DOL Issues Re-Proposed Regulations Defining Investment Advice Fiduciary and Proposes New PTEs 

Employee Benefits & Executive Compensation Alert

May 5, 2015

The U.S. Department of Labor (DOL) issued long awaited re-proposed regulations governing fiduciary status and investment advice titled “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule—Investment Advice” for public comment on April 14, 2015. The proposed regulations would amend the definition of fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA), as amended, to better protect retirement savers against conflicted investment advice. The DOL also proposed two new prohibited transaction exemptions, as well as amendments to a number of existing prohibited transaction exemptions, relating to compensation received for fiduciary investment advice.

The DOL’s original October 2010 proposal on this topic was withdrawn in September 2011 following substantial criticism from the financial services industry and Congress. The DOL contends that detractors see a threat to revenues estimated at approximately $17 billion a year.

According to the DOL, the current regulations have not been meaningfully updated since 1975 and are more narrowly targeted than the statutory language, as a result, the regulations no longer adequately address today’s investment realities where plan participants and beneficiaries are major consumers of investment advice and make many of the investment decisions for their retirement savings. Of particular concern to the DOL is the retail market and rollovers from employer plans to IRAs because advice regarding IRA investments has few legal protections against conflicts of interest.

Proposal Re-Defines Fiduciary for Investment Advice

The proposed rule defines a fiduciary as someone who renders “investment advice” (as defined) directly to a plan fiduciary, participant or beneficiary, or IRA owner, for a fee or other compensation, whether direct or indirect. Under the proposed rule the adviser directly or indirectly: (i) represents to or acknowledges acting as an ERISA fiduciary with respect to the advice or (ii) renders the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is individualized or specifically directed to the advice recipient for consideration in making investment or management decisions.

The proposal describes four types of covered fiduciary investment advice:

  • investment recommendations (for example, whether to take a distribution and the investment of a rollover);
  • investment recommendations for management of securities or other property, including securities or other property to be rolled over or otherwise distributed from a plan or IRA;
  • appraisals, opinions or similar statements as to the value of securities or other property if provided in connection with a specific transaction or transactions involving the acquisition, disposition or exchange of such securities or other property by a plan or IRA; and
  • recommendations of persons to perform asset management services or to make investment recommendations for direct or indirect compensation.

The DOL has requested comments on how to determine whether a communication rises to the level of a “recommendation” for purposes of distinguishing between investment education and investment advice and specifically whether some or all of the standards developed by the Financial Industry Regulatory Authority (FINRA) for this purpose should be adopted.

Non-Fiduciary Communications Under the Proposed Rule

The proposed rule makes exceptions for certain activities from the definition of fiduciary investment advice:

  • Investment Education – Similar to current rules, general investment education on retirement saving, including providing financial, investment and retirement information and materials, asset allocation models or interactive investment materials is carved-out, provided the materials do not include recommendations for specific investment products available under the plan or IRA, and do not include advice or recommendations as to specific investment products, specific investment managers, or the value of particular securities or other property. General information and education relating to “lifetime income issues,” including longevity and inflation risk would also be carved-out.
  • “Platform” Providers’ Marketing of Investments – Record-keepers and third party administrators (TPAs) who market a selection of investments to participant-directed individual account plans would not be acting as investment advice fiduciaries by marketing or making available investment vehicles, provided they did so without regard to the individualized needs of the plan or its participants and beneficiaries. Such record-keepers and TPAs would also be required to disclose in writing that they are not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity. Similarly, record-keeper activities assisting plan fiduciaries in selecting and monitoring a plan’s investment alternatives by identifying investment alternatives that meet objective criteria specified by the fiduciary or by providing objective financial data regarding available investment alternatives would not constitute fiduciary investment advice.
  • Plan Sponsor’s Employee Communications – Certain communications by a plan sponsor's employees with plan fiduciaries, provided the employees receive no additional compensation, would be carved out. The exception recognizes that an employer’s employees, such as members of a company’s human resources department, may provide, as incidental to their duties, reports and recommendations for investment committees and other named fiduciaries of the employer’s plans and should not be treated as fiduciaries for doing so.
  • Seller’s and Swap Transaction Carve-Outs – The seller’s carve-out would exempt incidental advice provided in connection with an arm's length sale, purchase, loan or bilateral contract between an expert plan investor who is an ERISA plan fiduciary and an adviser. The swap carve-out addresses advice by counterparties in connection with certain swap transactions under the Commodity Exchange Act or Securities Exchange Act.

Prohibited Transaction Exemptions

Proposed prohibited transaction exemptions would permit some common forms of compensation otherwise prohibited as a conflict of interest. These include:

  • A “best interest contract exemption” would allow commissions and revenue sharing for investment advice, provided that the conditions of the exemption are satisfied. These conditions include that the adviser and financial institution employing, or otherwise contracting with, the adviser contractually acknowledge fiduciary status; warrant that they will comply with applicable federal and state laws governing advice and have adopted written policies and procedures reasonably designed to mitigate the impact of conflicts of interest; and disclose basic information on their conflicts of interest, compensation arrangements and on the cost of recommended investments.

    In addition, the adviser must agree to, and comply with, certain “impartial conduct standards.” This includes providing only advice that is in the “best interest” of the retirement investor, and not making misleading statements about investments or recommending an investment if the anticipated compensation to be received by the adviser and its affiliates would exceed reasonable compensation. The exemption is only available with respect to advice delivered in the retail market to plan participants and beneficiaries, IRA owners and small plans (plans with fewer than 100 participants).

    The exemption would not apply if the contract includes any provision that limits the liability of the adviser or the financial institution for a violation of the contract’s terms. Adopting the approach taken by FINRA, the contract could require the parties to arbitrate individual claims, but it could not limit the rights of the plan, participant, beneficiary, or IRA owner to bring or participate in a class action against the adviser or the financial institution.
  • A “principles-based exemption” would, subject to similar contractual terms required for the best interest contract exemption, allow a fiduciary investment adviser or the financial institution employing or otherwise contracting with the adviser to buy or sell certain fixed-income securities from or to a plan or IRA from the adviser’s (or financial institution’s) own inventory for the account of the adviser (or the financial institution) as a result of the adviser’s investment advice.

In addition, the DOL has asked for comments on a streamlined “low-fee exemption” that would allow otherwise prohibited fees when an adviser is recommending the lowest-fee product in a given class of products.

Next: Comment Period

The process is far from over. According to the DOL, a public hearing will be scheduled shortly after the close of the initial 75-day public comment period, which began April 20. After the public hearing, an additional comment period will be permitted. Labor Secretary Thomas Perez has made clear that the 75-day comment period will not be extended, and has stated that the Obama administration is committed to getting a final rule before the president leaves office. However, key Senate Democrats have signaled their ambivalence toward the proposal, which is also being attacked by Republican lawmakers and financial groups. 


Jay A. Dorsch

Chair, Employee Benefits and Executive Compensation

(215) 665-4685

Related Practices

If you have any questions on the information presented in this alert, please contact Jay A. Dorsch at (215) 665-4685 or, or Stephen Bowers at (215) 665-7283 or