DOL Issues Proposed Rule Clarifying Fiduciary Definition

The current fiduciary definition, Borzi explained, also required a “cumbersome and fact-intensive” five-step analysis to determine who is considered a fiduciary. Under the newly proposed rule, the five-part test will not be “the determining factor” anymore in determining fiduciary status, Steve Saxon, chairman of Groom Law Group, told AdvisorOne in an interview. “If you’re a registered investment advisor (RIA) and you’re providing recommendations on the purchase or sale of securities, you’re a fiduciary.” Equally significant, he says, is that “even if you’re not an RIA, [DOL has] made it easier to pass muster under the five-part test and become a fiduciary because they’ve eliminated the mutual understanding provision.”

EBSA is taking comments on the proposed rule until Jan. 20, 2011. The proposed rule would define certain advisors as fiduciaries even if they do not provide advice on a regular basis. DOL says that upon adoption, the proposed rule would affect sponsors, fiduciaries, participants, and beneficiaries of pension plans and individual retirement accounts, as well as providers of investment and investment advice-related services to such plans and accounts. “Investment advisors under the ‘40 Act would always be considered to be fiduciaries under this [newly proposed] rule,” Borzi said. “If you hold yourself out as a fiduciary, you will be a fiduciary under this regulation.”

Saxon says that historically, DOL “has struggled with sticking advisors with fiduciary status,… so the changes that [DOL has] made have addressed the problems that they’ve had in the past.” The “end-game” for DOL with the proposed rule is to have the ability to focus on advisors’ conflicts of interest and to know how advisors get paid. The rule, he adds, “not only applies to advice on securities and other property, but it also applies to advice on the selection of investment managers.”