The Department of Labor (DOL) is considering finalization of a proposal changing the definition of who is an investment advice fiduciary with respect to an IRA and a workforce savings plan such as a 401(k) plan -- both of which are governed by the Employee Retirement Income Security Act (ERISA). The DOL proposal would substantially expand the circumstances in which a broker-dealer (BD), financial advisor (FA) or other plan service provider becomes a fiduciary by treating much of the info or recommendations that they provide as investment advice.
The proposed rule would not only subject many of the broker dealers, financial advisers and service providers selling and supporting Transamerica products and services to a fiduciary duty, but would also prohibit such persons and entities from receiving any compensation contingent on the sale of products and services, including any revenue sharing arrangement or commissions. This would significantly impact the business model used by BDs, FAs, and other service providers selling and supporting Transamerica products and services to workplace plans, IRAs and participants in those plans. The DOL proposal would also have a detrimental impact on investors, especially the smaller investor, who benefits (from a cost standpoint) from the current model which permits commission based sales, revenue sharing arrangements, etc.
The DOL proposal also exceeds and conflicts with the scope of the proposed SEC rulemaking related to a BD standard of care under Dodd-Frank, especially in the IRA space. As required by the Dodd-Frank Act, earlier this year the SEC provided a report to Congress regarding the standard of care for investment advisers and broker dealers. The SEC report recommends that the SEC establish a harmonized standard of care, and that any potential conflicts of interest must be disclosed, but not prohibited. In addition to creating conflicts with new rules expected from the SEC and the CFTC under the Dodd-Frank Act, the DOL proposed rule would create direct conflicts with requirements of existing securities laws, including the Investment Advisers Act of 1940. Several provisions of DOL’s proposed rule, including the ‘seller’s exception’ and the valuation requirements will require broker-dealers to comply with two different requirements.
To date, the industry and many Members of Congress have expressed their concern with the DOL proposal. DOL has decided that it will re-propose the rule. We expect the re-proposed rule to be released sometime this summer.
