DOL Fiduciary Rule to Revamp Regulation of Advice to Plans and IRAs

April 15, 2015

Reproposal would broaden the fiduciary definition, narrow exceptions, and substantially revise prohibited transaction exemptions applicable to current and newly covered fiduciaries.

The US Department of Labor (DOL) yesterday released its proposed rule “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule—Investment Advice,” which replaces its 2010 proposal. The proposal would change the definition of an investment advice fiduciary for the Employee Retirement Income Security Act (ERISA) standards of fiduciary conduct and the prohibited transaction rules under ERISA and section 4975 of the Internal Revenue Code (the Code). The proposal’s publication comes approximately 50 days after the Office of Management and Budget received the proposal for review on February 23. If adopted as proposed, we believe that the rule will profoundly affect how members of the financial services industry provide services to plans and Individual Retirement Accounts (IRAs).

The proposal includes a revised and broader definition of activities that would result in fiduciary status, a series of limited exceptions to fiduciary status, a package of new prohibited transaction exemptions, amendments to current exemptions for existing and newly covered fiduciaries (as well as nonfiduciaries), and a new regulatory impact analysis. The structure of the proposal is as follows:

  • Proposed definition of fiduciary investment advice.
    The reproposed definition differs significantly from the 2010 proposal’s definition and specifically includes advice to IRA owners and advice regarding rollovers and distributions from ERISA plans and IRAs.
  • Proposed definition includes limited exceptions.
    There would be exceptions to fiduciary status, subject to satisfying various conditions, for the following:

    1. Incidental advice provided in connection with a sale, purchase, loan, or bilateral contract with an ERISA plan with 100 or more participants or $100 million or more in assets

    2. Counterparties’ advice and other communications in connection with certain swap or security-based swap transactions for ERISA plans

    3. Employees of a plan sponsor with respect to advice that they provide to the fiduciaries of the sponsor’s plan, as long as they receive no additional compensation

    4. Recordkeepers, third-party administrators, and other service providers that provide a platform of investment options to ERISA-covered, participant-directed, individual account plans where a plan fiduciary selects the particular investment options that will be made available for investment by plan participants and beneficiaries (as well as certain related selection and monitoring activities)

    5. Valuations prepared for employee stock ownership plans (ESOPs), ERISA plans, and IRAs in connection with certain legally required reporting and disclosure obligations, and investment funds (e.g., collective investment funds and pooled separate accounts)

    6. Investment education, subject to conditions similar in many regards to those included in current DOL guidance under Interpretive Bulletin 96-1 (which would be revoked) but with certain notable differences—including that asset-allocation models that refer to specific investment products would not fall within the investment education safe harbor

  • Proposed “Best Interest Contract Exemption” (BICE).
    This new exemption would provide relief that would permit an investment advice fiduciary to receive certain types of “prohibited compensation” where the investment advice fiduciary contractually agrees to be subject to a “best interest” standard. The “best interest” standard is generally defined as ERISA’s prudence standard with a duty of loyalty standard that would require advice to be provided “without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.”

    The exemption is limited to advice provided to plan participants and beneficiaries, IRA owners, and fiduciaries of plans with less than 100 participants.  Further, the exemption covers only compensation received in connection with investments in certain assets, including bank deposits, mutual fund shares, interests in bank collective funds and insurance company separate accounts, shares of exchange-traded REITs and ETFs, publicly-offered corporate bonds, certain agency debt securities and Treasuries, certain insurance contracts, and exchanged-traded equity securities. Thus, the exemption would not appear, among other things, to cover compensation related to hedge fund and other private fund investments, or (as specifically stated in the exemption) compensation related to futures and options.

    The exemption would also require certain point-of-sale and annual disclosures, and recordkeeping, reporting, and other requirements.

    This exemption would not cover principal transactions, which would be addressed by a separate proposed exemption.
  • Proposed exemption for principal transactions.
    This exemption would provide relief for principal transactions in certain debt securities with an ERISA plan or an IRA, subject to satisfying conditions similar to those required under the BICE and other requirements. Notably, this exemption would not appear to cover principal transactions that involve municipal securities.
  • Proposed amendments to existing exemptions.
    These amendments would generally impose a “best interest” standard to obtain relief under the following exemptions:

    1. PTE 75-1, Part III (Underwriting)
    2. PTE 75-1, Part IV (Market Making)
    3. PTE 75-1, Part V (Margin Loans)
    4. PTE 77-4 (Affiliated Mutual Funds)
    5. PTE 80-83 (Purchases in Underwritings Benefiting an Affiliate)
    6. PTE 83-1 (Mortgage Pool Securities)
    7. PTE 84-24 (Insurance Agents and Brokers and Mutual Fund Principal Underwriters)

      • PTE 84-24 would be revoked in part so that investment advice fiduciaries to IRA owners would not be able to rely on it with respect to (1) transactions involving variable annuity contracts and other annuity contracts that constitute securities under federal securities laws and (2) transactions involving the purchase of mutual fund shares. According to the DOL, investment advice fiduciaries to IRA owners could rely on the Best Interest Contract Exemption instead.

    8. PTE 86-128 (Affiliated Brokers)

      • PTE 86-128 would no longer be available for investment advice fiduciaries to IRAs.

Conforming changes would be made in the following exemptions:

1. PTE 75-1, Part I (Agency Transactions)

      • Part I(b) and (c) (providing relief for certain nonfiduciary services to plans and IRAs) would be revoked with the intention that persons who seek to engage in these transactions rely on ERISA section 408(b)(2) or Code section 4975(d)(2).

2. PTE 75-1, Part II (Mutual Fund Transactions)

      • Relief for sales of mutual fund shares as principal, currently covered by PTE 75-1, Part II(b), would be provided instead under PTE 86-128.

The DOL is also considering, and has requested comments on, whether the final exemptions should include a “new ‘low-fee exemption’ that would allow firms to accept payments that would otherwise be deemed ‘conflicted’ when recommending the lowest-fee products in a given product class, with even fewer requirements than the best interest contract exemption.”

The initial deadline for comments on the reproposal is expected to be on or about July 1 (or 75 days after the proposed rule is published in the Federal Register). According to the DOL, a public hearing will be scheduled shortly after the close of the initial public comment period, and then the public record will be reopened for additional comments after the public hearing. The DOL has also indicated that any final rule “would be effective 60 days after publication in the Federal Register and the requirements of the final rule would generally become applicable eight months after publication of a final rule,” subject to certain exceptions.

Because of the breadth and complexity of these proposed changes and the numerous ways in which they may affect how services are provided to ERISA plans and IRAs, we plan to issue a series of LawFlashes on the proposed regulation and exemptions that will provide a more detailed analysis of the proposal and its potential effects.

Read our past publications covering the DOL’s fiduciary definition rulemaking:


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Steven W. Hansen
Michael R. Weissmann

Louis L. Joseph
Marla J. Kreindler
Michael M. Philipp
Julie K. Stapel

New York
Craig A. Bitman
Barbara D. Klippert

Robert L. Abramowitz
Steven D. Spencer
David B. Zelikoff

Lisa H. Barton
John G. Ferreira
R. Randall Tracht

Washington, DC
Brian J. Baltz
Althea R. Day
Charles M. Horn
Lindsay B. Jackson
Daniel R. Kleinman
Amy Natterson Kroll
Gregory L. Needles
Michael B. Richman
Steven W. Stone