Under the current regulatory definition of fiduciary advice, a broker-dealer and its advisor are fiduciaries under ERISA and/or the Code when (1) providing advice about investments for a fee, (2) on a regular basis, (3) under a mutual understanding with the plan fiduciary or IRA owner, (4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and (5) that the advice is based on the particular needs of the plan or IRA (the 5-Part Test).
The DOL expanded its interpretation of the “regular basis” component in the Preamble to (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees), (the PTE). Under its new interpretation, a broker-dealer and its advisor are providing advice on a regular basis (1) if the advisor has a pre-existing advice relationship with the investor on tax-qualified retirement assets (e.g., advising on another IRA), or (2) if the advisor anticipates that the rollover recommendation is the first step in an ongoing financial relationship concerning tax-qualified retirement assets (e.g., the rollover IRA). This is the interpretation that the Florida court set aside. We expect that the court’s decision will increase the sense of urgency for the issuance of a new regulation.
Why the DOL Believes a New Fiduciary Rule is Needed
On January 4, 2023, the DOL published its regulatory agenda. The regulatory agenda is a listing of the regulations (including exemptions) that the Department expects to have under active consideration for promulgation, proposal, or review during the coming 6- to 12-month period. In its regulatory agenda, DOL explains why it believes a new rule is needed:
The 1975 regulation’s five-part test is not founded in the statutory text of ERISA, does not take into account the current nature and structure of many individual account retirement plans and IRAs, is inconsistent with the reasonable expectations of plan officials and participants, and IRA owners who receive investment advice, and allows many investment advice providers to avoid status as a fiduciary under federal pension laws…The Department believes that the 1975 regulation must be revised to align with retirement investors’ reasonable expectations regarding their relationships with investment advice providers and to reflect developments in the investment advice marketplace since the 1975 regulation was adopted. Failure to appropriately define an investment advice fiduciary under ERISA is likely to expose retirement investors to conflicts of interest that will erode retirement savings.
The DOL observes that amending the fiduciary advice rule and associated exemptions are especially important to address the conflicts of interest associated with rollovers.
The risks are especially great with respect to recommendations to roll assets out of ERISA-covered plans to IRAs because of the central importance of retirement plan savings to workers, the relative size of rollover transactions, and the technical requirements of the current fiduciary regulation, which have encouraged advisers to argue that their advice falls outside the regulation’s purview regardless of its importance.
Based on this, it is likely that the proposed rule will specifically address rollover recommendations. While it’s possible that the proposal will take an approach similar to the way rollovers are addressed under the Preamble to PTE 2020-02, it’s also possible that the DOL will go beyond the re-interpretation in the Preamble, for example, the proposal could say that a rollover recommendation is, in and of itself, fiduciary advice.
Impact on PTE 2020-02 and other PTEs
The DOL explains that as part of the rulemaking, it will be making conforming changes to existing PTEs:
In conjunction with this rulemaking, EBSA also will evaluate available prohibited transaction class exemptions and consider proposing amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors.
The DOL further explains that the proposed rule and associated PTE amendments will include the following requirements:
- adherence to a best interest standard;
- no more than reasonable compensation may be charged;
- elimination or mitigation of conflicts of interest; and
- important disclosures to affected parties.
Because PTE 2020-02 already contains these requirements, it does not seem likely that the proposed rule will have a significant impact on that PTE. However, other PTEs that do not contain all of these conditions — such as PTE 84-24 which applies to insurance and annuity transactions — will likely be amended as part of the rulemaking.
Since we don’t know how far the new proposal will go in modifying the definition of fiduciary advice and we don’t know for sure what conditions will be imposed by the proposed changes to the exemptions, it is premature to make changes to policies and procedures for compliance with the existing rules. However, it is almost certain that the proposals will be no less demanding than the current rules. As a result, broker-dealers should, for the moment, ensure that their policies and practices are consistent with the current rules and, of course, be attentive to any new proposals.
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