Furthermore, in adopting the rule the DOL was well aware of concerns by some industry participants that the ICS (including the BIS) were “vague.”
Some commenters asserted that some of the exemption’s terms were too vague and would result in the exemption failing to meet the “administratively feasible” requirement under ERISA section 408(a) and Code section 4975(c)(2). The Department disagrees with these commenters’ suggestion that ERISA section 408(a) and Code section 4975(c)(2) fail to be satisfied by this exemption’s principles-based approach, or that the exemption’s standards are unduly vague. It is worth repeating that the Impartial Conduct Standards are built on concepts that are longstanding and familiar in ERISA and the common law of trusts and agency. Far from requiring adherence to novel standards with no antecedents, the exemption primarily requires adherence to basic, well-established obligations of fair dealing and fiduciary conduct. Moreover, as discussed above, the exemption’s reliance on these familiar fiduciary standards is precisely what enables the Department to apply the exemption to the wide variety of investment and compensation practices that characterize the market for retail retirement advice, rather than to a far narrower category of transactions subject to much more detailed and highly-proscriptive conditions (i.e., rules).
As previously discussed, the Impartial Conduct Standards are not unduly vague or unknown, but rather track longstanding concepts in law and equity. In response to interpretive questions posed in the comments, the Department has provided a series of requested interpretations in the preceding preamble section.
The financial institutions and advisors must adhere to basic standards of impartial conduct. In particular, under this standards-based [i.e., principals] approach, the advisor and financial institution must give prudent advice that is in the customer’s best interest, avoid misleading statements, and receive no more than reasonable compensation.
The DOL addressed the principal concept of the BIS on numerous occasions throughout the discussion of the rule adding even more specificity to the concept and repeatedly emphasizing that the concept is not new and unknown but rather well founded in the 40-year application of ERISA and the even older law of trusts.
The best interest standard, as set forth in the exemption, is intended to effectively incorporate the objective standards of care and undivided loyalty that have been applied under ERISA for more than 40 years. Under these objective standards, the advisor must adhere to a professional standard of care in making investment recommendations that are in the retirement investor’s best interest. The advisor may not base his or her recommendations on the advisor’s own financial interest in the transaction. Nor may the advisor recommend the investment, unless it meets the objective prudent person standard of care. Additionally, the duties of loyalty and prudence embodied in ERISA are objective obligations that do not require proof of fraud or misrepresentation, and full disclosure is not a defense to making an imprudent recommendation or favoring one’s own interests at the retirement investor’s expense.