The Department of Labor’s (DOL’s) recently reproposed rule “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule – Investment Advice” deals with the part of the definition of “fiduciary” under ERISA that causes a person or entity to be a fiduciary as a result of providing investment advice for a fee. As a general matter, the rule — if adopted — would make more types of service providers and services fiduciary in nature, especially in the context of IRAs and rollovers.
Here are some critical, threshold questions and issues that we are seeing:
- Questions about the scope of the definition of investment advice. The definition relies heavily on terms such as “understanding,” “specifically directed to,” “for consideration,” and “recommendation.” It is not clear in some cases how these concepts apply in practice.
- Questions about the carve-outs from fiduciary status. The proposed rule includes six carve-outs from fiduciary status. There is a carve-out for “counterparties” to contracts with larger plans (more than 100 participants) or independent plan fiduciaries (with at least $100 million in assets). The DOL staff has indicated informally that this carve-out is intended to apply to contracts for services (as well as purchases, sales, loans, etc.), but clarification on this point would be helpful. There are also questions about how to address plans that fall below the “large plan” thresholds during the term of a contract. Carve-outs also exist for “platform providers” in participant-directed plans, but it is not clear whether these carve-outs apply to brokerage windows or managed accounts. The carve-out for valuations raises issues regarding valuations for “white label” or other custom, institutional funds. Finally, with respect to carve-outs in general, do they function as a “safe harbor” or are they the only avenues to avoid fiduciary status in these circumstances?