Subject: Rollover Recommendations

Florida Court Decision’s Impact on Rollover Advice

Key Takeaways:

The Department of Labor (the DOL) expanded its interpretation of fiduciary advice in its guidance issued in connection with Prohibited Transaction Exemption (PTE) 2020-02. As a result, many more broker-dealers and registered representatives (advisors) became fiduciaries under ERISA and/or the Code for their recommendations to retirement investors, including rollover recommendations. Since fiduciary recommendations that result in transaction-based compensation are generally prohibited transactions, they will need the protection provided by complying with the conditions in PTE 2020-02.

A federal district court in Florida (American Securities Association (ASA) v. U.S. Department of Labor, Case No. 8:22-cv-330 (M.D. Fla. Feb. 13, 2023)) set aside the DOL’s expanded interpretation of fiduciary investment advice for rollover recommendations. At the time of writing this article, we do not know whether the DOL will appeal that decision.

However, the court did not change the regulatory definition of fiduciary advice and its application to advice to retirement plans or IRAs. Even if the expanded interpretation for rollover recommendations does not apply, where broker-dealers and their advisors provide ongoing advice to retirement investors they can still be fiduciaries for recommendations to IRA owners, plan fiduciaries and participants (and, in addition, under the DOL’s previous guidance can, in limited circumstances, still be fiduciaries for rollover recommendations). As a result, broker-dealers and their advisors will still need the relief provided by PTE 2020-02, including the best interest process it requires.

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The DOL’s New Fiduciary Rule: What We Can Expect

Key Takeaways:

The current DOL fiduciary rule says that a broker-dealer and its registered representatives (advisors) are fiduciaries to a plan under ERISA if a functional 5-part test is satisfied. This same 5-part test applies to determining whether an advisor is a fiduciary to an IRA under the Internal Revenue Code (the Code).

The DOL expanded its interpretation of fiduciary advice in the Preamble to PTE 2020-02 by re-interpreting one of the elements of that 5-part test. As a result, many more broker-dealers and their advisors are fiduciaries under ERISA and/or the Code for their recommendations to retirement investors, including rollover recommendations. While a recent decision by a Federal District Court in Florida set aside the DOL’s position on fiduciary status due to rollover recommendations, it did not change the 5-part test and its application to advice to retirement plans or IRAs. (We will discuss the impact of that holding on rollover recommendations in a future article.)

The DOL’s regulatory agenda indicates that in the near future, the DOL will be proposing a new fiduciary definition and proposing amendments to existing prohibited transaction exemptions (PTEs) to align with the proposed regulation. While we don’t know what the new regulation will say, we anticipate that, at the least, it will include the DOL’s expanded interpretation of fiduciary advice for rollovers (and might go beyond that). We also anticipate that many of the conditions in PTE 2020-02 will be included in the proposals for other exemptions, for example, in PTE 84-24.

Background

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Rollover Recommendations – Do the SEC and DOL Requirements Align?

Key Takeaways

The SEC and the DOL have separately issued guidance on rollover recommendations – however, a close examination indicates that the guidance by both agencies is very similar. The SEC’s guidance for broker-dealers is in Regulation Best Interest and a recent Staff Bulletin on account recommendations. The DOL’s guidance about rollover recommendations came in the form of an expanded interpretation of fiduciary advice found in the Preamble to PTE 2020-02 and a set of Frequently Asked Questions. These pieces of guidance share the following three principles: (1) a best interest standard, (2) a process to support that best interest standard that requires consideration of relevant factors about the investor, the investor’s current retirement account and the recommended rollover account, and (3) documentation supporting the basis for the recommendation.

There are a few differences between the SEC and the DOL guidance that broker-dealers and their registered representatives should know about, including that the SEC rollover guidance is applicable to a much broader array of retirement plans and accounts, and also that the SEC guidance does not require a disclosure about the best interest reasons for the rollover recommendation as does the DOL under PTE 2020-02.

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