U.S. Department Of Labor Proposes New Fiduciary Rule – Retirement, Superannuation & Pensions

On October 31, 2023, the U.S. Department of Labor (the
“DOL”) issued proposed changes to the definition of
“investment advice” fiduciary under the Employee
Retirement Income Security Act of 1974 (“ERISA”). With
this proposal, the DOL revisits its efforts to re-make the
fiduciary rule after the 2016 fiduciary rule was vacated by the
U.S. Court of Appeals for the Fifth Circuit in 2018.

In conjunction with the amended fiduciary definition, the DOL
has also proposed amendments to several prohibited transaction
class exemptions (“PTEs”). These changes include
eliminating the ability to rely on certain widely-used PTEs for
investment advice transactions, curtailing the availability of PTE
84-24 (Transactions Involving Insurance Agents and Brokers, Pension
Consultants, Insurance Companies and Investment Company Principal
Underwriters) and adding additional conditions to, and
considerations for the use of, PTE 2020-02 (Improving Investment
Advice).

In light of the fraught history of the DOL’s proposals on
the fiduciary rule and the similarities to the vacated 2016
fiduciary rule, we expect that there will be extensive and
voluminous commentary on this latest proposal. Comments are due on
or before January 2, 2024 (which is 60 days from the Federal
Register publication date of November 3, 2023), and the DOL
anticipates holding a public hearing on or around December 18, 2023
(approximately 45 days following the Federal Register publication
date).

This client alert provides high-level, preliminary observations
about the proposal. We expect to provide a more detailed review as
we complete our analysis of the regulatory package and monitor
developments in connection with the comment period.

Investment Advice Fiduciary Definition

Current Definition

Under the current definition of “investment advice”
fiduciary that has been in place since 1975, a person is a
fiduciary only if all the elements of the following five-part test
are satisfied: (1) the person renders advice as to the value of
securities or other property, or makes recommendations as to the
advisability of investing in, purchasing, or selling securities or
other property, (2) on a regular basis to the plan (3) pursuant to
a mutual agreement, arrangement, or understanding with the plan or
plan fiduciary that (4) the advice will serve as a primary basis
for the plan’s investment decisions with respect to plan
assets, and that (5) the advice will be individualized based on the
particular needs of the plan.

Proposed Definition

Under the proposal, a person is an investment advice fiduciary
when making a recommendation of any securities
transaction or other investment transaction or any investment
strategy involving securities or other investment property to a
plan, plan fiduciary, plan participant or beneficiary, IRA, IRA
owner or beneficiary, or IRA fiduciary (collectively,
a “retirement investor”) in one of the following the
contexts:

1. 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;




2. 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




3. the person making the recommendation represents or acknowledges
   that they are acting as a fiduciary when making investment
   recommendations.

The phrase ”recommendation of any securities
transaction or other investment transaction or any investment
strategy involving securities or other investment
property” means recommendations:

1. as to the advisability of acquiring, holding, disposing of, or
   exchanging, securities or other investment property, as to
   investment strategy, or as to how securities or other investment
   property should be invested after the securities or
   other investment property are rolled over, transferred, or
   distributed from the plan or
   IRA;




2. as to the management of securities or other investment
   property, including, among other things, recommendations on
   investment policies or strategies, portfolio composition, selection
   of other persons to provide investment advice or investment
   management services, selection of investment account arrangements
   (e.g., account types such as brokerage versus advisory) or
   voting of proxies appurtenant to securities; and




3. as to rolling over, transferring, or distributing
   assets from a plan or IRA, including recommendations as to whether
   to engage in the transaction, the amount, the form, and the
   destination of such a rollover, transfer, or
   distribution.

Finally, the DOL proposal specifically states that written
disclaimers will not control to the extent inconsistent with other
communications, marketing materials, applicable law or other
interactions. In addition, the DOL specifically declined to include
an exception for sophisticated investors, e.g., the
“sophisticated plan fiduciary” exception that was
included in the 2016 rule.

Proposed Amendments to Prohibited Transaction Exemptions

Concurrently with its expansion of what constitutes fiduciary
investment advice, the DOL proposes to eliminate the availability
of certain PTEs that currently apply to investment advice
transactions, while also amending PTE 2020-02 (the exemption that
the DOL wants investment advice fiduciaries to utilize) with
conditions and requirements that make PTE 2020-02 more challenging
to satisfy.

