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The DOL’s Fiduciary Interpretation and Exemption: Impact on Rollover Recommendations

On December 18, 2020, the Department of Labor published its expansion of the fiduciary interpretation and exemption for conflicted advice in the Federal Register. (Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers and Retirees.) The exemption will be effective on February 16, 2021. The interpretation is effective immediately.

Since the effective date for the exemption is after the inauguration of the Biden administration, it is almost certain that the effective date will be further delayed. During that delay, we think it is likely the exemption will be revised or possibly withdrawn. But, it is just as likely that the expanded definition of fiduciary advice for rollover recommendations will be retained and possibly expanded. That could make life more difficult for broker-dealers, investment advisers and insurance companies. While these rules will affect all of those industries, this article focuses on the impact of the likely outcomes on broker-dealers.

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Fiduciary Status for the Unwary

If you thought that avoiding fiduciary status would be a slam-dunk after the “new” DOL fiduciary advice rule was vacated, think again. The DOL’s old fiduciary regulation is back and it casts an unexpectedly wide net.

Let’s start with the background. The reinstated fiduciary definition says that a broker-dealer and its advisor (a “broker”) are fiduciaries to a plan if a functional five-part test is satisfied: (1) the broker provides advice about investments for a fee or other compensation, (2) on a regular basis, (3) under a mutual understanding, (4) that the advice will form a primary basis for the plan’s decisions, and (5) that the advice is individualized based upon the plan’s particular needs. For this purpose, a “plan” includes not only an ERISA plan, but also an IRA. (In the context of IRAs, being a fiduciary under the five-part test does not itself implicate a standard of care, but does apply to the applicability of certain prohibited transactions.)

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Recommending Rollovers in the Evolving Regulatory Environment (Part 3)

In Parts 1 and 2 of this post, we talked about the current and proposed rules applicable to rollover recommendations by broker-dealers and RIAs. Part 1 discussed the DOL and FINRA rules that apply now. In Part 2, we explained the SEC proposals. In this post, we talk about how to make a compliant rollover recommendation, regardless of which set of rules applies.

(“Rollover recommendation” refers to advice to a retirement plan participant to take a distribution of his or her account and roll it over to an IRA that is being advised by the broker-dealer or RIA.)

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