The hottest ERISA issue of 2015 is the DOL’s proposal to expand the definition of fiduciary advice. That proposal has become highly publicized because of the White House endorsement and the aggressive Wall Street opposition. Unfortunately, political rhetoric on both sides has dominated the discussion . . . to the detriment of thoughtful analysis. Hopefully, this brief article adds to the “thoughtful” side of the ledger.

The current fiduciary rule – and presumably the proposal — has three basic requirements: a fiduciary must act solely in the interest of the participants and beneficiaries; a fiduciary must act for the exclusive purpose of providing retirement benefits and paying only reasonable expenses; and a fiduciary must engage in a prudent process to make decisions. That’s pretty much it.

While some of the attention is on that standard of conduct, most of the opposition has been to the prohibited transaction rules that apply to fiduciaries. In other words, the greatest controversy isn’t over the fiduciary standard, but instead it is about the fiduciary prohibitions of certain conflicts of interest that apply to fiduciaries.

The most publicized of those prohibitions is that a fiduciary adviser must receive “level compensation,” so that the adviser is not, in effect, able to recommend investments that increase the adviser’s compensation. Obviously, that is a conflict of interest. However, under ERISA and the Internal Revenue Code, it is also a prohibited transaction. While, on the face of it, the prohibition seems reasonable, it has the practical effect of eliminating, or at least severely restricting, many well-established practices by broker-dealers and insurance brokers. In other words, it could be highly disruptive of common current practices.

The financial services industry has lobbied against that prohibition. The DOL is aware of their concerns and has, on the face of it, addressed them. In materials released about the fiduciary proposal, the White House said that it will include an explanation to:

“Preserve the ability of working and middle class families to choose different types of advice: The Department’s proposal will continue to allow private firms to set their own compensation practices by proposing a new type of exemption from limits on payments creating conflicts of interest that is more principles-based. This exemption will provide businesses with the flexibility to adopt practices that work for them and adapt those practices to changes we may not anticipate, while ensuring that they put their client’s best interest first and disclose any conflicts that may prevent them from doing so. This fulfills the Department’s public commitment to ensure that all common forms of compensation, such as commissions and revenue sharing, are still permitted, whether paid by the client or the investment firm.“

Unfortunately, it’s hard to tell if the proposed prohibited transaction “exemption” (that is, an exception to the prohibited transaction rules) will be reasonable. At first blush, it appears that the proposal will require more disclosure about compensation and conflicts of interest . . . and will also require that a fiduciary adviser act in the best interest of the participants. Of course, that’s difficult to measure . . . so the devil will be in the details, in the sense that we won’t know whether the exemption will be workable until we actually see it.

My best guess is that the Office of Management and Budget will release the proposed regulation and exemptions to the public somewhere between late April and mid-June. Other than that, we just have to wait and see.

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The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.