Fiduciary Compliance Remains a Squishy Concept

Content, context and presentation are now the important factors in determining whether a particular activity represents fiduciary advice—but that could change.

A recent webinar presented by 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 regulatory change is grasping 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 wherein it was the exception that a firm could not find a way to cite the five-part test to deny fiduciary liability into an environment in which practically anyone offering advice for compensation to retirement investors—including those purchasing products in individual retirement accounts (IRAs)—will immediately be deemed a fiduciary.

The attorneys agreed that the DOL in the last 10 years or so had grown “incredibly frustrated” with the way its granular guidance about the five-part test, which it issued in good faith 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 pretty confusing spot, given the fact that an anti-regulation Republican is in the White House and in command of the agency that is supposed to enforce the new fiduciary rule, which in fact has not even fully come into effect yet, as applicability dates for the rules various provisions stretch well into 2018.

And so the Goodwin attorneys urged advisers to continue to track the outstanding memorandum from President 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 The fiduciary rulemaking could still be withdrawn or clarified in a substantial way, they warned.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 stated, “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 out by ERISA; however they do not yet actually have to paper individual contracts to this effect with all their clients. This is important in cases where the advisory practice is continuing to assess compensation via commissions rather than flat fees for service.  

One attorney speculated that “we will have to wait and see whether the full BIC requirement including the contract comes into place. My theory, tentatively, is that the Trump administration could decide to maintain this middle ground transition standard where advisers can use commissions without papering enforceable contracts, so long as they make good-faith efforts to eliminate potential conflicts.” It would then seemingly be up to the DOL to pursue violators, rather than the plaintiffs’ bar

The attorneys concluded that, whatever the fiduciary future brings, firms will want to be thinking deeply about who on their staff is talking directly or indirectly to clients—and how this group can be kept up to speed on changing policies and procedures regarding the all-important distinction between education and advice under ERISA. “It’s not just the big firms with big call centers that may need to make changes,” one attorney warned. “Whatever your organization looks like, you need to make sure the people who are on your own end of the phone are up to speed about your approach.”