Top of Mind

The DOL’s Proposed Fiduciary Rule: Some “Top of Mind” Thoughts

As the 123-page Department of Labor (DOL) Fiduciary Rule arrived on my computer on the evening of June 29, I did not have high expectations. After all, the DOL has been at this for a decade, with no success. And the prior Fiduciary Rule - which I liked - did not survive a court challenge from the very same person who now runs the DOL.

However, after reading the document, I found that my initial impression was wrong. Sure, the myriad of ways that investment advice fiduciaries can be paid under the new rule’s prohibited transaction exemption does appear to be designed to protect them, as opposed to participants. And the rule’s view of proprietary products was on the charitable side, to put it mildly; here’s an example: “Product limitations can serve a beneficial purpose by allowing broker-dealers and associated persons to develop increased familiarity with the products they recommend.” Say what? I am fairly certain that, in the age of the internet, broker-dealers can easily develop a mastery of "XYZ" mutual fund, whether it is proprietary or not.

But aside from those areas, there were several bright spots. First, the new rule included a significant amount of language associated with putting the interest of the participant ahead of the fiduciary adviser. Specifically, the term “impartial conduct standards,” which is mentioned a whopping 48 times in the proposed rule, requires that a) investment advice must be in the best interest of the investor and does not place any other interests ahead of that interest; b) compensation paid for such advice must be reasonable; and c) statements made with respect to the transaction must not be materially misleading. Now, on the downside, all of this is limited by the verbiage “at the time it (investment advice) is provided,” which means it cannot be revisited if the investment advice does not turn out to be in the best interest of the participant in the future. However, even with that caveat, this language can be an effective deterrent for those who would place their own interest above that of those they serve.

And, while clearly this is a watered-down version of the previous Fiduciary Rule, it is not so weak as to have no teeth at all. There are a decent number of hoops to jump through to take advantage of the prohibited transaction exemptions, which will likely discourage many bad actors from attempting to exploit participants. And, speaking of bad actors, those convicted within the past ten years of certain crimes arising out of their provision of investment advice to retirement investors, or who engaged in systematic or intentional violation of the conditions of the prohibited transaction exemption, or provided materially misleading information to the DOL in relation to their conduct under the exemption, are ineligible for the exemption entirely.

The fact that the Fiduciary Rule will not be a “pushover’ for potential bad actors is particularly evident with regard to rollovers. Much of the proposed rule is dedicated to rollover activity, and it is quite clear that the DOL has a concern in this area. The proposed rule requires documentation of the reasons why each individual rollover was prudent, with specific reasoning (i.e., the retirement investor’s alternatives to a rollover, including leaving the money in his or her current employer’s plan, if permitted, and selecting different investment options; the fees and expenses associated with both the plan and the IRA, etc.) and it does a lot to address the current "asset raiding" of retirement plan accounts by some providers.

The major negative I found in the rule is the fact that the DOL could not think of something better than reverting to a five-part test written in 1975 to determine an investment advice fiduciary. This outdated test is far from the clearest standard for investment fiduciary conduct. So why use it again? Likely because the DOL was under pressure to get this rule out, given that it is the final year of a presidential term.

It is important to remember that even if this proposed rule morphs into a final rule that everyone can live with, the last final rule was quickly set aside by an incoming administration, even when it was “this close” to becoming effective. However, I hold hope that there will be a final Fiduciary Rule that will go into effect before I retire! Granted, that is awhile from now…

Do you disagree with my first impressions of the Fiduciary Rule? Feel free to share your thoughts with me on LinkedIn, Twitter or at

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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