The Obama-Era Fiduciary Rule Survives in Times of Trump
There’s been some buzz over news that the Obama-Era Fiduciary Rule—a sensible revamping of a decades-old rule concerning providers of investment advice—went into effect on June 9, 2017 with certain provisions delayed until January 1, 2018, despite control by a new Republican administration.
The new Fiduciary Rule greatly expands fiduciary-status coverage of investment professionals who offer financial advice—such that even one-time advice can create a fiduciary relationship.
Historically, the classic “five-part” test established in 1975 provides that a person giving ‘investment advice’ is a fiduciary only if the person:
renders advice as to the purchase, sale, or value of securities or other property;
on a regular basis;
pursuant to a mutual agreement, arrangement or understanding, written or otherwise, between such person and the plan or a plan fiduciary; that
the advice will serve as a primary basis for investment decisions with respect to plan assets; and that
the advice will be individualized based on the particular needs of the plan.
See Federal Register Vol. 75, No. 204 (Friday, October 22, 2010); 29 CFR 2510.3–21(c).
Significantly, the new Fiduciary Rule does not require that investment advice be rendered on a regular basis.
Moreover, the new Fiduciary Rule eliminates the requirement that the parties mutually understand the advice will serve as a primary basis for plan investment decisions. This change means that how important the advice is to the recipient has no bearing on the advice-giver’s fiduciary status.
The practical effect of the new Fiduciary Rule is to broaden the class of investment advice providers who meet the definition of a fiduciary and, accordingly, are subject to strict legal obligations and duties to their clients.
As could be expected, the new Fiduciary Rule has meet fierce opposition from Wall Street, conservative critics, and the financial industry at large.
As previously reported by this law firm, the Fiduciary Rule has faced challenges in the courts and an uncertain future under the Trump Administration. Despite being upheld in an early federal court challenge, signs from the Trump Administration, including a February 2017 Presidential Memorandum mandating further review of the revised rule and delaying implementation, suggested a bleak future for the rule. However, in May 2017, the DOL and Secretary of Labor Alexander Acosta issued statements and guidance announcing the Fiduciary Rule would go into partial effect on June 9, 2017. Full compliance with the rule is currently required by July 1, 2018.\
Secretary Acosta stated in the Wall Street Journal that there is “no principled legal basis to change the June 9 date while we seek public input” but that review of the rule would continue. The DOL further stated in its May 2017 compliance FAQ that review of the rule remains ongoing and there is still a possibility “that additional changes will be proposed to the fiduciary duty rule and [Prohibited Transaction Exemptions].”
Based on the DOL’s guidance detailed above, compliance with the new Fiduciary Rule will not be heavily enforced prior to the full-compliance period. Guidance contemporaneously issued by the DOL Employee Benefit Security Administration states that during this period the DOL’s “general approach to implementation will be marked by an emphasis on assisting (rather than citing violations and imposing penalties on) plans, plan fiduciaries, financial institutions, and others who are working diligently and in good faith” to comply. In light of the foregoing, employee benefit funds should be aware of the new rules and should act accordingly.
The DOL’s compliance FAQ is available at: https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/coi-transition-period.pdf.
Field Assistance Bulletin No. 2017-02 available at: https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2017-02
For more information regarding the new Fiduciary Rule, compliance, or other concerns, please contact your trust fund counsel.
Author: Ryan Kadevari
