Waiting with Bated Breath

The DoL sent shock waves through the retirement industry when it released its original proposal for a new definition of what makes a financial professional a fiduciary last October (see “DoL Broadens Fiduciary Net”). After much push-back from the industry, the DoL withdrew its proposal in September (see “EBSA to Re-Propose Definition of Fiduciary Rule”). Some in the industry breathed a sigh of relief, thinking that the DoL’s Employee Benefits Security Administration (EBSA) was going to drop the issue, but Campbell, speaking on a webcast hosted by PLANADVISER and sponsored by ADP and Federated Investors, says the DoL is still very determined to weigh in on the matter of who is a fiduciary.

Campbell explained what the implications are for financial professionals who carry fiduciary status: it determines their business model (both legal standard of conduct as well as what services can be provided); how they can get paid; what kind of professional insurance they need; whether they are liable for the plan fiduciary’s misconduct as a “co-fiduciary”; whether 408(b)(2) disclosures always or sometimes apply and whether business partners/affiliates raise prohibited transaction issues.

Being a fiduciary means always acting in the best interest of your client, Campbell noted. “Regardless of your personal views on this,” he said, “having the standard of care for being a fiduciary comes with baggage of prohibited transactions.” Additionally, he noted, the way EBSA writes the proposal has a significant impact–many industry professionals said the original proposal left too much uncertainty.

Other concerns regarding the original proposal included:

• A significantly expanded scope of ERISA fiduciary status to include common non-fiduciary advice regarding investment option selection provided by broker/dealers and others.
• Exceptions to broad rule for product sellers and “platform” operators provided limited relief as written due to conditions/ambiguity.
• Fiduciary status for many of these advisers would effectively prohibit receipt of variable compensation and execution of principal trades, as well as impose more burdensome liability.
• The proposal would affect not only ERISA plans (DC and DB) but also IRAs.
• Proposal’s request for comment suggests DoL is also considering restrictive standards for cross-selling and IRA roll-over solicitations to plan participants.
• Proposal would make ESOP and other valuations fiduciary advice.

One of the main aspects to the original proposal was a “new category of advice,” said Campbell, referred to as “management recommendations.” However, this was not clearly defined; the proposal only said management recommendation “includes, for example,” advice regarding proxy voting and asset manager selection.

Campbell explained that the new definition of fiduciary will be more based around “who you are” rather than if you pass the five-part test established along with ERISA in 1975. He pointed to a “catch-all” phrase that says:“Anyone else giving individualized advice, for a fee (direct or indirect), pursuant to an understanding that the advice “will be considered” in plan decision-making.” To Campbell, this seems to be “extremely broad” and any adviser talking to a plan can potentially be thought of as a fiduciary in this regard.

Exceptions to Every Rule 

Campbell outlined the four exceptions to this “catch-all” definition that were included in the original proposal.  They are:

• Sales Exception—if seller or seller’s agent can demonstrate the plan fiduciary or participant knew/should have known that “advice” was a sales discussion where interests are “adverse” and the advice not “impartial,” then seller not a fiduciary (unless the seller represents itself as a fiduciary adviser).
• Platform Exceptions—broker/dealer or recordkeeper offering a platform of investment options can market platform and give information about platform options without giving fiduciary investment advice if it discloses that it is not giving impartial advice and does not individualize information.
• Valuation Exception—valuations performed solely for reporting and disclosure purposes not fiduciary, unless valuation of asset for which there is not a generally recognized market and valuation used for distribution purposes.
• Education Exception—retains Interpretive Bulletin 96-1 that certain information provided to participants is non-fiduciary “education" rather than fiduciary advice.

Campbell was asked if the new rule will differentiate between a 3(21) fiduciary adviser and a 3(38) investment manager. He answered that these are two very different beasts – a 3(38) investment manager has discretionary control over a plan’s assets and can invest them as he chooses. A 3(21) fiduciary adviser provides advice to the plan sponsor, knowing it will be used as the primary vehicle for making investment decisions.  There also exist non-fiduciary advisers – advisers who may give advice to a plan, but have not met all prongs of the five-part test. The DoL is hoping to drive home the point that anyone who gives advice to a plan should be held liable – as a fiduciary – for giving that advice in an unbiased manner.