The Fiduciary Rule: What’s Next (Part 2)?

This is my 86^th article about interesting observations concerning the Department of Labor’s (DOL) fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

This is the second of my four-part series on the critical questions raised by the 5^th Circuit Court of Appeals decision to “vacate,” or throw out, the Fiduciary Rule. My last post, Angles #85, introduced the questions:

• Who is a fiduciary?
• What is the fiduciary standard of care?
• How will conflicts of interest be treated under the new rules?

This post discusses the first question: “Who is a fiduciary?”

Assuming that the 5^th Circuit Court of Appeals decision is the final word, the old 5-part fiduciary test will automatically be reinstated. That means that, in order for an advisor to be a fiduciary, all 5 requirements in the regulation must be satisfied. (Keep in mind, though, that this only applies to non-discretionary investment advice. Where an advisor has discretion, the advisor is a fiduciary under a different rule.) The 5-part test is that the advisor must:

• Make investment or insurance recommendations for compensation;
• Provide the advice on a regular basis;
• Have a mutual understanding with the retirement investor that:
  • The advice will serve as a primary basis for investment decisions; and
  • The advice will be individualized and based on the particular needs of the retirement investor.

The definition covers investment and insurance advice to “retirement investors,” in other words, to plans, participants and IRA owners.

Let’s look at each of the 5 parts of the definition.

With regard to the first requirement—recommendations for compensation, it appears that virtually all recommendations to retirement investors would satisfy that requirement, if the advisor (or his supervisory entity, e.g., broker-dealer or RIA) will receive compensation, directly or indirectly, when the recommendation is accepted.

The second requirement—that the advice be given on a regular basis—is a more interesting issue and will vary from case to case. Let me explain. Where an advisor regularly meets with a retirement investor and updates the advice (e.g., asset allocation or investments), it is likely that the requirement is satisfied. That would apply, for example, to an advisor for a 401(k) plan who meets with a plan sponsor on a quarterly or annual basis. Similarly, it might apply where an advisor recommends an individual variable annuity or individual fixed indexed annuity to an IRA owner, with the contemplation that they will meet periodically to review the investments, indexes, etc. However, it would not apply to a one-time sale, where the advisor sells an investment or insurance product and does not provide any ongoing advice.

The third requirement is that there be a mutual understanding, arrangement or agreement, between the retirement investor and the advisor that the advice satisfies the 4^th and 5^th requirements (below). While some people believe that refers to a subjective understanding in the minds of the advisor and the investor, the DOL will probably use the standard of what a reasonable third party would conclude based on the communications between the advisor and the investor.

The fourth requirement is that the recommendations be understood to be a primary basis for making investment or insurance decisions. It is frequently described incorrectly as “the” primary basis. However, if you look at the wording of the regulation (and if you look back into the history of the regulation), the recommendation simply has to be one of the primary bases. In other words, it doesn’t have to be the sole, or even the predominant, basis for making decisions. As a result, it seems like this condition would usually be satisfied, because recommendations are typically made for the purpose of being seriously considered by an investor.

The last requirement is that there is a mutual understanding that the advice is individualized and based on the particular needs of the retirement investor. While the expectation, and perhaps the understanding in most cases, is that investment recommendation is designed for the particular investor, there are cases where communications about investments may not be fiduciary advice. For example, if a broker-dealer has a list of preferred mutual funds or stocks, the list would likely be viewed as generic and, therefore, as not being intended for any particular investor. However, if that list was narrowed by an advisor and then presented to an investor, that would probably tip the scales in the other direction.

The moral to this story is that, even if the 5^th Circuit decision becomes the final word on the fiduciary rule, many—if not most—advisors to retirement plans will still be fiduciaries.

On the other hand, it may make a difference for IRAs. For example, RIAs may generally be fiduciaries, even in the IRA world, because they provide investment services on a regular—or ongoing—basis and there is usually an understanding that the advice is individualized. In addition, many RIAs provide discretionary investment management services for IRAs, which is automatically fiduciary advice.

However, insurance agents and representatives of broker-dealers may, in some cases, make recommendations on an isolated basis, and there may be an understanding that it is a sale, where the advisor will not be providing continuous services. But, where an insurance agent or a representative of a broker-dealer satisfies the 5-part test, the agent/advisor will be a fiduciary.

The fiduciary standard of care will be discussed in the next article, Angles #87.

