It had to be obvious that when President Obama gave his support to a DOL fiduciary rule, that a proposal was imminent. Today, the DOL came out with its much anticipated (over a period of years) proposed revisions to the definition of fiduciary. The following is a brief summary of the main issues that impact investment advisers, but more likely broker-dealers or dual registrants.
Under the proposed definition of fiduciary, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, participant, or IRA owner for consideration in making a retirement investment is a fiduciary. Notice there is no exemption if the compensation is “solely incidental” to other services.
Being a fiduciary means that the adviser must provide impartial advice in their 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. This is a stronger fiduciary duty than that required under the Investment Advisers Act, which allows for accepting payments that are conflicts as long as the conflicts are disclosed and the recommendations are in the client’s best interest.
Advisors (which includes investment advisers, broker-dealers, insurance agents, etc.) and plan sponsors are exempt from being deemed a fiduciary when providing general education. This is similar to the current rule, except it makes it clear that references to specific investments constitutes investment advice.
A new type of prohibited transaction exemption was created (the “best interest contract exemption”) that allows firms to continue to set their own compensation practices (including commissions). In order to use this exemption, the company and individual adviser providing investment advice must enter into a contract with its clients that:
- Commits the firm and adviser to providing advice in the client’s best interest;
- Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest; and
- Clearly and prominently discloses any conflicts of interest, like hidden fees, that might prevent the advisor from providing advice in the client’s best interest.
The DOL does not have the authority to determine what type of registration a securities professional should have. If, however, you look at the definition of fiduciary, it would seem that most, if not all, DOL fiduciaries would be registered investment advisers if the advice was regarding securities. If the DOL fiduciary was a registered investment adviser, it would already be committed to the three requirements of the “best interest contract exemption.”
There will undoubtedly be noise about the proposal from all sides. If you cut through a lot of the legalese, however, you can see that there is a simple theme; if you provide investment advice for compensation, you are a fiduciary.
There will also be talk about what the SEC should now do about harmonizing investment adviser and broker-dealer standards of care. We suggest they follow the same theme as the DOL, but use that they already have in place. There is a place for fiduciaries and non-fiduciary sales people. The SEC should simply enforce the Investment Advisers Act, and require adviser registration of brokers that provide advice beyond that which is solely incidental to their brokerage practice. Much of the confusion that pervades the financial services industry would be cured.