DOL Finalizes Fiduciary Exemption Consistent with Best Interest Standard

Investment professionals can collect payment for a wider range of transactions, so long as they satisfy the reinstated ‘five-part test’ for fiduciaries.

The US Department of Labor (DOL) on Tuesday finalized a fiduciary exemption under the best interest standard, allowing investment advisers to collect payment for a wider range of advice.

The exemption is part of broader regulation for retirement plans under the Employee Retirement Income Security Act (ERISA) that also reinstates the “five-part test” to determine fiduciary status, in line with the best interest standard—called Regulation Best Interest (Reg BI)—put forth by the Securities and Exchange Commission (SEC), according to the DOL. The regulation is called the “Improving Investment Advice for Workers & Retirees Exemption.”

“Under the exemption, investment professionals must plainly tell retirement investors that they are acting as fiduciaries and they must act in the retirement investors’ best interest,” acting Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA) Jeanne Klinefelter Wilson said in a statement.

The regulation from the DOL is the latest in a yearslong struggle to update the fiduciary standard, which under the Obama administration required all investment professionals to act in their clients’ best interest, but was promptly vacated in 2018 under the Trump administration as an overreach of executive authority.

For more stories like this, sign up for the CIO Alert daily newsletter. 

“Our efforts complete the task of replacing a flawed, standalone rule promulgated by the Obama Labor Department,” read a Tuesday opinion piece in the Wall Street Journal from Labor Secretary Eugene Scalia and SEC Chairman Jay Clayton.

“That 2016 rule sought to impose a one-size-fits-all approach that would have made it more difficult both for financial professionals to provide meaningful advice and for investors to find the combination of products and services that worked best for them,” they continued.

The final fiduciary rule has landed somewhere in between the Obama-era rule and what came before, and it could satisfy those who have tired of the constant tug of war over the standard, experts say. But where the fiduciary rule will go after Inauguration Day, and what happens to it then will depend on whoever is selected as the next DOL secretary.

Under Tuesday’s final exemption, investment professionals can collect fees on previously prohibited transactions, such as rollovers into employee benefit plans and individual retirement accounts (IRAs), so long as they satisfy the five-part investment test. Professionals have to adhere to impartial conduct standards, act in their clients’ best interest, receive reasonable compensation, and make no misleading statements.

The exemption applies broadly to registered investment advisers (RIAs), as well as to broker/dealers (B/Ds), banks, insurance companies, and other individual investment advisers.

The exemption will be effective 60 days after it’s been published in the Federal Register.