The US 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 advice to plans, participants (including rollovers), and IRAs.
Key Takeaways
- One time investment recommendations to qualified and ERISA retirement plans and their participants, and to IRA owners, can be fiduciary advice. Plans, participants and IRA owners are referred to as “retirement investors”.
- A rollover recommendation is one-time advice that will result in fiduciary status.
- Fiduciary recommendations that result in compensation to a securities adviser (that is, to an investment adviser or broker-dealer) or to an insurance agent will be prohibited conflicts of interest, necessitating satisfaction of the conditions in a prohibited transaction exemption.
This blog post is an overview of the new proposals. Follow up posts will go into detail on each of the proposals.
The proposed fiduciary regulation—called the “Retirement Security Rule”–defines fiduciary advice as follows:
- The person either directly or indirectly (e.g., through or together with any affiliate) has discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities or other investment property for the retirement investor;
- The person either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of their business and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or
- The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.
Comment: The first definition is not new. The current regulation also defines discretionary investment management as fiduciary advice. The third definition is new…basically it says that if you say you are a fiduciary, then you are. The most significant change is in (ii), the definition of nondiscretionary fiduciary advice. It replaces the current 5-part test providing that fiduciary advice includes: (1) investment recommendations for compensation; (2) by a financial professional who is in the business of making investment (including insurance) recommendations; (3) where the recommendation can reasonably be viewed as personalized or individualized; and (4) where it is reasonable to believe that the recommendations are to be a basis for an investment decision that is in the best interest of the retirement investor. I suspect that the last requirement is intended to buffer the DOL’s position that the definition is the equivalent of a relationship of “trust and confidence” in anticipation of litigation over the definition. (The Fifth Circuit Court of Appeals decision vacating the Obama-era fiduciary regulation said that a relationship of trust and confidence was the foundation of fiduciary status. The opinion also said that a sales process did not include a relationship of trust and confidence and therefore was not fiduciary in nature.)
The remaining parts of the proposed package were amendments to existing prohibited transaction exemptions, PTEs.
One of those PTEs is 2020-02. In my experience most investment advisers and broker-dealers are already complying with the current version of this PTE. Under the proposed changes, captive or career insurance agents (referred to as statutory employees of insurance companies) and their insurance companies will also have to satisfy the conditions of the exemption for conflicted fiduciary advice to plans, participants and IRAs (including for the compensation resulting from the services or products to the rollover individual retirement account or annuity).
The proposal includes a number of relatively minor changes to the conditions in the exemption. There will be one or more future articles on those changes. But, for the moment, the message is that, for advisors and firms that are already in compliance with the conditions in 2020-02, the proposed changes will be relatively minor.
The PTE with the most significant proposed changes is 84-24, the so-called insurance exemption. As suggested in the discussion of 2020-02 above, insurance agents who are statutory employees of insurance companies are removed from 84-24 and moved to 2020-02. Then the DOL proposed to substantially amend PTE 84-24 to cover “Independent Producers,” or independent insurance agents. While the changes would apply to both insurance policies and annuity contracts, the greatest impact will be on sales of annuities to fund rollovers from plans to individual retirement annuities. And, within the annuity world, the greatest impact will likely be on fixed index annuities.
The proposed changes to 84-24 will be discussed in detail in future posts, but from a big picture perspective, many of the requirements of 2020-02 (e.g., best interest standard of care, disclosure of services and conflicts, specific best reasons for rollover recommendations) will apply to independent agents. In addition, the insurance companies issuing the annuity contracts used by independent agents will have heightened oversight responsibility (even though they will not be required to be co-fiduciaries like firms are required to be under PTE 2020-02).
Concluding Thoughts
The biggest changes are to the definition of nondiscretionary fiduciary advice (the 5-part test) and to independent insurance agents and the insurance companies they work with. However, all broker-dealers, investment advisers, and banks and trust companies will need to make at least some changes if these proposals become final rules. More to come.
