trendspotting | PLANADVISER July/August 2017

Fuzzy on Fiduciary Compliance

Context and presentation are factors

By John Manganaro | July/August 2017
Art by Lisk Feng

A recent webinar presented by law firm Goodwin Procter offered extensive analysis of the ongoing implementation of the Department of Labor (DOL) fiduciary rule, which has greatly expanded the definition of fiduciary investment advice under the Employee Retirement Income Security Act (ERISA). 

According to a team of Goodwin ERISA attorneys, the key to understanding the ongoing change is to grasp the difference between the old “five-part test” formerly used to determine fiduciary status, and the new blanket approach. Stated simply, the advisory industry is moving from an environment where firms typically could find a way to cite the five-part test in order to deny fiduciary liability, to one where practically anyone offering advice for compensation to retirement investors—including those purchasing products in individual retirement accounts (IRAs)—will immediately be deemed a fiduciary.

According to the attorneys, in the last 10 years or so, the DOL had grown “incredibly frustrated” with the way its granular guidance about the five-part test, which it issued to help providers understand when they were acting as fiduciaries, was being aggressively used to undermine its otherwise broad-based policing authority of qualified retirement plans. That frustration strongly fueled the effort under the last Democratic presidential administration to establish a far stricter and more direct definition of fiduciary advice under ERISA.

Today the industry is left in a somewhat confusing spot, given that an anti-regulation Republican is in the White House and in command of the agency supposed to enforce the new fiduciary rule—a rule still not even fully in effect, as the applicability dates for various provisions stretch well into 2018.

Therefore, the Goodwin attorneys urged advisers to continue to track the outstanding memoranda from President Donald Trump, instructing a full review of the fiduciary regulations and exemptions. The fiduciary rulemaking could still be withdrawn or clarified in a substantial way, they warned. As one attorney said, “It is not unreasonable, in our mind, to be hedging between different approaches right now, in terms of thinking about abandoning commission or moving down another path. As we have stressed, much of this is still subject to change.”

The attorneys suggested they are particularly interested to see how the “transition best interest contract (BIC)” period plays out. Right now, under the fiduciary rule transition period, advisers to retirement accounts are fiduciaries, and they have to comply with the impartial conduct standards set forth by ERISA; however, they do not yet have to paper individual contracts to this effect with all of their clients. This is important in cases where the advisory practice is continuing to assess compensation via commissions rather than flat fees for service.