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A U.S. Department of Labor (DOL)
proposed rule, published in the
Federal Register on Oct. 22, 2010, updates and broadens the definition of "fiduciary" to include any person who provides investment advice to employee retirement plans and plan participants for a fee or other compensation.
The proposed rule would define these advisors as fiduciaries even if they do not provide advice on a “regular basis.” On adoption, the rule would affect plan sponsors, participants and beneficiaries of defined benefit and defined contribution retirement plans, as well as providers of investment and investment advice-related services to such plans and accounts, including consultants and brokers who offer investment advice.
The upshot: stricter regulations and expanded liability for consultants, advisors and brokers who offer investment-related advice to employers that provide 401(k) and other employee retirement plans.
According to the DOL, the proposed rule seeks to:
Fiduciaries and Nonfiduciaries
The DOL's proposed rule would amend a 1975 regulation that defines when a person providing investment advice becomes a fiduciary under the Employee Retirement Income Security Act (ERISA).
fiduciary standard of care requires fiduciaries that provide advice, including investment recommendations, to ensure that the advice is in the client's best interest, above the advisor's own interest or his/her firm’s interest. Nonfiduciary advisors, such as brokers and other service providers, are often held to the
suitability standard of care, which provides that they need only make recommendations that are “suitable” for a client based on the client's profile. In other words, if an essentially similar but lower cost investment were available, a nonfiduciary advisor need not recommend it (unless the price is so high it becomes unsuitable).
"The proposal will ensure that plans receive advice based on reliable information that protects the interests of plan participants and beneficiaries," said a statement released by Phyllis C. Borzi, assistant secretary of labor, who oversees the DOL's Employee Benefits Security Administration. "We believe that this proposal more closely reflects the statutory language of ERISA and the realities of the current investment marketplace, and therefore will ensure those who provide investment advice are held accountable as fiduciaries under the law."
The Independent Directors Council, which represents independent directors of mutual funds,
testified before the House Financial Services Committee that it "supports the imposition of a fiduciary duty on broker-dealers who provide investment advice about securities, just as investment advisors are held to a fiduciary duty standard for the same conduct."
However, some securities brokers opposed this development.
David A. Genelly, an attorney who advises brokers and financial advisors, wrote in
a column published in
Investment News: "A broker is a broker, and an advisor is an advisor. If brokers are now going to have the same fiduciary duties that advisors have, simply because they render some adjunct 'investment advice' when they make recommendations, there is no telling where the liability will stop."
Exceptions to Fiduciary Status
The proposed regulations do provide for certain actions that are not treated as rendering investment advice and would not result in fiduciary status. These include:
Written comments on the proposed rule should be submitted to the DOL by Jan. 21, 2011, which is 90 days after the rule's publication. Comments may be submitted by e-mail to e-ORI@dol.gov (enter into subject line: Definition of Fiduciary Proposed Rule) or by using the Federal eRulemaking portal at
Stephen Milleris an online editor/manager for SHRM.
DOL Releases Proposed Fiduciary Definition Regulations, JP Morgan, October 2010
SHRM Online Retirement Plans Resource Page
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