DOL Fiduciary Rule Back in Play as Industry Preps for PTE 2020-02

New federal regulations for retirement advisers may not last long.

Though the US Department of Labor’s exemption for investment advice fiduciaries has taken effect as planned and is expected to be enforced in December as scheduled, the agency has since signaled its intent to revisit its fiduciary regulation on a broader scale.

The DOL recently announced its intent to amend the definition of the term “fiduciary” by including it as an item on its spring regulatory agenda. The agency revised the definition previously but it did not stick because a federal court vacated the DOL fiduciary rule that contained the change.

“Though firms and advisers need to educate themselves on the new prohibited transaction exemptions, they also should know that additional changes could come,” said Brandi Brown, senior vice president of regulatory affairs for RegEd. “The DOL still wants to redefine the term ‘fiduciary’ and any efforts to do so could impact retirement advisers.”

In releasing its most recent regulatory agenda, the DOL’s Employee Benefits Security Administration noted that its rulemaking would amend the regulatory definition of the term fiduciary “to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries.” 

The EBSA also stated, “The amendment would take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest. “

Previous attempts to protect investors

The DOL, through the EBSA, wants to prevent advisers from profiting at clients’ expense by holding more advisers to a fiduciary standard. It could curb certain types of advisers’ compensation while increasing compliance obligations for them and their firms in doing so.

The DOL previously broadened the definition of a “fiduciary” in a 2016 rule. At that time, the DOL redefined a “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA) to include any person who receives a fee or other compensation for investment advice or recommendations for employee benefit plans or individual retirement accounts.

Regulators created the fiduciary rule to ensure that retirement advisers would put investors first, noting that adviser conflicts could cost IRA investors $410 billion over 10 years as an example of the need to protect clients.

However, financial services firms and business groups pushed back, delaying the rule’s implementation date from April 2017 to July 2019. Ultimately, it never took effect because a federal court vacated the DOL fiduciary rule in March 2018, citing its “unreasonableness.”

In doing so, the court also eliminated two new prohibited transaction class exemptions — the Best Interest Contract Exemption and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs — that had been included with the fiduciary rule, along with amendments to several pre-existing prohibited transaction class exemptions.

After the court ruled, the DOL enacted a temporary enforcement policy under which it would not pursue prohibited transactions claims against investment advice fiduciaries who worked diligently and in good faith to comply with Impartial Conduct Standards for transactions that would have been exempted under the new exemptions, per Field Assistance Bulletin 2018-02. Nor would the DOL treat the fiduciaries as violating the applicable prohibited transaction rules.

New prohibited transaction exemption

The DOL has since gone further, granting a new prohibited transaction class exemption for investment advice fiduciaries giving advice to employer retirement plans, IRAs, or holders of either type of account, publishing Improving Investment Advice for Workers & Retirees (Prohibited Transaction Exemption 2020-02) in the Federal Register in July 2020.

Applicable to registered investment advisers, broker-dealers, insurers, banks, and their investment professionals, PTE 2020-02 requires fiduciary investment advice to meet “Impartial Conduct Standards” that include the requirement to act in the best interest of the client, to receive no more than reasonable compensation, as well as a requirement to make no materially misleading statements about recommended investment transactions and other relevant matters. PTE 2020-02 also includes protective conditions requiring disclosure to retirement investors, conflict mitigation, and a retrospective compliance review.

Retirement advisers may be compensated for fiduciary investment advice that meets the standards of PTE 2020-02, including for recommendations to roll over assets from an employee benefit plan to an IRA. However, some advisers have stopped giving rollover advice due to the DOL rule’s complexities.

Renewal of the five-part test

PTE 2020-02’s preamble includes an interpretation of when the advice to roll over employee-benefit-plan assets to an IRA would be considered fiduciary investment advice. In it, the DOL acknowledges that neither “a single instance of advice” to roll over plan assets nor “sporadic interactions between a financial services professional and a retirement investor” would be enough to apply a fiduciary standard.

 “However, advice to roll over plan assets can also occur as part of an ongoing relationship or an intended ongoing relationship that an individual enjoys with his or her investment advice provider,” the DOL noted. “In circumstances in which the investment advice provider has been giving advice to the individual about investing in, purchasing, or selling securities or other financial instruments through tax-advantaged retirement vehicles,” the advice to roll over assets could cause the fiduciary standard to be applied under the regular-basis prong of the Five-Part Test for Status as an Investment Advice Fiduciary.

Adopted in 1975, the five-part test had been eliminated in the DOL fiduciary rule that was vacated in 2018. But the test remains relevant due to the court’s decision.

Under the five-part test, a financial institution or investment professional is an investment advice fiduciary if they receive a fee or other compensation when they:

  1. “Render advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
  2. On a regular basis,
  3. Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that
  4. The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that
  5. The advice will be individualized based on the particular needs of the plan or IRA.”

In explaining its final interpretation on rollover advice in PTE 2020-02, the DOL stated, “financial institutions and investment professionals who meet the five-part test and are investment advice fiduciaries relying on this exemption should clearly disclose their fiduciary status to their Retirement Investor customers.”

Revisiting the definition of “fiduciary”

Though PTE 2020-02 took effect in February, regulators do not plan to enforce it until December. The temporary enforcement policy stated in Field Assistance Bulletin 2018-02 will remain in place until Dec. 20, 2021.

The DOL also plans to begin rulemaking to amend the regulatory definition of “fiduciary” by December as well. In doing so, it will evaluate prohibited transaction class exemptions and consider proposing amendments or new exemptions “to ensure consistent protection of employee benefit plan and IRA investors” as part of its rulemaking as well.

Any fiduciary rule that the DOL proposes would not be finalized until at least 2023, and another fight may be brewing in the interim, but the agency seems committed to expanding the fiduciary standard for retirement advisers as it seeks to protect investors further.

“Retirement advisers still have time to prepare for PTE 2020-02 but its complexities require that they start soon if they haven’t already,” RegEd’s Brown said. “They also should expect the DOL to address additional issues as they redefine ‘fiduciary’ and be prepared to learn about any new requirements that may result.”

Visit our website to learn more about RegEd’s Insurance CE solution, or Firm Element Training to learn more about continuing education (CE) courses for insurance professionals and broker-dealers.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation, and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please schedule a consultation.

RegEd Sponsors FSI OneVoice 2021

RegEd, the leading provider of compliance technology solutions to broker-dealers and other financial services firms, will be a sponsor and exhibitor at the Financial Services Institute (FSI) OneVoice conference, which will be held in Orlando, Fla., and virtually, from July 26-28.

The FSI OneVoice 2021 conference is an educational forum for independent financial services firm executives. Attendees will learn critical insights on the most important issues affecting their businesses as they move forward in a post-Covid-19 world.

This year’s conference will include general sessions on navigating the recovery, diversity and inclusion, and the future economy. It also will have concurrent sessions on topics related to compliance, supervision, operations, and technology. Presenters and panelists will include regulators, senior executives from leading financial services firms, and industry subject-matter experts.

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RegEd representatives will be available to meet with conference attendees to understand their compliance challenges and discuss solutions that help broker-dealers and other financial services firms to meet compliance requirements and proactively manage their compliance programs.

For more information on RegEd or its attendance at the FSI OneVoice conference, please call 800-334-8322 or email sales@reged.com.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation, and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please schedule a consultation.

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