The Department of Labor released its final rule to amend the definition of fiduciary under the Employee Retirement Income Security Act (ERISA).
The DOL first shared copies of the new rule with the Federal Register.
According to Labor Secretary Tom Perez, some 300,000 comments came in on the proposed rule, and many adjustments were made to the final rule that reflect this input.
As advisors and broker-dealers pore over the rule, they will closely review the many definitions included in it.
Here are the preliminary details on some terminology it includes, based on industry research, reports and analysis compiled over the past 12 months:
Advice/Advisor
The Department of Labor's fiduciary standard states that a person is deemed to be providing investment advice if that person:
(1) Provides recommendations on the purchase, holding, disposing or exchange of securities or property, including those being affected by a rollover of or distribution from a retirement plan or IRA.
(2) Makes investment management recommendations.
(3) Appraises investment.
(4) Makes recommendations of individuals who provide advice for a fee.
BICE
Under the new rules, the Best Interest Contract Exemption, would permit some variable compensation for advisors and financial institutions in certain circumstances, subject to compliance with detailed conditions, according to some industry analysis. This compensation, though, requires that parties enter into a contract, which would be be enforced by the states.
BICE permits advisors, financial institutions and their affiliates and related entities to receive compensation for advice related to "assets" given to "retirement investors."
"Best interest" is defined as investment advice when the advisor or financial institution is acting with "the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person would exercise."
Advice is "based on the investment objectives, risk tolerance, financial circumstances and needs of the retirement investor," given "without regard to the financial or other interests of" the advisor, financial institution, affiliate, related entity "or other party."
BICE Disclosures
The Labor Department has estimated the costs associated with the various paperwork requirements of the new and updated Best Interest Contract Exemptions, which require investor disclosures. Of greatest interest here is the cost of the BICE, according to the Financial Services Institute.
The Labor Department believes that the BICE will require 86 million disclosures to be distributed in the first year, and 66.4 million annually in subsequent years. It is unclear where these numbers come from, the FSI says.
Estimates for the costs associated with these disclosures will be about $77.4 million in the first year and $29.2 million in subsequent years, according to the DOL.
Carve-outs
There are a number of carve-outs, or counterparty exclusions, from the DOL's definition of fiduciary advice, including certain principal sales transactions and swaps, activities of plan sponsor employees, certain information provided by platform providers, and selection and monitoring assistance (that does not include advice or recommendations).
Two of particular note involve educational information and information provided to large plan fiduciaries. The education exclusion specifically applies to plans, participants and IRA owners (not just participants), and specifically includes information relating to retirement income. However, the exclusion does not permit the education to reference specific investment products, even those available on the plan menu.
With regard to large plan fiduciaries, it is generally understood that if the advisor is offering products to the fiduciary of a plan with more than 100 participants, she will not be providing fiduciary advice if there is a written acknowledgement from the fiduciary that she understands that advisor is not operating as a fiduciary, and a number of fee and other disclosures have been provided.
If the advisor is offering products to the fiduciary of a plan with more than $100 million in assets, then this disclosure and acknowledgment do not have to be in writing.
In general, those parties engaged in simple "order-taking" to buy or sell investments without providing any recommendations are not considered to be involved in the provision of investment advice and hence do not have any fiduciary responsibility to the plan sponsor.
