Why the Advisers Act Still Matters as DOL Proposes Rule

The Investment Advisers Act of 1940 will mark its 86th anniversary next month, and legal and industry observers say a proposed Labor Department rule would change how fiduciary duties apply to retirement plans and private investments.

Knut Rostad, co-founder and president of the Institute for the Fiduciary Standard, warned the Department of Labor proposal would reduce the duties that SEC-registered advisors now follow, including duties of care and loyalty and requirements to avoid or disclose and obtain consent for conflicts of interest.

Under the proposal, plan fiduciaries evaluating alternative investments in 401(k) plans could use a primarily procedural review of six factors instead of conducting a substantive, independent investigation. The procedural approach would allow reliance on sponsor representations, marketing materials and industry statements rather than requiring deeper due diligence on performance, fees, liquidity and valuations.

Rostad wrote that the rule would “invite conflicts of interest” and argued that, if implemented as written, it would amount to “the death of ERISA,” reversing expectations that fiduciaries perform independent inquiries before investing plan assets in less transparent products.

Fiduciary law scholar Tamar Frankel wrote that a core rule preventing fiduciaries from acting in conflicts of interest is central to fiduciary law. The 1963 Supreme Court decision in Securities and Exchange Commission v. Capital Gains Research Bureau described the Advisers Act as reflecting “a congressional recognition of the delicate fiduciary nature of an investment advisory relationship.”

Critics point to limited transparency in many alternative investments. Private funds and other nonpublic vehicles often do not provide the same performance data, fee breakdowns, liquidity schedules or independent valuations available for public-market products. They say allowing procedural checks in place of substantive verification could leave plan participants without independent confirmation of key product features.

Supporters of the Labor Department proposal argue it could expand access to alternative investments for retirement savers and reduce legal risks that deter plan sponsors from offering such options. Opponents counter that expanding access should not lessen the standards that govern fiduciary conduct when evaluating complex or opaque products.

The Advisers Act was enacted as part of 20th-century efforts to professionalize investment advice and to require advisors to act in clients’ best interests. Commentators note parallels between those duties and earlier American commitments to conduct public and financial affairs free of interested ties.

The Labor Department has solicited public comment on the proposal. Legal groups, plan sponsors and industry groups are preparing formal positions that could shape the final rule and its enforcement.