Part 1- Interesting Angles on DOL’s Fiduciary Rule #1

Part 2 – Best Interest Standard of Care: Interesting Angles on the DOL’s Fiduciary Rule #2 

Part 3 – Hidden Preamble Observations: Interesting Angles on the DOL’s Fiduciary Rule #3

Part 4 – TV Stock Tips and Fiduciary Advice: Interesting Angles #4

Part 5 – Level Fee Fiduciary Exemption: Interesting Angles on DOL’s Fiduciary Rule #5

Part 6 – Fiduciary Regulation And The Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #6

Part 7 – Fiduciary Regulations And The Exemptions : Interesting Angles on the DOL’s Fiduciary Rule #7

Part 8 – Designated Investment Alternatives: Interesting Angles on the DOL’s Fiduciary Rule #8

Part 9 – Best Interest Standard and the Prudent Man Rule: Interesting Angles on the DOL’s Fiduciary Rule #9

Part 10 – FINRA Regulatory Notice: Interesting Angles on the DOL’s Fiduciary Rule #10

Part 11-ERISA and the Internal Revenue Code: Interesting Angles on the DOL’s Fiduciary Rule #11

Part 12- Potential Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #12

Part 13-Investment Policies: Interesting Angles on the DOL’s Fiduciary Rule #13

Part 14- Investment Suggestions: Interesting Angles on the DOL’s Fiduciary Rule #14

Part 15- Best Interest Contract Exemption: Interesting Angles on the DOL’s Fiduciary Rule #15

Part 16 – Adviser Recommendations: Interesting Angles on DOL’s Fiduciary Rule #16

Part 17 – Level Fee Fiduciary: Interesting Angles on DOL’s Fiduciary Rule #17

Part 18- Best Interest Contract Exemption and IRA Advisor Compensation: Interesting Angles on the DOL’s Fiduciary Rule #18

Part 19- Interesting Angles on the DOL’s Fiduciary Rule #19: Advisors’ Use of “Hire Me” Practices.

Part 20- Three Parts of “Best Interest Standard of Care”: Interesting Angles on the DOL’s Fiduciary Rule #20

Part 21- Retirement Plan Documentation and Prudent Recommendation: Interesting Angles on the DOL’s Fiduciary Rule #21

Part 22-Banks and Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #22

Part 23-Prohibited Transactions: IRA and RIA Qualified Money: Interesting Angles on the DOL’s Fiduciary Rule #23

Part 24 – Differential Compensation Based on Neutral Factors

Part 25-Reasonable Compensation Versus Neutral Factors: Interesting Angles on the DOL’s Fiduciary Rule #25

Part 26- Interesting Angles on the DOL’s Fiduciary Rule #26- Reasonable Compensation for IRAs: When and How Long?

Part 27 – Definition of Compensation

Part 28 – What About Rollovers that Aren’t Recommended?: Interesting Angles on the DOL’s Fiduciary Rule #28

Part 29- Interesting Angles on the DOL’s Fiduciary Rule #29- Capturing Rollovers: What Information is Needed?

Part 30- Three Kinds of Level Fee Fiduciaries . . . and What’s A “Level Fee?”: Interesting Angles on the DOL’s Fiduciary Rule #30

Part 31 – Interesting Angles on the DOL’s Fiduciary Rule #31: “Un-levelizing” Level Fee Fiduciaries

Part 32 – What “Level Fee Fiduciary” Means for Rollover Advice: Interesting Angles on the DOL’s Fiduciary Rule #32

Part 33- Discretionary Management, Rollovers and BICE: Interesting Angles on the DOL’s Fiduciary Rule #33

Part 34- Seminar Can Be Fiduciary Act: Interesting Angles on DOL’s Fiduciary Rule #34

Part 35- Presidential Memorandum on Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #35

Part 36 –Retirement Advice and the SEC: Interesting Angles on the DOL’s Fiduciary Rule #36

Part 37 – SEC Retirement-Targeted Examinations: Interesting Angles on the DOL’s Fiduciary Rule #37

Part 38- SEC Examinations of RIAs and Broker-Dealers under the ReTIRE Initiative: Interesting Angles on the DOL’s Fiduciary Rule #38

Part 39- FINRA Regulatory Notice 13-45: Guidance on Distributions and Rollovers: Interesting Angles on the DOL’s Fiduciary Rule #39

Part 40 – New Rule, Old Rule – What Should Advisers Do Now?: Interesting Angles on the DOL’s Fiduciary Rule #40

Part 41 – While We Wait: The Current Fiduciary Rule and Annuities: Interesting Angles on DOL’s Fiduciary Rule #41

Part 42 – Rollovers under DOL’s Final Rule: Interesting Angles on DOL’s Fiduciary Rule #42

Part 43 – BICE Transition: More Than the Eye Can See – Interesting Angles on DOL’s Fiduciary Rule #43

Part 44 – Basic Structure of Fiduciary Package (June 9): Interesting Angles on DOL’s Fiduciary Rule #44

Part 45 – DOL Fiduciary “Package”: Basics on the Prohibited Transaction Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #45

Part 46 – How Does an Adviser Know How to Satisfy the Best Interest Standard?: Interesting Angles on the DOL’s Fiduciary Rule #46

Part 47- “Real” Requirements of Fiduciary Rule: Interesting Angles on DOL’s Fiduciary Rule #47

Part 48- The Last Word: The Fiduciary Rule Applies on June 9- Interesting Angles on the DOL’s Fiduciary Rule #48

Part 49- The Requirement to Disclose Fiduciary Status: Interesting Angles on the DOL’s Fiduciary Rule #49

Part 50- Fourth Impartial Conduct Standard: Interesting Angles on DOL’s Fiduciary Rule #50

Part 51- Interesting Angles on the DOL’s Fiduciary Rule #51: Recommendations to Transfer IRAs

Part 52 – Interesting Angles on the DOL’s Fiduciary Rule #52: The Fiduciary Rule and Exemptions: How Long Will Our Transition Be?

