Will The DOL Fiduciary Rule Get Trumped?

By: Justin DiCicco

The Department of Labor (“DOL”) has recently come under fire by various groups since expanding its definition of a fiduciary.  This rule has faced numerous challenges in courts all over the nation, but the DOL rule has held its ground and been found valid.[1]  But will this trend of courts upholding this rule continue, or will its opponents find a new way to get rid of the fiduciary rule?

In April of 2016, the DOL adopted a final rule which expanded and defined who is considered a “fiduciary” of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (“ERISA”).[2]  The DOL expanded the definition of a “fiduciary” since regulations were issued in 1975 which narrowed the statutory definition of fiduciary investment advice by creating a specific five-part test that had to be satisfied before someone could be considered a fiduciary adviser.[3]  The investment advice marketplace has changed significantly since this test was originally issued and as a result, many investment professionals were not required to adhere to ERISA’s prohibited transaction rules or fiduciary standards, which allowed them to operate with conflicts of interests that did not have to be disclosed.[4]

The final rule adopted by the DOL replaces the narrow five-part test with a new definition that is a better fit with the language ERISA and the Internal Revenue Code of 1986 (“Code”).[5]  Under the new rule, a person gives investment advice when that person makes a recommendation to a retirement plan, plan fiduciary, plan participant and beneficiary or IRA owner for a fee or other form of compensation, either directly or indirectly, as to the holding or exchanging of securities or other investment properties.[6]  Investment advice also includes recommendations as to securities or other investment property after the property has been transferred or been distributed from an IRA or plan.[7]  An essential element of this new rule is whether a recommendation actually occurred.[8]  The final rule states that a “recommendation” is a communication which “based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action,” and is to be judged by an objective standard.[9]

The second part of this final rule establishes the types of relationships that have to exist in order for these recommendations to give rise to fiduciary investment advice responsibilities.[10]  The rule covers recommendations made by people who: (1) acknowledge that they are acting as a fiduciary within the meaning of ERISA or the Code; (2) offer advice pursuant to a written or verbal agreement or understands that the investment advice is based on the particular needs of the advice recipient; and (3) direct recommendations to specific recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.[11]  For a recommendation to be considered fiduciary investment advice, it must be offered in exchange for a fee or other form of compensation.[12]

In response to the upcoming implementation date of this rule, President Trump signed an executive memorandum which instructed the DOL to reexamine the new fiduciary rule.[13]  The President wants the DOL conduct research and review the legal and economic impact that the fiduciary rule will have on those affected by it.[14]  If the DOL finds that the rule prevents access to retirement information and financial advice or is inconsistent with President Trump’s administrative policies, then the memorandum demands this agency to revise or rescind the rule.[15]  Additionally, it seems likely that the next secretary of labor and head of the DOL will follow the instructions in the executive memorandum and change this rule.[16]

While opponents of the DOL’s fiduciary rule have been finding it difficult to challenge this rule in the courtroom, it looks like the President may be their saving grace to make sure that this rule never takes effect.

 

[1] Matthew Cutts & James Sivon, Financial Services in the 1st Month of Trump Presidency, Law360 (Feb. 23, 2017, 4:31 PM), https://www.law360.com/articles/895115/financial-services-in-the-1st-month-of-trump-presidency.

[2] Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice, 68 Fed. Reg. Vol 81, 20945.

[3] Id.                                             

[4] Id.

[5] Id. at 20948.

[6] Fact Sheet: Department of Labor Finalizes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle Class Families Billions of Dollars Every Year, U.S. Dep’t of Lab., https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/dol-final-rule-to-address-conflicts-of-interest.

[7] Id.

[8] Id.

[9] Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice, 68 Fed. Reg. Vol 81, 20948.

[10] Id.

[11] Id.

[12] Id.

[13] Matthew Cutts & James Sivon, Financial Services in the 1st Month of Trump Presidency, Law360 (Feb. 23, 2017, 4:31 PM), https://www.law360.com/articles/895115/financial-services-in-the-1st-month-of-trump-presidency.

[14] Id.

[15] Id.

[16] Id.

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