DOL Releases Fiduciary Investment Advice Proposals

Practical Law Legal Update w-041-2494 (Approx. 7 pages)

DOL Releases Fiduciary Investment Advice Proposals

by Practical Law Employee Benefits & Executive Compensation

Background

ERISA's statutory definition of "fiduciary" provides that a person is a fiduciary with respect to a plan to the extent the person:

Exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of the plan's assets.
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.
Has any discretionary authority or discretionary responsibility in the administration of such plan.

(ERISA § 3(21)(A) (29 U.S.C. § 1002(21)(A)).)

In 1975, the DOL issued a regulation creating a five-part test that defined when an individual is considered to provide "investment advice" under ERISA § 3(21)(A)(ii). A person is considered to provide investment advice if the person:

Renders advice as to the value of securities or other property, or makes recommendations about investing in, purchasing, or selling securities or other property.
On a regular basis.
Pursuant to a mutual agreement, arrangement or understanding.
That the advice will be the primary basis for investment decisions regarding plan assets.
That the advice will be individualized to the particular needs of the plan.

(29 C.F.R. § 2510.3-21(c).)

For more information, see Practice Note, ERISA Fiduciary Duties: Overview: Determining Fiduciary Status.

Path to 2023 Proposed Changes

The 2023 proposal follows more than a decade of regulatory activity and court challenges.

The DOL originally proposed changes to the fiduciary rule in 2010. That rule was withdrawn in 2011, re-proposed in 2015, and finalized in April 2016. In 2018, the US Court of Appeals for the Fifth Circuit vacated the 2016 fiduciary rule in Chamber of Commerce of the United States of America v. United States Dep't of Labor (885 F.3d 360 (5th Cir. 2018); see Article, Expert Q&A on the Demise of the DOL's Fiduciary Rule) and the pre-amendment version of the rule (the 1975 version) was reinstated.

The DOL then released a temporary enforcement policy under Field Assistance Bulletin (FAB) 2018-02 (see Legal Update, FAB 2018-02 Announces Temporary Enforcement Policy for the DOL's Fiduciary Rule). In December 2020, the DOL finalized PTE 2020-02, a class exemption on fiduciary investment advice to retirement investors, including in the context of rollovers (see Legal Update, DOL Finalizes Fiduciary Investment Advice PTE 2020-02). In February 2023, the US District Court for the Middle District of Florida issued an opinion vacating an element of the DOL's rollover policy (see Legal Update, District Court Vacates DOL Guidance on Fiduciary Investment Advice Involving Rollovers).

Proposed 2023 Changes

In the preamble to the 2023 proposal, the DOL cites the current regulatory landscape (such as the SEC's adoption of Regulation Best Interest and state-based legislative developments on fiduciary conduct standards) and the growth of participant-directed investment arrangements and IRAs as impetus for changing the five-part test.

Proposed Definition

Under the 1975 regulations, a person would be an investment advice fiduciary by meeting the five-part test which provides that a person provides fiduciary investment advice if the person:

Renders advice on the value of securities or other property or makes recommendations about investing in, purchasing, or selling securities or other property.
On a regular basis.
Pursuant to a mutual agreement, arrangement, or understanding.
That the advice will be the primary basis for investment decisions regarding plan assets.
That the advice will be individualized to the particular needs of the plan.

In a shift from the current 1975 regulations, the DOL has proposed that a person would be an investment advice fiduciary if the following requirements are met:

The person provides investment advice or makes an investment recommendation to a retirement investor (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA fiduciary).
The advice or recommendation is provided for a fee or other compensation, direct or indirect.
The person provides the advice or makes the recommendation in one of the following contexts:
- the person either directly or indirectly 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 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.

(88 Fed. Reg. 75890 (Nov. 3, 2023).)

Fiduciary status is determined on a transaction-by-transaction basis.

The "regular basis" prong in the proposal is a shift from the current 1975 regulation. The DOL noted that the 1975 regulations do not address advice provided on a one-time basis but that this type of advice can be some of the most important advice the retirement investor will ever receive. Whether someone gives investment recommendations on a regular basis as part of their business is based on the totality of facts and circumstances.

Disclaimers

Typically, investment advice providers include boilerplate disclaimers which may conflict with other communications and interactions between the providers and the investor. Under the proposal, written statements disclaiming fiduciary status do not control to the extent that they are inconsistent with:

Oral communications.
Marketing materials.
State or federal law.
Other interactions with the retirement investor.

Rollovers

Under ERISA, advice provided on a one-time basis (such as rollover advice) is typically not required to be in the saver's best interest. Under the proposal, one-time advice is not automatically excluded from treatment as fiduciary investment advice. According to the preamble, the DOL's position is that advice in connection with a rollover decision, even if not accompanied by a specific recommendation on how to invest assets, should be treated as fiduciary investment advice.

Education

There is no specific provision about participant education in the proposal, which is covered in Interpretive Bulletin (IB) 96-1. The DOL notes it believes the IB would provide accurate guidance under the proposed regulations even as applied to plan participants, beneficiaries, IRA owners and beneficiaries, or fiduciaries. (See Practice Note, Participant Investment Education and Investment Advice.)

Health Plan Arrangements

The DOL noted that the use of "retirement investor" in the proposed regulation does not imply that the fiduciary definition only applies to retirement savings vehicles. As noted in the preamble, "IRA" includes health savings accounts (HSA) and certain other tax-advantaged trusts and plans. However, 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.

For more information, see Practice Note, Defined Contribution Health Plans: Overview.

PTE Changes

Multiple PTEs would be amended under the proposal.

PTEs 75-1, 77-4, 80-83, 83-1, and 86-128 allow investment advice fiduciaries to receive compensation for certain transactions. In part, the proposed changes would remove fiduciary investment advice from the covered transactions and make other administrative changes (88 Fed. Reg. 76032 (Nov. 3, 2023)). The changes to PTE 84-24 would affect investment advice fiduciaries that are independent insurance agents (88 Fed. Reg. 76004 (Nov. 3, 2023)).

The DOL has proposed amending the most recent of the exemptions, PTE 2020-02, to:

Expand coverage to include investment advice by a Pooled Plan Provider (see Practice Note, Multiple Employer Retirement Plans (MEPs): Pooled Plan Providers).
Clarify the fiduciary acknowledgment requirement.
Add disclosures around an investor's right to obtain information and revise the rollover disclosure.
Allow financial institutions providing investment advice through computer models (robo-advice) to rely on the exemption.

For more information on PTE 2020-02, see Compliance with Prohibited Transaction Exemption 2020-02 Checklist. For details on other PTEs, see Practice Note, Prohibited Transactions and Exemptions Under ERISA and the Code.

Practical Implications

The DOL's voluminous release is an important step for retirement plan sponsors, administrators, and service providers, who have been waiting for the DOL to provide guidance on the status of the fiduciary rule. The DOL requested comments on a number of items in the proposed regulation and amendments to the PTEs. Interested parties have until January 2, 2024, to comment. The DOL also anticipates holding a public hearing on the proposals. If finalized, virtually all brokers, financial and investment advisors, and insurance agents will be affected.

DOL Releases Fiduciary Investment Advice Proposals | Practical Law