Share

Northwest OH Legal Blog

Wednesday, May 13, 2015

PROPOSED DOL FIDUCIARY RULE PROTECTS INVESTORS BUT WILL IT SIMPLIFY COMPLIANCE BURDENS?

            The Department of Labor (DOL) proposed a new rule that will cast a wider net over the definition and standards of a “fiduciary” where individual investors are concerned and impose greater disclosure requirements on investment advisers’ fees and conflicts of interest.  This rule has been in the making for over 5 years and was originated as a way to help less discerning investors, mainly in the middle class masses, avoid excessive fees and advice from brokers and investment advisers who may not fully disclose fees and commissions,  thereby lessening the integrity of many investment professionals who fully disclose fees and earnings, provide client-centered advice and are highly capable. If passed after a 75-day notice and comment period, the regulation will level the playing field for investment advisers who are well-intentioned and put their clients’ needs ahead of their own financial gain.  The path of this proposed regulation may be fiery, since the rule was approved by the United States Office of Management and Budget after only a 50-day review when it was projected to be reviewed for at least 90 days. 

            President Obama endorsed this proposed regulation in February, 2015 as a way to promote “middle- class economics.”   By protecting investors in the generation X and Y groups, who may not be able to rely on a weak system of Social Security in the coming years or a company sponsored pension plan, this new regulation may ironically add more complexity and ultimately burden those same investors with complex compliance red tape.

            Current regulations require analysis of a 5-prong test to determine if a person or entity is providing bona-fide investment advice as a fiduciary. The five-part test requires that the advisers (1) Make recommendations on investing in, purchasing or selling securities or other property, or give advice as to their value; (2) On a regular basis; (3) Pursuant to a mutual understanding that the advice; (4) Serves as a primary basis for investment decisions; and (5) Will be individualized to the particular needs of the plan.

            Regulations proposed by the DOL broaden the definition of fiduciary to specify that a  person provides fiduciary-related investment advice by (1) providing investment or investment management recommendations or appraisals to an employee benefit plan, a plan fiduciary, participant or beneficiary, or an individual retirement account (IRA) owner or fiduciary, and (2) either (a) acknowledging the fiduciary nature of the advice, or (b) acting pursuant to an agreement, arrangement, or understanding with the advice recipient that the advice is individualized to, or specifically directed to, the recipient for consideration in making investment or management decisions regarding plan assets, pursuant to a mutual understanding of the parties.

             Further, the new definition of fiduciary investment advice generally covers the following categories of advice:  (1) investment recommendations, (2) investment management recommendations, (3) appraisals of investments, or (4) recommendations of persons to provide investment advice for a fee or to manage plan assets.  

            So who will this proposed and expanded definition of a fiduciary apply to if it makes it through the 75-day comment period and public hearings, unscathed, and is finalized? This definition will apply to anyone who gets paid for providing individualized advice to a plan sponsor, a participant in a retirement plan or an IRA in consideration for making a retirement-related investment decision.  It applies to brokers, investment advisers, insurance agents or financial planners equally.  However, the rule as it is being proposed will not deem a plan sponsor or a plan’s service providers as fiduciaries if they are educating participants on investments. 

            Brokers will still have the freedom to charge for their services in a variety of approved ways including commissions, revenue sharing arrangements and 12(b)(1) fees. The unique feature of this proposed regulation lies in the DOL’s creation of a new kind of prohibited transaction exemption, dubbed the “best interest contract exemption.”  Investment firms and advisers who operate under this exemption may receive commissions and revenue sharing amounts as long as they commit to putting their client’s best interests first and fully disclose any conflicts of interest that would encourage their recommendation of an investment based on compensation, awards or other advantages that they might receive  for doing so. All hidden fees must also be disclosed to fall under this prohibited transaction exemption.

            Originally proposed in 2010, the rule was withdrawn in 2011 amid vehement disagreement from financial industry leaders, who asserted that the expanded definition of “fiduciary” along with  increased oversight on investment advisers would significantly raise liabilities for brokers, forcing them to abandon clients with modest incomes who greatly need investment advice to meet retirement income goals.  This proposed regulation, like many others that affect retirement-related issues seems to raise more questions about how it will be implemented than answers as to how it will benefit investors that already have well-meaning and transparent advisers. 

 


Archived Posts

2017
September
August
July
June
May
April
March
February
January
2016
December
November
October
September
August
July
June
May
March
February
January
2015
November
October
September
August
July
June
May
April
March
2014
October
September
July
June
May
April
March
February
January
2013


With offices in Toledo and Lima, OH Allotta Farley Co., L.P.A. serves clients throughout northwest OH with various legal matters. Areas of service include Allen County, Ashland County, Auglaize County, Crawford County, Defiance County, Erie County, Fulton County, Hancock County, Hardin County, Henry County, Huron County, Lucas County, Marion County, Mercer County, Morrow County, Ottawa County, Paulding County, Putnam County, Richland County, Sandusky County, Seneca County, Van Wert County, Williams County, Wood County, Wyandot County.

Disclaimer
Hiring an attorney is an important decision which should not be based solely on advertising. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.



© 2017 Allotta Farley Co., L.P.A. | Disclaimer
2222 Centennial Road, Toledo, OH 43617
| Phone: 419.535.0075
121 West High Street, 10th Floor, Lima, OH 45801
| Phone: 419.224.0075

Labor Union Representation | Taft–Hartley/Multiemployer Benefit Plans | Workers' Compensation | Unemployment/Appeals | ERISA Disability | | Attorneys

Law Firm Website Design by
Zola Creative