Part 53 – Fiduciary Rule and Discretionary Investment Management: Interesting Angles on DOL’s Fiduciary Rule #53

Part 54 – Interesting Angles on the DOL’s Fiduciary Rule #54: The DOL’s RFI and Possible changes to BICE

Part 55- DOL’s RFI and Recommendation of Annuities- Interesting Angles on DOL’s Fiduciary Rule #55

Part 56-Recommendations of Contributions as Fiduciary Advice: Interesting Angles on the DOL’s Fiduciary Rule #56

Part 57- Relief from 408(b)(2) Requirement on Change Notice: Interesting Angles on the DOL’s Fiduciary Rule #57

Part 58- Recommendations to Contribute to a Plan or IRA- Interesting Angles on the DOL’s Fiduciary Rule #58

Part 59- What Plans and Arrangements Are Covered by the Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #59

Part 60- What the Tibble Decision Means to Advisers: Interesting Angles on the DOL’s Fiduciary Rule #60

Part 61- Interesting Angles on the DOL’s Fiduciary Rule #61: The Fiduciary Rule, Distributions and Rollovers

Part 62 – Is It Possible To Be An Advisor Without Being A Fiduciary? – Interesting Angles on the DOL’s Fiduciary Rule #62

Part 63-Policies and Procedures: The Fourth BICE Requirement – Interesting Angles on the DOL’s Fiduciary Rule #63

Part 64 –What Does the Best Interest Standard of Care Require?-Interesting Angles on the DOL’s Fiduciary Rule #64

Part 65- Unexpected Consequences of Fiduciary Rule – Interesting Angles on the DOL’s Fiduciary Rule #65

Part 66- Concerns About 408(b)(2) Disclosures: Interesting Angles on the DOL’s Fiduciary Rule #66

Part 67- From the DOL to the SEC – Interesting Angles on the DOL’s Fiduciary Rule #67

Part 68-Recommendations of Distributions – Interesting Angles on the DOL’s Fiduciary Rule #68

Part 69- Compensation Risks for Broker-Dealers and RIAs: Interesting Angles on the DOL’s Fiduciary Rule #69

Part 70-Interesting Angles on the DOL’s Fiduciary Rule #70: The Fiduciary Rule and Recordkeeper Services

Part 71- Senate, Tax Cuts and Jobs Act, income tax rate, Corporate Tax Rate, Passthrough Entities, Foreign Income, Qualified Property, Interest Deduction Limitation

Part 72-Interesting Angles on the DOL’s Fiduciary Rule #72 – The “Wholesaler” Exception

Part 73- Interesting Angles on the DOL’s Fiduciary Rule #73: Recordkeeper Investment Support for Plan Sponsors

Part 74 –Interesting Angles on the DOL’s Fiduciary Rule #74: One More Fiduciary Issue for Recordkeepers

Part 75 – Interesting Angles on the DOL’s Fiduciary Rule #75: The Fiduciary Rule: Mistaken Beliefs

Part 76 – Interesting Angles on the DOL’s Fiduciary Rule #76

Part 77 – Interesting Angles on the DOL’s Fiduciary Rule #77: The Fiduciary Rule: Mistaken Beliefs (#2)

Part 78 – Interesting Angles on the DOL’s Fiduciary Rule #78: The Fiduciary Rule: Mistaken Beliefs (#3) 

Part 79 – Interesting Angles on the DOL’s Fiduciary Rule #79-The Fiduciary Rule: Mistaken Beliefs (#4)

Part 80 – Enforceable During Transition?: Interesting Angles on the DOL’s Fiduciary Rule #80

Part 81 – Interesting Angles on the DOL’s Fiduciary Rule #81: The Fiduciary Rule Prohibits Commissions… or Not (Myth #6)

Part 82 – Interesting Angles on the DOL’s Fiduciary Rule #82- Undisclosed (and Disclosed) 12b-1 Fees: The Different Views of the SEC and DOL

Part 83 – Part 2 of Undisclosed (and Disclosed) 12b-1 Fees: Interesting Angles on the DOL’s Fiduciary Rule #83

Part 85 – Interesting Angles on the DOL’s Fiduciary Rule #85