DOL Revives Five-Part Fiduciary Test; Offers New Guidance on Rollover Advice

On June 29, 2020, the U.S. Department of Labor (DOL) issued a Notice of Proposed Class Exemption (“Notice”) that reinstated its previous “five-part test” to determine who is an investment advice fiduciary under ERISA as well as a proposed prohibited transaction exemption for investment advice fiduciaries that is based on the Department’s temporary policy adopted after a 2018 ruling by the Fifth Circuit Court of Appeals vacated the DOL’s 2016 Fiduciary Rule.

Reinstatement of DOL’s 5-Part Test for Investment Advice

The DOL amended the Code of Federal Regulations to execute the Fifth Circuit’s order, which effectively reinstated the Department’s “five-part test” as set forth in its 1975 regulation defining investment advice fiduciaries under the Code and ERISA.

For advice to constitute “investment advice,” a financial institution or investment professional who is not a fiduciary under another provision of the statute must:

(1) provide advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;

(2) on a regular basis;

(3) pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner that;

(4) the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and that

(5) the advice will be individualized based on the particular needs of the plan or IRA.

In addition, the Notice affirms that advice about rolling a distribution to an IRA or another plan can be considered fiduciary investment advice if the five-part test is met and the rollover is part of an ongoing investment relationship, even if the rollover is the first action of that relationship.

The Proposed Class Exemption

The proposed class exemption would allow investment advice fiduciaries – registered investment advisers, broker-dealers, insurance companies, banks, and individual investment professionals that are their employees or agents – to provide a wider range of retirement options so long as they abide by the DOL’S Impartial Conduct Standards:

  • A best interest standard. Investment advice must reflect the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use. Investment advice must be based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor. It must not place the financial or other interests of the investment professional or other party ahead of the interests of the retirement investor.
  • A reasonable compensation standard. Any compensation received, directly or indirectly, by the financial institution, the investment professional, or their affiliates for their services, would not be permitted to exceed reasonable compensation within the meaning of section 408(b)(2) of ERISA and section 4975(d)(2) of the Internal Revenue Code.
  • A best execution standard. Financial institutions and investment professionals are required to seek out the best execution of the investment transaction reasonably available per federal securities law.
  • A requirement to make no materially misleading statements. Statements made to retirement investors by financial institutions or investment professionals concerning any transaction or “relevant matters” – fees and compensation conflicts of interest or other facts that may reasonably affect an investor’s investment decisions – must not be materially misleading at the time such statements are made.

These standards align with those found in the Securities and Exchange Commission’s (SEC) Regulation Best Interest (“Reg BI”), which went into effect on June 30, 2020. Reg BI – also known as Rule 151-1 of the Securities Exchange Act of 1934 – applies to the code of conduct for broker-dealers and their staff when making recommendations to retail customers regarding securities transactions, investment strategies, asset rollovers, and other related business. Reg BI requires that these recommendations be based on a customer’s best interest.

The proposed exemption also includes the following requirements:

  • Financial institutions must provide written disclosures to the investor prior to the transaction that acknowledge fiduciary status, describe the services being provided, and disclose any material conflicts of interest;
  • To ensure compliance with the impartial conduct standards, financial institutions must establish, maintain, and enforce written procedures;
  • When executing a rollover, financial institutions must document why the rollover is in the best interest of the investor;
  • Annual reviews must be conducted to determine a financial institution’s compliance with the impartial conduct standards and include an annual certification from the institution’s CEO or equivalent officer; and
  • Records documenting compliance with the proposed exemption must be maintained for six years and made available to certain parties.

Hall Benefits Law’s vision is to provide every client with the peace of mind that comes from the confidence that HBL has addressed all possible compliance vulnerabilities. To learn more, call our team of responsive, experienced ERISA and employment counsel at 678-439-6236.

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