Department of Labor (DOL) is tasked with the administration of ERISA. As early as 1975, the EBSA had issued regulatory guidance interpreting the statutory definition of investment advice fiduciary found in ERISA section 3(21)(A)(ii), and the guidance remains in effect today.

Remember that today's predominant type of employer-sponsored retirement plan, the ubiquitous 401(k) plan, did not exist when the EBSA issued its regulatory definition of investment advice fiduciary, and participants did not direct their own investments. It has been over 40 years since the regulations defining the role and scope of what it means to be an investment advice fiduciary were first issued. During that 40-year period, we have seen enormous changes in technology and in the types of employer-sponsored retirement plans offered by employers to their employees. We have transitioned from a retirement system that was focused on a predictable stream of retirement income that was funded either primarily or exclusively by employer contributions (i.e., the defined benefit retirement plan) to a defined contribution retirement system in which the employees are primarily responsible for funding their own retirement benefit and for investing their own account balances; this is further characterized by payment typically in the form of a lump sum distribution, as opposed to a guaranteed lifetime stream of income.

It is against this backdrop that the EBSA began the process of updating the regulatory definition of investment advice fiduciary by issuing proposed regulations in 2010 that substantially changed the regulatory definition of investment advice fiduciary that had been in effect since 1975. This was done in order to make the regulations more closely reflect the current types of retirement plans and investment practices. On April 14, 2015, the EBSA reissued proposed regulations, and those regulations are the subject of our discussion.

As stated in the Fact Sheet issued by the EBSA on April 14, 2015, the proposed regulations require retirement advisers to abide by a fiduciary standard…"putting their clients' best interest before their own profits." Under the new proposed regulations, a person is an investment advice fiduciary if such person:

  1. provides advice for a fee or other compensation (direct or indirect) regarding: (i) investments, including distributions and rollovers; (ii) the management of retirement plan or IRA assets, including a rollover or distribution; (iii) the valuation of assets in connection with a transaction involving plan assets; or (iv) a recommendation of a person who is going to receive a fee for services described in (i), (ii), or (iii); and
  2. either: (i) represents or acknowledges fiduciary status; or (ii) renders advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is individualized to, or specifically directed to, the advice recipient for consideration in making investment or management decisions.

Please note: Nowhere in the proposal is the term investment adviser or investment adviser representative used. Those terms are found in both state and federal securities law. The term used is investment advice fiduciary.

According to the EBSA, under the new proposed regulation defining an investment advice fiduciary, any individual receiving compensation for providing advice that is individualized or specifically directed to a plan participant, beneficiary, or IRA owner for consideration in making a retirement investment decision is a fiduciary. Such decisions can include, but are not limited to, what assets to purchase or sell and whether to roll over from an employer-based plan to an IRA. The fiduciary can be a registered representative, registered investment adviser (or IAR), insurance agent, or other type of adviser. Some of these advisers are subject to federal securities laws and some are not, but that status makes no difference for purposes of being considered a fiduciary under the new proposed regulations.

This seems to be clear that anyone, including an insurance agent, a registered rep, or a bank representative, discussing the reasons for considering rolling over a 401(k) plan into an IRA would likely fall under the definition, even if securities are not involved.

The EBSA indicates that being a fiduciary simply means the adviser must provide impartial advice in the client's best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer is adequately protected. In the view of the EBSA, conflicts of interest would arise when a fiduciary investment adviser to an ERISA-covered retirement plan or IRA receives compensation that varies based on the adviser's investment recommendations or when such adviser receives compensation from third parties in connection with the investment advice.

So what are some of the exceptions to the definitions? For starters, there is the “education” exemption for those whose only role is providing general education about retirement plans (nothing specific to the participant). Another exception is if the client (i.e., either the plan fiduciary, participant, beneficiary, or individual IRA investor) calls the broker and directs the broker which assets to purchase. There is no fiduciary advice being rendered, and such a transaction would not be subject to the new rules.

Probably the most complicated (and will likely be the most used) is the "best interest contract exemption" (BICE). This is a is a prohibited transaction exemption (PTE) that allows fiduciary advisers and the firms for whom they work to continue to set their own compensation practices as long as they, among other things, commit to putting their clients' best interest first and disclose any conflicts of interest that may prevent them from doing so. To qualify for the BICE PTE, both the adviser and his or her firm (e.g., broker-dealer) would need to enter into a contract with the adviser's client(s) that:

  • Commits both the firm and the individual adviser to providing advice that is in the client's best interest.
  • Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest.
  • Clearly and prominently discloses any conflicts of interest.
  • Expands the ability of a plan participant or plan fiduciary to bring a private right of action under ERISA if the adviser is a fiduciary and fails to provide advice in the client's best interest.  One of the effects of this clause is that it would override the arbitration clauses found in most broker-dealer/client agreements.

There are some specific requirements that must be followed in order for this exemption to be valid, including many more disclosures of expenses than are currently made. Perhaps one of the most difficult to monitor is the fact that those relying on this exemption must enter into the contract prior to any relevant advice being given.

There are many, many more technical details that I’m leaving out, but let me summarize my thoughts on the relationship to this proposed rule and Kaplan.

1. Too many publications use the term investment adviser when that term is not being used in the proposal. Investment advice fiduciary (the term used in the statutes), investment fiduciary, and retirement adviser seem to be interchangeable to EBSA. I believe that is part of the reason for the confusion.

2. As explanation, the following appears in the proposal:

“By using the term adviser, the department does not intend to limit its use to investment advisers registered under the Investment Advisers Act of 1940 or under state law. For example, as used herein, an adviser can be an individual or entity who can be, among other things, a representative of a registered investment adviser, a bank or similar financial institution, an insurance company, or a broker-dealer.” 

That statement would seem to indicate that the DOL does not consider a Series 65 to be a requirement.

3. If the DOL proposal is adopted, some who come under the definition may decide to become RIAs (or investment adviser representatives of RIAs) on the grounds that they would be subject to the same fiduciary standard anyway. In other words, “if you’re going to get the name, you might as well play the game.”

4. Of course, we are available to provide Series 65 (or Series 66) training if desired, but the ultimate licensing decision should begin with the client’s legal counsel.