The US Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment advice to plans, participants (including rollovers), and IRAs (including transfers of IRAs).

This post discusses the “fiduciary acknowledgement” definition of fiduciary investment advice in the DOL’s proposed fiduciary regulation. More specifically, the proposed regulation says that a person will be an ERISA and Code fiduciary if “The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.” (There will be future articles discussing “investment recommendations”, but for the moment, consider it to be a recommendation for a retirement investor to invest in securities, insurance or other property.)

The preamble to the proposal goes into more detail on the DOL’s reasoning:

An investment advice provider that acknowledges fiduciary status has expressly agreed that the customer may place trust and confidence in them. Furthermore, as discussed in the Fifth Circuit’s opinion, honesty is a general premise of a common law fiduciary relationship. This provision of the proposal would ensure that parties making a fiduciary representation or acknowledgment cannot subsequently deny their fiduciary status if a dispute arises, but rather must honor their words.

Comment:  To fully appreciate the reference to the Fifth Circuit’s opinion and to “trust and confidence”, see my blog article The New Fiduciary Rule (4): A Relationship of Trust and Confidence.

The preamble continues:

For purposes of the proposal, paragraph (c)(1)(iii) [the fiduciary acknowledgement provision] is not limited to the circumstances in which the person specifically represents that they are a fiduciary for purposes of Title I or Title II of ERISA, or specifically cites any particular statutory provisions. It is enough that the investment advice provider told the retirement investor that the investment advice or investment recommendations were or will be made in a fiduciary capacity. As with the other contexts identified in proposed paragraph (c)(1), this is intended to align fiduciary status with the retirement investor’s reasonable expectations. A retirement investor who is told by a person that the person will be acting as a fiduciary reasonably and appropriately places their trust and confidence in such a person. 

Comment: The regulatory provision requires, for fiduciary status, that the representation or acknowledgement must be connected with the investment recommendation. But, how closely? The DOL likely contemplates a statement, verbal or in writing, that is “connected with” the recommendation, as opposed to a general statement such as those found in ADV disclosures of registered investment advisers. However, the language in the preamble is broader than in the regulation, for example, the preamble could be read as meaning that a more general status as a fiduciary would invoke fiduciary status. Unless there is a more detailed description in the final regulation or its preamble, the line will ultimately be drawn by the courts. Obviously, it is better to have regulatory clarity than lawsuits.

Explanation: The references to Title I and Title II of ERISA are technical references to what we commonly call ERISA—Title I is the DOL’s province, and Title II refers to  the parts of the Code governing qualified plans and IRAs and which is enforced by the IRS.

Concluding Thoughts

It is hard to argue that someone who represents that they are a fiduciary for a particular recommendation to a retirement investor shouldn’t be held to a fiduciary standard. As a result, I imagine this will be in the final regulation in substantially the same language.

However, my hope is that the DOL will explain, perhaps in the preamble to the final regulation, that a general representation of fiduciary status or adherence to fiduciary standards wouldn’t result in fiduciary status for purposes of ERISA or the Code. In other words, as I look as this from the perspective of a lawyer who will advising clients on compliance with the final rules, I believe that the DOL should clarify that the representation must be connected to the recommendation.

After all, registered investment advisers are fiduciaries for purposes of securities regulation, but that shouldn’t necessarily mean that they are Title I and Title II fiduciaries in every case.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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