Employee Benefits Alert
The ERISA Fiduciary Regulation has landed. This morning, the U.S. Department of Labor (DOL) released to the public the final rule which it had preceded with informal guidance and press statements. It appears DOL has tried to address the concerns expressed by many in the financial services industry, particularly with respect to proprietary products and the seller's carve-out. DOL has announced that it has simplified the rule and that the rule reflects its effort to ease implementation burdens. In fact, if the final rule lives up to the pre-release hype, the rule's more practical approach to implementation may be one of the best features to come out of the re-writing process. The rule's effective date is no longer on the eight-month fast track originally proposed in 2010, but is now on a more deliberate pace with phase-in periods, the first of which hits a year from now. The most onerous implementation provisions of the regulation -- preparation of policies and procedures, new disclosures and new contract provisions -- will become effective on January 1, 2018. In addition, DOL eliminated some of the most contentious disclosure requirements from the proposal, including eliminating the requirement to develop investment projections and distribute an annual disclosure to investors.
The fiduciary definition of "investment adviser for a fee" remains largely unchanged from the proposed rule and DOL chose to adopt the FINRA definition of "recommendation." DOL did clarify fiduciary status in small ways. For example, an adviser's initial "hire me" pitch would not entail fiduciary activity, although its investment recommendations after being hired would be. Some of the exceptions to fiduciary status have been expanded, particularly with respect to what has been referred to as the seller's carve-out. The final rule permits plans with $50 million in assets to be covered by the exception if other requirements are met, in contrast to the proposed rule which limited the exception to large plans with $100 million or more in assets. The other exceptions to the fiduciary definition appear largely unchanged from the proposed rule; however, the final rule contains more language as to what constitutes "education" that would qualify as non-fiduciary information.
The final rule appears to reflect a few significant changes to the Best Interest Contract (BIC) Exemption, which would need to be satisfied if the adviser qualifies as a fiduciary investment adviser (Advice Provider) and receives compensation for the investment recommendation. The BIC Exemption includes specific guidance on how proprietary product providers can satisfy the exemption and continue to sell their products. DOL did not, as it suggested it might, adopt a streamlined option for low-fee or low-cost, passively managed investment options. In fact, the preamble to the regulation clarifies that the adviser is not required to recommend the lowest fee option if another product is better for the client.
Another major change from the proposal exempts ERISA plans from the requirement that the Advice Provider enter into a written contract with the investor before making a recommendation. Although individual retirement arrangements (IRAs) and non-ERISA plans remain subject to the written contract requirement, the final regulation clarifies that the contract provisions can be incorporated into account opening documents. Moreover, the regulation makes clear that existing clients need not execute a new written contract -- instead, Advice Providers can notify current clients of the amendments and if the client does not object to the modifications, the new provisions will become part of the existing agreement between the Advice Provider and the investor. This "negative consent" feature eases some of the burden of the new rule. Along the same lines, DOL incorporated a grandfathering rule for existing arrangements.
Notably, DOL eliminated the list of approved investments and indicated that Advice Providers are permitted to provide investment advice with respect to all asset classes to investments.
Finally, DOL also clarified what is not covered -- the final rule spells out DOL's view that health, disability and term life insurance policies are not subject to the fiduciary rule. Similarly, DOL reserved all appraisal and valuation issues for a later rulemaking.
We will provide a full analysis of the rule and prohibited transaction exemptions in the days to come. Watch this space!
For more information, please contact one of the following authors:
Theresa S. Gee, email@example.com, 202-626-5928
Erin M. Sweeney, firstname.lastname@example.org, 202-626-6053