Key Takeaways:
- The Department of Labor (“DOL”) issued a proposed amendment to its investment advice fiduciary regulation that would:
- cover IRAs in addition to ERISA retirement plans;
- eliminate the current five-part test for determining the fiduciary status of investment advisers; and
- focus on specific investment recommendations, including rollover recommendations.
- The DOL is also proposing to amend certain related prohibited transaction exemptions.
On October 31, 2023, the Department of Labor (“DOL”) issued a much-anticipated proposal to amend its 1975 “investment advice fiduciary” regulation, which defines when a person who provides investment advice for a fee or other compensation to a retirement plan subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), is a “fiduciary” to such plan. The proposed amendment (the “2023 Proposed Amendment”) arrives more than five years after the Fifth Circuit invalidated the DOL’s 2016 amendment to the regulation. Like the 2016 amendment, the 2023 Proposed Amendment would expand the regulation’s coverage to include investment advice fiduciaries with respect to individual retirement accounts (“IRAs”). The DOL is also proposing to amend certain related prohibited transaction exemptions (“PTEs”).
Current Regulation
The DOL’s current regulation applies to persons providing investment advice for a fee to ERISA retirement plans. It uses a five-part test for determining an investment adviser’s fiduciary status. Under this test, an investment adviser will be a fiduciary only if, among other things, the adviser renders investment advice on a “regular basis” to the plan pursuant to a “mutual agreement, arrangement or understanding” that such services will serve as a “primary basis” for the plan’s investment decisions.
For over a decade, the DOL has regarded the current regulation as not well-suited to an environment in which retirement savings are more likely to be held in participant-directed retirement plans, such as 401(k) plans, and IRAs than in traditional pension plans. In particular, the DOL considers it a significant shortcoming of the current regulation that it excludes instances of discrete advice, such as rollover recommendations, that may nevertheless have substantial consequences for retirement investors.
2023 Proposed Amendment
Expanded Coverage. The 2023 Proposed Amendment would expand the regulation’s coverage to include persons rendering investment advice for a fee to an ERISA plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA fiduciary (“Retirement Investors”).
Elimination of Five-Part Test. The 2023 Proposed Amendment would also eliminate the current regulation’s five-part test and provide, instead, that an investment adviser is a fiduciary if the adviser makes a recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property to a Retirement Investor and satisfies one of the following conditions:
1. The adviser either directly or indirectly has discretionary authority or control with respect to purchasing or selling securities or other investment property for the Retirement Investor (note: this condition is substantially the same as under the current regulation but covers Retirement Investors generally);
2. The adviser directly or indirectly makes investment recommendations to investors on a regular basis as part of their business (regardless of the number of recommendations made to the specific Retirement Investor), 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
3. The adviser represents or acknowledges that they are acting as a fiduciary when making investment recommendations.
By focusing on specific recommendations rather than ongoing relationships, the DOL believes that the 2023 Proposed Amendment brings the regulation closer to the requirements of ERISA and the prohibited transaction provisions of the Internal Revenue Code of 1986, as amended, which determine an investment adviser’s fiduciary status on a transaction-by-transaction basis. At the same time, the DOL claims that the 2023 Proposed Amendment is much more narrowly tailored than the 2016 amendment, because it only applies to recommendations made under circumstances that would justify a Retirement Investor’s trust and confidence in the investment adviser.
Proposed PTE Amendments
In connection with its proposal to amend the Investment Advice Fiduciary regulation, the DOL is also proposing to amend certain related PTEs. These amendments would include: (i) an amendment to PTE 2020-02 (the so-called “best interest exemption”) to require the provision of additional disclosures to Retirement Investors receiving advice from financial institutions; (ii) an amendment to PTE 84-24 to provide an exemption for independent insurance producers (who may have trouble relying on PTE 2020-02) to sell annuities and other insurance products; and (iii) amendments to PTEs 75-1, 77-4, 80-83, 83-1 and 86-128 to remove the exemptions for investment advice fiduciaries, who would have to rely on PTE 2020-02 going forward. Consistent with the Fifth Circuit’s ruling on the 2016 Amendment, the proposed amendment to PTE 2020-02 does not create any new causes of action for IRA owners, beneficiaries or fiduciaries, or require investment advisers to provide enforceable warranties to Retirement Investors.
Comment Period and Proposed Effective Date
The deadline to provide comments on the 2023 Proposed Amendment is January 2, 2024. If the 2023 Proposed Amendment is finalized, it will become effective 60 days after publication of the final rule in the Federal Register.
