The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

When a person makes a “covered” fiduciary recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

The proposed regulation defines a “retirement investor” as a: …plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary (retirement investor). (The emphasis is mine.)

“IRA fiduciary” is defined in the proposed regulation as: The term ‘‘IRA fiduciary’’ means a person described in section 4975(e)(3) of the Code with respect to an IRA.

Code section 4975(e)(3) includes this definition: …renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so.

In other words, a fiduciary advisor or insurance agent can be an IRA fiduciary and a covered recommendation by a wholesaler to that advisor or agent would be fiduciary advice.

“Plan fiduciary” is defined in the proposed regulation as: The term ‘‘plan fiduciary’’ means a person described in section (3)(21)(A) of the Act and/or 4975(e)(3) of the Code with respect to a plan.

ERISA section (3)(21)(A) includes a definition similar to the one in Code section 4975(e)(3). As a result, a covered recommendation to a fiduciary advisor or agent of a plan will be a fiduciary recommendation by a wholesaler.

A “covered” recommendation is one in which the person is a fiduciary (as defined in the proposed fiduciary recommendation—see Fiduciary Rule (6)) and the recommendation is about the investment of “qualified” or retirement accounts (as that is defined in the proposed regulation). One of the covered recommendations is: As to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property.

In other words, recommendations about securities (e.g., mutual funds) or insurance products (e.g., annuities) would fall within the definition of covered recommendations.

Note, though, that not all insurance products are “investment property” subject to the regulation. The proposal explains: The term ‘‘investment property’’ does not include health insurance policies, disability insurance policies, term life insurance policies, or other property to the extent the policies or property do not contain an investment component.

Some people reading this article may think that there is a wholesaler’s exception. Well, there used to be. When the Obama era fiduciary rule was vacated in a decision by the 5^th Circuit Court of Appeals, the wholesaler’s exception went out the door with the rest of the rule. To be fair, comments were filed with the DOL that the wholesaler’s exception should be reinstated, but we will have to wait to see if that happens.

For a podcast discussion of the impact on wholesalers, see ERISA Moments Ep. 12.

Under the new proposal, if a covered recommendation is made, a wholesaler (and the wholesaler’s firm) would be a fiduciary. It appears that the DOL did not contemplate that would happen—or that it would happen often, perhaps because it believed that wholesalers did not make individualized recommendations. Here is what the preamble to the proposed regulation said:

In the context of ‘‘wholesaling’’ activity, which involves communications by product manufacturers or other financial service providers to financial intermediaries who then directly advise plans, participants, beneficiaries, and IRA owners and beneficiaries, the Department believes that communications to financial intermediaries would typically fall outside the scope of proposed paragraph (c)(1)(ii) because they would not involve recommendations based on the particular needs or individual circumstances of the plan or IRA serviced by the intermediary. There may also be other circumstances in which application of proposed paragraph (c)(1)(ii) would not result in a covered recommendation being treated as fiduciary investment advice. (The emphasis is mine.)

However, the DOL then acknowledges that wholesalers could give individualized fiduciary recommendations:

In general, however, the Department envisions that proposed paragraph (c)(1)(ii) would apply broadly to recommendations to plan and IRA fiduciaries acting on behalf of plans and IRAs.

From a technical perspective, fiduciary status can be avoided by providing information and education about products and services, with general explanations of circumstances where the product or service would be suitable and valuable. However, once the discussion turns to a particular plan investor or IRA investor, the issue of an individualized fiduciary recommendation emerges. For example, and perhaps obviously, if a wholesaler said that he or she recommended a particular investment, insurance product, or service for a specific plan or IRA, the line separating nonfiduciary information/explanation from fiduciary recommendation may have been crossed. There is also a concept of implied recommendation, for example, that might include a statement such as, “If it were me in that circumstance, I would invest in this product”.

To avoid fiduciary status—if the regulation is finalized as drafted—there will need to be training, supervision and policies consistent with education and information…and avoiding fiduciary status. A key is that the recommendations not be individualized, which in some cases will be different than current practices.

One thought is that, where a wholesaler becomes a fiduciary by virtue of a recommendation, the problem could be solved by complying with the conditions in PTE 2020-02. That may be harder than it first seems. The fiduciary proposal provides:

For purposes of this paragraph, when advice is directed to a plan or IRA fiduciary, the relevant retirement investor is both the plan or IRA and the fiduciary. (The emphasis is mine.)

That suggests that the wholesaler and his or her employer (assuming it is an entity eligible to use PTE 2020-02, likely an RIA or insurer) must satisfy the PTE’s conditions both to the IRA or plan fiduciary adviser and to the primary plan fiduciaries (e.g., the plan committee) or the IRA owner. In my limited experience with the roles of wholesalers, they often do not have access to the IRA owners or primary plan fiduciaries and therefore will not have the ability to satisfy the requirements of the exemptions , e.g., provide the required disclosures.

Concluding Thoughts

Time will tell. The final regulation may or may not have relief for wholesalers. The industry has asked for it.

If there is relief, it will come almost certainly come with strings attached–there will likely be some conditions, perhaps disclosures

However, it is equally possible that the final regulation will not provide relief. In that case, financial institutions that employ wholesalers who work with advisors and agents who serve private sector qualified retirement plans and IRAs (including both individual retirement annuities and accounts) will need to develop policies, practices and training consistent with the educational/informational approach if they want to avoid fiduciary status.