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Compliance September 11, 2023
DOL Sends New Adviser Fiduciary Rule to OMB for Review
The rule is expected to broaden when investment advice is considered fiduciary advice under ERISA.
Reported by Paul Mulholland
The Department of Labor has sent a new fiduciary rule proposal to the Office of Management and Budget for review.
Though the text of the proposal is not yet available, the DOL says the proposal is designed to “more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries.”
Specifically, the proposal has a focus on “the ways advisers are compensated that can subject advisers to harmful conflicts of interest.”
The Department of Labor, starting with the administration of former President Barack Obama, has twice—using different mechanisms—tried to institute a fiduciary rule regarding retirement investments, and twice federal courts have rejected them.
In 2018, the U.S. 5th Circuit Court of Appeals overturned a DOL regulation finalized in 2016 which would have applied fiduciary status as understood under the Employee Retirement Income Security Act to advisers who recommend that a client transfer assets from an ERISA-covered plan to an IRA, as well as advisers who provide continuing advice on how to invest those assets once the rollover is complete.
This rule replaced the previous five-part test that had applied to advisers considered a 3(21) fiduciary. Under that test, an adviser has to: provide investment advice to a plan; on a regular basis; pursuant to an agreement; that is the primary basis for investment decisions; and whose advice is individualized to the plan.
The appeals court’s decision striking down the 2016 rule effectively restored the five-part test. The court wrote that the rule overstepped the DOL’s authority to regulate IRAs under ERISA because the financial professionals swept up by the rule did not have a “special relationship of trust and confidence,” because recommendations for rollovers are one-time advice.
Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute, notes that whatever the proposal says, the DOL is looking to “bring more financial professionals under the fiduciary status of ERISA.” He adds that making the proposal “consistent with the Fifth Circuit ruling is going to be a challenge for them.” Nevertheless, Berkowitz expects “they will propose some sort of change to the five-part test.”
According to the Berkowitz, the “key thing” for the new proposal to survive judicial review is that it cannot assign ERISA fiduciary status unless “there is a relationship of trust and confidence,” a phrase which appears many times in the Fifth Circuit opinion when discussing the common law definition of fiduciary.
The SEC also has rules of its own under Regulation Best Interest, and “there’s not a need for further rulemaking,” says Berkowitz.
This sentiment is echoed by Susan Neely, the CEO of the American Council of Life Insurers. In an emailed statement, Neely argued that “the SEC and the states are positioned to address conflicts of interest, the Labor Department’s main focus.” The SEC regulates adviser conflicts through Reg BI, which does not have the same prohibited transaction rules that come with ERISA fiduciary status.
Berkowitz adds that the frequent proposals and re-proposals in this domain “create an air of greater uncertainty and risk for advisers and the consumers they work with.”
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