End of the Fiduciary Rule

The long, slow death of the new fiduciary rule is finally complete. On June 21st, the 5thCircuit Court of Appeals issued a mandate vacating the rule, in U.S. Chamber of Commerce v. Department of Labor. The rule, which was initially passed in April 2016 and included the best interest contract exemption (BICE) and various prohibited transaction exemptions, sought to change the definition of an ERISA Section 3(21) fiduciary rendering advice for a fee. The rule was intendedto provide greater consumer protections for retirement plan and IRA investments. Industry reaction to the rule was mixed, and many sought to challenge the rule, leading to the 5thCircuit case that was its ultimate demise.


What is the law now?

Without the new rule, things are returning to business as usual. The prior rule (promulgated in 1975) lays out a five-part test defining 3(21) fiduciary status. Under the five-part test, an individual is a fiduciary rendering investment advice for a fee if the individual:

  1. Renders advice as to the value of securities or other property;

  2. On a regular basis;

  3. Pursuant to a mutual agreement or understanding with the plan or plan fiduciary;

  4. The advice serves as the primary basis for investment decisions; and

  5. The advice is individualized to the plan.

It is unclear whether theDepartment of Labor’s (“DOL”) will narrow the five-part test or propose another new standard in the future.


Where does this leave plan sponsors and advisers?

For investment advisers, the saga continues. On April 18, 2018, the Securities and Exchange Commission (“SEC”) released several proposals for comment setting standards of conduct for advisers and broker/dealers with “retail customer” relationships (which include retirement plan participants). While not an exact copy of the DOL rule, there are many similarities between the two. Advisers who spent the past several years focusing on compliance with the DOL’s rule are now shifting to understanding and complying with the SEC’s proposed rules. The comment period for the SEC’s proposed rules is open until August 7th.


Plan sponsors are also indirectly impacted by these changes. Sponsors should work with ERISA counsel to review service agreements to determine how these changes may affect ongoing business relationships.


If you have questions as to how these changes affect your business, please contact one of our attorneys for assistance.


© Boutwell Fay LLP 2018, All Rights Reserved.This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us.The information contained in this article is effective as of June 29, 2018.




End-of-the-Fiduciary-Rule
.pdf
Download PDF • 439KB