The DOL’s fiduciary regulation was scheduled to become effective this September 23. The exemptions were scheduled to become partially effective this September 23 and fully effective September 23, 2025.

Two Federal district courts—one in the Eastern District of Texas and the other in the Northern District—have stayed the effective dates. That means that the new rules will not be effective until the courts have decided the validity of the regulation and exemptions and, most likely, until the appeals are exhausted one way or the other.

As a result, the current fiduciary regulation, with its 5-part test, will continue in effect pending the final resolution of the lawsuits. In the same vein, the current PTEs 84-24 and 2020-02 will continue in effect until a final decision is reached on the validity of the amended PTEs.

My last article, Fiduciary Rule 41, covered the court stays; this article  and the next few will discuss compliance issues for broker-dealers, investment advisers and insurance companies under the current rules. While future articles will focus on continuing issues under the fiduciary regulation’s 5-part test and the existing PTEs, this article and the next look at guidance by the SEC and the SEC’s staff on rollover recommendations, which parallel the DOL’s but which only require a single recommendation.

While the SEC’s Regulation Best Interest (Reg BI) and its Commission Interpretation Regarding Standard of Conduct for Investment Advisers (RIA Interpretation) both discuss rollover recommendations, the most detailed discussion is in a Staff Bulletin (SEC.gov | Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors).

Before discussing the details of the Bulletin, I should point out that Reg BI only applies to retail investors (which includes very small plans) and not to retirement plans generally. On the other hand, the fiduciary standard for investment advisers applies to all advice given by investment advisers, including advice to retirement plans. The Bulletin, though, only applies to advice to retail investors by both broker-dealers and investment advisers. For rollover purposes, recommendations to participants are considered to be advice to retail investors.

The Bulletin is in a Q&A format. Q&A 4 asks and answers:

4. Retirement Account Rollover Recommendations[19]
   1. Are there additional factors that I should consider when making a rollover recommendation in order to have a reasonable basis to believe the recommendation is in the retail investor’s best interest?

Yes. When making a rollover recommendation to a retail investor, you must have a reasonable basis to believe both that the rollover itself and that the account being recommended are in the retail investor’s best interest. In addition to the factors discussed above, the staff believes that there are specific factors potentially relevant to rollovers that you should generally consider when making a rollover recommendation to a retail investor. These factors include, without limitation, costs; level of services available; features of the existing account, including costs; available investment options; ability to take penalty-free withdrawals; application of required minimum distributions; protection from creditors and legal judgments; and holdings of employer stock.[20]

As with account recommendations more generally, relevant factors should be considered in light of, among other things, the retail investor’s investment profile to develop a reasonable belief that the retirement account or rollover recommendation is in the retail investor’s best interest.[21] In the staff’s view, when making a rollover recommendation, it may be difficult for a firm to assess periodically the adequacy and effectiveness of its policies and procedures or to demonstrate compliance with its obligations to retail investors without documenting the basis for the recommendation.

In addition to Reg BI and the IA fiduciary standard, some rollovers also are subject to regulation by the Department of Labor. If you are relying on Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”), you may want to review guidance from the Department of Labor on factors to consider in making a rollover recommendation, as well as relevant documentation requirements.[22]

1. When considering a rollover recommendation, do I have to consider the option of leaving the retail investor’s investments in the employer’s plan?

As discussed above, you must have a reasonable basis to believe that an account recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest. In the staff’s view, it would be difficult to form a reasonable basis to believe that a rollover recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest, if you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan, where that is an option. To evaluate any recommendation to transfer assets out of an employer’s plan, or between individual retirement accounts, you would need to obtain information about the existing plan, including the costs associated with the options available in the investor’s current plan.[23]

Note:  I have left in the footnote references just so you know that they are there. The bolding is mine and that language is discussed below.

Comments:

• The Staff Bulletin says that the recommendation to take the money out of the plan and the recommendation to transfer it to an IRA must both be in the retail investor’s best interest. Under both the SEC’s standards and the DOL’s, that implicates a Care Obligation and a Loyalty Obligation, which together constitute a best interest standard.
• The Staff Bulletin says that, to develop a recommendation, the relevant factors need to be considered, including but not limited to: costs; level of services available; available investment options. That is virtually identical to the DOL’s guidance which requires a comparative analysis of the investments, costs and services in the retirement plan and the potential rollover IRA. In other words, the SEC Staff and the DOL are in alignment on the process required for broker-dealers and investment advisers for rollover recommendations.
• The SEC Staff Bulletin says that the relevant factors need to be evaluated in light of the retail investor’s investment profile. There is no daylight between that guidance and the DOL’s.
• The SEC Staff Bulletin says that “it may be difficult for a firm to assess periodically the adequacy and effectiveness of its policies and procedures or to demonstrate compliance with its obligations to retail investors without documenting the basis for the recommendation”. Not only does the DOL agree with that position, but it favorably cross-referenced it in the preamble to the now stayed amendment to PTE 2020-02.
• The SEC Staff Bulletin says: “it would be difficult to form a reasonable basis to believe that a rollover recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest, if you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan, where that is an option.” Again, that is also the DOL’s position.
• The SEC Staff Bulletin goes on to say: “To evaluate any recommendation to transfer assets out of an employer’s plan, or between individual retirement accounts, you would need to obtain information about the existing plan….” The DOL is somewhat more flexible in the sense that, if the actual information not available, “alternative data” can be used. Without knowing, I assume that the SEC and its staff would accept that approach.

Concluding thoughts

The court stays provide little relief to SEC regulated broker-dealers and investment advisers. That would include, for example, recommendations to roll over to “securities annuities” such as variable annuities and registered index-linked annuities.

There are some differences, but they are less significant than the similarities. In my next post, I will discuss some of the differences.