DOL Releases Proposed Fiduciary Rule

The Department of Labor (DOL) has released a new proposed rule updating the definition of an investment advice fiduciary under ERISA. According to a Biden Administration fact sheet, the proposal expands the definition of fiduciary in the following ways.

• Cover rollover advice such as recommendations when moving assets from a 401(k) to an IRA. Under the existing rule’s five-part test, covered advice is that which is given on a “regular basis.”
• Close loopholes on insurance products currently outside of the purview of the Securities and Exchange Commission’s regulation Best Interest, to require retirement advisers to provide advice in the saver’s best interest regardless of the security or product they are recommending.
• Cover advice to plan sponsors about which investments to make available as options in employer-sponsored retirement plans.

DOL notes in its fact sheet that it is proposing that a financial services provider would be an investment advice fiduciary under federal pension law if:

• the provider provides investment advice or makes an investment recommendation to a retirement investor,
• the advice or recommendation is provided for a fee or other compensation, and
• the financial services provider makes the recommendation in the context of a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in their best interest:
• the provider has discretion over investment decisions for the retirement investor;
• the provider 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 provider states that they are acting as a fiduciary when making investment recommendations.

Proposed amendments to PTE 2020-02 and PTE 84-24 were also made. Fundamental to both exemptions is the requirement that investment recommendations adhere to Impartial Conduct Standards, which require:

• Advice that is in the "best interest" of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
• Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemptions.
• Under the loyalty standard, advice providers may not place their own interests ahead of the interests of the retirement investor or subordinate the retirement investor's interests to their own.
• The investment professional and firm must charge no more than reasonable compensation and comply with federal securities laws regarding "best execution."
• The advice must be free from misleading statements about investment transactions and other relevant matters.

Amendments to several other applicable exemptions can be found here. The proposals include a 60-day period for public comments upon publication in the Federal Register.