On June 29, the Department of Labor (DOL) proposed a new regulation to govern investment advice pertaining to retirement accounts. This new rule replaces an earlier rule that was invalidated in 2018 by a federal appeals court.

The proposed rule would provide exemptions under federal law allowing fiduciaries to receive compensation for advice that would otherwise be prohibited, such as third-party payments, as long as they act in a retirement saver’s best interests.

The new proposed class exemption would require fiduciary investment advice to be provided in accordance with impartial conduct standards, including a best interest standard, a reasonable compensation standard, and a requirement to make no materially misleading statements about recommended investment transactions and other relevant matters. The proposed exemption would be available to registered investment advisers, broker-dealers, insurance companies, banks, and individual investment professionals who are their employees or agents.

It is the third time in a decade that the agency has revisited the definition of investment advice under the Employee Retirement Income Security Act of 1974 (ERISA), which governs retirement plans.

What’s changed since the last version of this rule was proposed?

The rule officially reinstates the five-part test from 1975 under ERISA to determine who is a fiduciary. A financial institution or investment professional which meets this five-part test and receives a fee or other compensation, whether direct or indirect, is an investment advice fiduciary under ERISA and the Internal Revenue Code (Code).

With regard to rollover recommendations, all prongs of the five-part test (including that the advisor must regularly render advice on which their clients rely to make investment decisions) must be satisfied for a financial institution or investment professional to be deemed an investment advice fiduciary.

The preamble to the proposed rule also offers additional clarification on the practical application of the five-part test. The DOL notes that under the proposal, “status as an investment advice fiduciary will be informed by all the surrounding facts and circumstances.” 

The best interest standard in the new proposed class exemption is intended to align with the conduct standards in the Securities and Exchange Commission’s (SEC’s) Regulation Best Interest (and the fiduciary duty of registered investment advisers under securities laws). Reg BI, as it’s known, covers brokers who make investment recommendations to retail investors and includes (among other items) rollovers from 401(k)s to individual retirement accounts (IRAs). According to one DOL official, the new proposed exemption will enable “regulatory efficiencies.” Brokers who adhere to Reg BI (which was officially implemented on June 30) will likely be considered to be in compliance with the new DOL rule.

Under the class exemption, financial institutions would be required to document the specific reasons that recommendations to roll over employee benefit plan assets from a plan to an IRA, or from one type of account to another, are in the best interest of the retirement investor. The class exemption would also require financial institutions to disclose to retirement investors their status as investment advice fiduciaries under ERISA and the Code, as applicable, and provide an accurate written description of their services and any material conflicts of interest.

In addition, the financial institution would be required to establish, maintain, and enforce written policies and procedures designed to mitigate conflicts of interest and ensure that they (and their investment professionals) comply with the impartial conduct standards. The DOL’s proposed rule also includes an annual retrospective compliance review.

What are the next steps?

There is a 30-day public comment period for the proposed rule which ends on Aug. 6. After reviewing comments, the DOL could modify the proposal and then issue a final rule. While this process could take months, some experts contend that the DOL is incentivized to finalize the rule quickly, so that it cannot be overturned by administrative or congressional action, in case President Donald Trump loses the November presidential election.

As always, we’ll keep you posted.

Sources

Investment News, “DOL proposes new standard to replace vacated fiduciary rule,” Mark Schoeff Jr., June 29, 2020

Investment Company Institute (ICI) Pension Alert, “DOL releases fiduciary rulemaking package,” Shannon Salinas, June 29, 2020

Pensions & Investments, “DOL unveils proposed exemption for fiduciaries,” Brian Croce, June 29, 2020

Ignites, “DOL departs from long-standing approach to rollovers,” Beagan Wilcox Volz, June 30, 2020

NAPA Net, “DOL unveils new fiduciary rule proposal,” Nevin E. Adams, JD, June 30, 2020

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On June 29, the Department of Labor (DOL) proposed a new regulation to govern investment advice pertaining to retirement accounts. This new rule replaces an earlier rule that was invalidated in 2018 by a federal appeals court. The proposed rule would provide exemptions under federal law allowing fiduciaries to receive...