The fiduciary standard proposal released Tuesday is, according to the Labor Department, an improvement upon a 2010 version in a number of ways. Here’s how, in the DOL’s own words, as detailed in an agency FAQ:
1. Provides a new, broad, principles-based exemption that can accommodate and adapt to the broad range of evolving business practices.Industry commenters emphasized that the existing exemptions are too rigid and prescriptive, leading to a patchwork of exemptions narrowly tailored to meet specific business practices and unable to adapt to changing conditions. Drawing on these and other comments, the best interest contract exemption represents an unprecedented departure from the Department’s approach to PTEs over the past 40 years. Its broad and principles-based approach is intended to streamline compliance and give industry the flexibility to figure out how to serve their clients’ best interest.
2. Includes other new, broad exemptions. For example, the new principal transactions exemption also adopts a principles-based approach. And DOL is asking for comments on whether the final regulatory package should include a new exemption for advice to invest in the lowest-fee products in a given product class, that is even more streamlined than the best interest contract exemption.
3. Includes a carve-out from fiduciary status for providing investment education to IRA owners, and not just to plan sponsors and plan participants as under the 2010 proposal. It also updates the definition of education to include retirement planning and lifetime income information. In addition, the proposal strengthens consumer protections by classifying materials that reference specific products that the consumer should consider buying as advice.
4. Determines who is a fiduciary based not on title, but rather the advice rendered.The 2010 rule proposed that anyone who was already a fiduciary under ERISA for other reasons or who was an investment adviser under federal securities laws would be an investment advice fiduciary. Consistent with the functional test for determining fiduciary status under ERISA, the proposal looks not at the title but rather whether the person is providing retirement investment advice.
5. Limits the seller’s carve-out to sales pitches to large plan fiduciaries with financial expertise. This responds to comments that differentiating investment advice from sales pitches in the context of investment products is very difficult and, unless the advice recipient is a financial expert, the carve-out would create a loophole that would fail to protect investors.