Major Changes to DOL Fiduciary Investment Adviser Definition and Prohibited Transaction Exemptions

By Jessica Morgan and Darcy Norville

On April 6, 2016, the U.S. Department of Labor (the "DOL") issued final regulations redefining fiduciary investment advice for ERISA-covered employee benefit plans and individual retirement accounts ("IRAs"). The final rule significantly expands the definition of who is a fiduciary and what constitutes fiduciary advice.

This Tonkon Tip is the first in a series of four Tips that will cover (1) who is now considered a fiduciary and what activities fall within the definition of fiduciary investment advice; (2) what activities are excluded from the new definition of fiduciary investment advice; (3) what requirements apply to fiduciary investment advisers who charge only "level fees"; and (4) what requirements apply under the new "best interest contract exemption" to fiduciary advisers who receive commissions, 12b-1 fees and other forms of compensation that are not "level fees." This Tip focuses on who is a "fiduciary adviser" and what is considered fiduciary "advice."


A fiduciary of an ERISA-covered plan or IRA is required to carry out his or her duties solely in the interest of plan participants and "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." The fiduciary duty of loyalty precludes a fiduciary from entering into conflict of interest transactions with an ERISA plan or IRA. Individuals who act as fiduciaries and breach those duties are subject to personal liability for resulting losses.

Under ERISA and similar provisions of the Internal Revenue Code (the "Code") that apply to IRAs, a fiduciary to an ERISA plan or IRA is restricted by prohibited transaction rules, the violation of which carry stiff DOL or tax penalties and the risk of legal claims of breach of fiduciary duties. The prohibited transaction rules prohibit the provision of services and other transactions between the fiduciary and plan or IRA, and prohibit fiduciaries from engaging in self-dealing or receiving compensation from third parties in connection with a transaction involving the plan or IRA.

The effect of these prohibitions is that, without an exemption, a fiduciary cannot transact with a plan or IRA or exercise fiduciary authority to increase its (or an affiliate's) compensation (such as recommending the purchase of an investment product that will pay a commission to the adviser), or otherwise collect payments from third parties in connection with a transaction involving the plan or IRA (such as a revenue sharing payment of 12b-1 fee). Without an exemption, a fiduciary under ERISA or the Code cannot engage in principal transactions with (i.e., selling products out of inventory) or extend credit to (e.g., lend cash or securities) a plan or IRA. Without an exemption, a fiduciary cannot recommend the purchase of affiliate's products or services (i.e., proprietary products).

The final rule amends the regulatory definition of fiduciary investment advice to replace the historic five-part test with a new definition that encompasses activities that were not previously considered to fall within the scope of providing investment advice for a fee, within the statutory language in ERISA and the Code.

Hence, the revised regulations are of critical importance for broker-dealers, insurance agents, pension consultants, record keepers, custodians, and other providers of investment products or administrative services to plans and IRAs. With the adoption of the new definition of "fiduciary", many in the financial services industry will have to make significant changes in their business practices.

Fiduciary "Advice" Under the New Rules

The definition of fiduciary and investment advice is focused on retirement plans and IRAs. The advice applies whether it is at a plan level or at the participant level. Plans include any ERISA plan and any IRA, including SIMPLE plans and SEP IRAs, Archer Medical Savings Accounts (MSAs), Health Savings Accounts (HSAs), Coverdell education savings accounts and Keogh plans for self-employed individuals.

Fiduciary "advice" includes, for a direct or indirect fee, any:

  1. Recommendation as to the advisability of acquiring, holding, disposing of or exchanging an investment or how to invest such proceeds after it is rolled over, transferred or distributed, or
  2. Recommendation as to the "management" of securities of other investment property, including recommendations:
    1. Regarding investment policies or strategies or portfolio composition;
    2. Regarding the selection of other persons to provide investment advice or investment management services;
    3. Regarding rollovers, transfers or distributions from a plan or an IRA; or
    4. Regarding the selection of investment account arrangements (e.g. brokerage vs advisory).

A "recommendation" is a communication that, based on its content, context and presentation would reasonably be viewed as a suggestion that the recipient engage in or refrain from taking a course of action. Recommendations must be provided by an adviser who:

  1. Represents or acknowledges its fiduciary status;
  2. Renders advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the recipient; or
  3. Directs the advice to a specific recipient regarding the advisability of a particular investment or management decision.

Rule of Thumb: The more specific the communication, the more likely it is a recommendation.

Additional activities that are now considered fiduciary advice under the new rule include:

  • IRA Rollovers – a recommendation to, or not to, roll over assets from a 401(k) or other employer-sponsored plan to an IRA is now fiduciary advice.


  • Recommending investment advisers – be careful about referral fees and other solicitation arrangements with investment advisers or broker dealers.


  • Recommending investment policies or strategies – the final rule does not require that such advice be individualized to constitute fiduciary advice.


  • Recommending an investment account arrangement – fee structures will need to be reviewed to determine whether different arrangements result in different amounts of net compensation.


  • Advice regarding plan distributions – advising a plan participant or IRA owner about taking a distribution from a plan – including required minimum distributions – may constitute investment advice if it includes a recommendation regarding investment of the funds.

Effective Dates

The new rules are effective April 10, 2017. However, the DOL has adopted a phased implementation approach for certain prohibited transaction exemptions extending to January 1, 2018.  During the period between April 10, 2017 and January 1, 2018, financial institutions and advisers must prepare for compliance with all conditions of the exemptions and must adhere to impartial conduct standards, provide notice to investors and designate a responsible person for addressing material conflicts of interest and compliance.

This client update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have any questions regarding the final regulations and prohibited transaction exemptions discussed in this update, please contact a member of Tonkon Torp's Financial Services practice group.

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