Last week, the U.S. Department of Labor held hearings to discuss a proposed change to the current definition of “fiduciary” in the Employee Retirement Income Security Act (ERISA) of 1974 (“Fiduciary rule change could mean compliance crush for B-Ds,”InvestmentNews, March 6, 2011). Under the proposed change, a “fiduciary” would be “anyone who renders advice to a retirement plan or participant for a fee or who provides advice or recommendations on the management of securities.”
Under current regulations, the standard is only applied to advisers who, on a regular basis, give advice and recommendations that serve as a primary basis for investment decisions by plans or plan participants and is individualized based on the particular needs of the plan. The proposed change would mean that more financial professionals would be considered “fiduciaries.” Like all expansions of the fiduciary standard, this translates into increased protections for investors.
If the Department of Labor, which holds rule-making powers over individual retirement accounts (IRAs), adopts the proposed change and applies it to IRAs, then:
- A “fiduciary duty” could be applied to anyone who gives investment advice for compensation to an employee benefit plan or plan participants regardless of whether the advice was given regularly or on a one-time basis or served as the “primary basis for investment decisions” by the advisee;
- Broker-dealer firms and their representatives would be prohibited from receiving commissions on IRAs; and
- 12(b)-1 fees would no longer be allowed in IRAs (For more information about 12(b)-1 fees, see our July 10, 2010 blog post).
The Department of Labor plans to issue a final decision by the end of 2011.