The White House has called for a fiduciary standard under the securities laws for investment advice given by broker-dealers and their representatives.

If that proposal is adopted, what will it mean for investment advice for 401(k) plans and participants?

In theory, it would be meaningless. However, in practice, the change would probably be significant.

First, as to the theory, there should not be any legal impact because ERISA already imposes fiduciary status on broker-dealers who provide individualized investment advice to plans and participants. And, while we do not know the details of how the proposed changes will be developed, it is doubtful that the new fiduciary standard would be any higher than the existing ERISA rules.

Before discussing the practical implications, let’s look at the major differences between fiduciary and non-fiduciary advice by broker-dealers—using general fiduciary concepts.

  • Fiduciary advice is governed by the prudent man rule. That means that the advice will be measured by the standard of a hypothetical knowledgeable investor or adviser, be based on the objectives of the investor (for example, the terms of a personal trust or a retirement plan), and must be consistent with generally accepted investment theories.

  • A fiduciary has a duty of loyalty to the investor . . . which means a fiduciary adviser must place the interests of the investor ahead of those of the adviser. That requires, among other things, that the adviser disclose, before investment decisions are made, all material conflicts of interest.

With that background, the most likely consequences on 401(k) plans will be:

  • Since broker-dealers will, if the proposal is implemented, be fiduciaries under the securities laws when they give advice, one change may be that more broker-dealers will permit their advisers to serve as fiduciaries for ERISA-governed retirement plans. Since it is likely that the fiduciary responsibilities under the two laws will be similar, the training programs for the advisers for fiduciary compliance under both sets of laws should be similar, the internal procedures and practices for compliance with both sets of laws should be similar, and so on. Since much of the effort and cost of fiduciary compliance would be incurred to comply with the new securities law standard, it is likely that many, and perhaps most, broker-dealers would develop fiduciary programs or expand their existing fiduciary programs for retirement plans.

  • The securities laws related to fiduciary standards (for example, the RIA requirements) require disclosures of material conflicts of interest. While ERISA has not required non-fiduciary advisers to disclose conflicts, it has required that the primary plan fiduciaries (i.e., plan sponsors) be aware of conflicts. Further, while the law is not entirely clear, there is an argument that fiduciary advisers are already obligated by ERISA to disclose material conflicts. Furthermore, there are proposals on the table (for example, the 408(b)(2) regulation and legislation that is working its way through Congress) that would require disclosures of certain conflicts of interest by non-fiduciary service providers.

Assuming that the newly proposed fiduciary rules would require disclosures of material conflicts, one of the burdens of ERISA fiduciary compliance will be largely eliminated by the securities laws imposing the same, or substantially similar, requirements.

For these reasons, my belief is that the proposed fiduciary standards under the securities laws will accelerate the move by broker-dealers to fiduciary status under ERISA.

Of course, there will continue to be significant differences between the fiduciary and conflicts standards under the securities laws and under ERISA. As the White House proposal is developed and works its way through Congress, those differences will be the subject of analysis and debate. Assuming that the proposal is enacted into law, broker-dealers will want to focus on the differences in order to develop their internal compliance practices and to avoid risk management and legal problems.


Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

Source: Adviser Report