As businesses return to work after Labor Day 2021, a principal focus for companies that serve US retirement plans will be the impending December 20 enforcement date for the Labor Department’s (DOL) latest fiduciary guidance under the Employee Retirement Income Security Act of 1974, as amended (ERISA). As previously reported, Rule 3.0, adopted in December 2020:
- Expanded the circumstances in which rollover advice would, at least in DOL’s view, constitute ERISA fiduciary advice, effective February 16, 2021;
- adopted PTE 2020-02, providing exemptive relief for conflicted investment advice provided by financial institutions and their investment professionals; and
- as of December 20, 2021, sunset DOL’s existing temporary enforcement policy for conflicted investment advice, adopted after the vacatur of Rule 2.0, with the result that financial institutions will require a permanent compliance solution thereafter.
Extension of the temporary enforcement policy. As of this writing, financial services firms generally have evaluated Rule 3.0 and charted a path forward in light of that guidance, but a number have deferred implementation in the entirely reasonable hope of an extension of the temporary enforcement policy particularly in light of DOL’s announced plans to modify this guidance (future Rule 4.0).
- An extension of DOL’s temporary enforcement policy, optimally to dovetail with the planned new guidance, is certainly warranted; it seems difficult to justify compelling firms to spend the resources to comply with Rule 3.0 in 2021, just to compel a do-over with a new Rule 4.0 in 2022 or 2023.
- The temporary enforcement policy requires compliance with DOL’s impartial conduct standards, so that safeguard for plan participants would remain in effect during any extension, including in the rollover setting.
- DOL has a history of waiting until very late in the game to extend a compliance date, so it remains possible that DOL still could take that action later this year.
Solutions for rollover advice. In the absence of further direction from DOL, it now has become incumbent on firms to accelerate their Rule 3.0 compliance project if the December 20 date is to be met, and in particular to implement PTE 2020-02 or an alternative solution if they are or may be serving as a fiduciary in rollover interactions. See our paper on the array of compliance solutions for rollover advice for more information.
- Rule 3.0 necessitates attention to (i) rollover advice and (ii) any other circumstance in which a provider has been relying on the temporary enforcement policy since 2018.
- For firms intending to transition to PTE 2020-02 for rollover advice, our understanding is that obtaining reliable plan expense information for the rollover comparison has emerged as a significant roadblock for which effective solutions are still works in progress. For this and other reasons, what effectively became a ten-month transition period (from the February 12 press release announcing that Rule 3.0 would take effect notwithstanding the change in Administrations) is proving inadequate to fully and properly operationalize compliance with PTE 2020-02.
Prospects for Rule 4.0. It is of course daunting to operationalize the Rule 3.0 compliance solution that will best serve a firm’s retirement investors, investment professionals and business interests without advance knowledge of Rule 4.0, but it seems that has now become unavoidable. In DOL’s most recent regulatory agenda, proposed Rule 4.0 was slotted for December 2021 - behind eight other guidance projects, six of which have yet to be published. The projected dates in DOL’s regulatory agenda often prove to be ambitious.
It is possible to speculate based on the available information. If DOL were to parallel the actions it took in 2016 when adopting vacated Rule 2.0, Rule 4.0 might be expected to include the following elements:
| Expand the investment advice fiduciary definition |
The Fifth Circuit opinion in Chamber of Commerce v. DOL vacating Rule 2.0 leaves little if any room for an expansion of the regulatory definition, but the April FAQs and latest regulatory agenda signaled that DOL is considering that step. As stated in the regulatory agenda:
This rulemaking would amend the regulatory definition of the term fiduciary …. [Rule 4.0] 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.
It seems predictable that any expansion would at least seek (i) more generally to treat rollover advice as fiduciary advice and (ii) to limit financial service providers’ flexibility to designate the ERISA status of an investment arrangement for retirement investors |
| Add the impartial conduct standards to the following PTEs, among other possible modifications |
PTE 84-24 |
Sale of insurance products and proprietary mutual funds |
| PTE 75-1 |
Parts III, IV: underwritings and market making |
| PTE 77-4 |
Discretionary investment manager allocation to proprietary mutual funds |
| PTE 80-83 |
Use of proceeds from sale of securities to reduce or retire indebtedness |
| PTE 83-1 |
Mortgage pool investment trusts |
| PTE 86-128 |
Commissions for the execution of securities transactions by a fiduciary; agency cross-transactions |
| Withdraw the following PTE |
PTE 75-1 |
Part II(2): Purchase of nonproprietary mutual funds
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That is, just as PTE 2020-02 substantially replicated the vacated Best Interest Contract Exemption, omitting only the IRA private right of action, Rule 4.0 might reasonably be expected to resurrect the other elements of vacated Rule 2.0.
Based on the April FAQs, Rule 4.0 might also be expected to address the following two points.
| Provide more guidance on how the ERISA standards differ from best interest standards under other laws |
The April FAQs suggest that, following the change in Administrations, DOL is seeing more distance between its impartial conduct standards and the best interest standards under other bodies of law that PTE 2020-02 specifically leveraged. Further elaboration of this point might be expected in Rule 4.0, which could have a material bearing on Rule 3.0 compliance choices and implementation.
- For example, the April FAQs focus on the “dangers” to investors created by certain compensation practices, a concern which is reiterated in the regulatory agenda.
- DOL could take a harder line on what practices constitute conflicts that cannot be effectively neutralized, and instead must be eliminated, similar to its stance in Rule 2.0.
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| Consider adding a fiduciary acknowledgement to other PTEs |
In 2016, DOL included a fiduciary acknowledgement in its vacated Best Interest Contract Exemption but not in its modification of any existing PTE.
We continue to think that requiring a fiduciary acknowledgement is the wrong policy call in any of these PTEs.
- Given the factual and legal uncertainties of the 5-part fiduciary definition, it goes too far to demand that financial institutions – rarely in a position to know with certainty the specifics of every interaction between an investment professional and a retirement investor – always to commit to that status in advance as a condition for exemptive relief, when a hindsight examination might show that status did not obtain. In Rule 3.0, DOL exacerbated the longstanding “inadvertent fiduciary” risk; if a firm perceives a need to observe a PTE to manage that risk, DOL should encourage that practice, not discourage it by compelling the firm to concede the fiduciary issue.
- Substantive compliance with the impartial conduct standards is far more important to DOL’s purposes.
- So long as the exemption requires compliance with the impartial conduct standards, DOL’s objective that the retirement investor’s interest comes first would be achieved.
- A fiduciary acknowledgement adds nothing to the substantive outcome.
- Contrary to DOL’s defense of the fiduciary acknowledgement in PTE 2020-02, the evidence shows that fiduciary status per se has little import for retirement investors and their expectations.
- While the fiduciary acknowledgement eases DOL’s burden in its enforcement activity, it unavoidably introduces the risk of creating a private right of action for IRAs, notwithstanding DOL’s stated intent that it not do so.
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It must be said, however, that even if a financial services provider makes reasonable advance guesses about where Rule 4.0 might go, any of the foregoing changes, in broad scope and/or in their details, could materially change that firm’s calculus as to its best approach to ERISA compliance as currently informed only by Rule 3.0.
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