Relief Removed for Investment Advice Transactions
from Certain Exemptions

In its release, the DOL states that the standard of care in PTE
2020-02 should apply “universally to all fiduciary investment
advice, regardless of the specific type of product or advice
provider.” As a result, the DOL proposes removing relief for
investment advice fiduciaries under the following exemptions so
that exemptive relief for fiduciary investment advice transactions
must be sought under PTE 2020-02:

• PTE 75–1 (Securities Transactions Involving
  Broker-Dealers, Reporting Dealers and Banks) Parts III &
  IV




• PTE 77–4 (Purchase of Shares of Open-End Investment
  Companies)




• PTE 80–83 (Use of Proceeds from Sale of Securities to
  Reduce or Retire Indebtedness)




• PTE 83–1 (Mortgage Pool Investment Trusts)




• PTE 86–128 Executing Securities Transactions and
  Recapture of Commissions.

PTE 84-24 Relief Limited to Independent Insurance
Agents

Currently, PTE 84–24 provides broad relief for commission
compensation received by insurance agents or brokers, pension
consultants, and principal underwriters as result of the purchase
by plans and IRAs of insurance or annuity contracts or investment
company securities. The DOL is proposing narrowing PTE 84–24
to limit relief to the receipt by independent insurance agents (who
sell the products of at least two insurance companies) of
fully-disclosed commissions and fees from insurance companies with
respect to annuity recommendations or other products not regulated
by the U.S. Securities and Exchange Commission. The conditions of
the proposed amendments to PTE 84-24 are similar to the conditions
contained in PTE 2020–02 and also include conditions specific
to what the DOL considers applicable in the context of independent
insurance agents.

PTE 2020-02 Additional Conditions and
Requirements

PTE 2020-02 provides relief for the receipt of compensation in
connection with investment advice. As a result of the proposed
changes to the PTEs discussed above, more service providers may
seek to avail themselves of the relief provided by PTE 2020-02, and
the proposal extends relief to robo-advice programs that had
previously been excluded from relief under the exemption.

The DOL, however, has also proposed a number of changes and
clarifications to PTE 2020-02 that will make the conditions of an
already burdensome exemption more difficult to meet. For example,
the DOL’s proposal includes the following changes and
clarifications to the existing exemption’s conditions with
respect to disclosure, policies and procedures, and retrospective
review:

• Additional Disclosure Conditions and
  Considerations:
  

  • Requirement of an affirmative fiduciary acknowledgement.
    Service providers may currently employ flexible phrasing. The DOL
    has expressed concern about this approach and will require a
    definitive written acknowledgement of fiduciary status.

  
  

  • Requirement of a statement of the “best interest”
    standard of care.

  
  

  • Requirement of a statement as to whether the retirement
    investor will pay for services directly or indirectly, including
    through third party payments. For example, if the retirement
    investor will pay through commissions or transaction-based
    payments, this must be clearly disclosed.

  
  

  • Requirement of a statement that retirement investors have the
    right obtain specific cost, fee and compensation information in a
    manner “reasonably designed to present full and fair
    disclosure that is materially accurate” with sufficient detail
    to permit the retirement investor to make an informed judgement
    about the costs of the transaction and the significance and
    severity of the conflicts of interest.




• Additional Disclosure Conditions and Considerations for
  Rollover Transactions:
  

  • Certain factors must be considered in the documentation of the
    basis for the rollover recommendation. The minimum relevant factors
    include: (i) alternatives to a rollover, (ii) fees and expenses
    associated with the plan and the recommended investment or account,
    (iii) whether an employer or other party pays for some or all of
    the plan’s administrative expenses, and (iv) different levels
    of services and investments available under the plan and the
    recommended investment or account.




• Additional Policies and Procedures Conditions and
  Considerations:
  

  • Prohibition on the use of quotas, appraisals, performance or
    personnel actions, bonuses, contests, special awards, differential
    compensation, or other similar actions or incentives that are
    intended, or that a reasonable person would conclude are likely, to
    result in, recommendations that are not in the retirement
    investor’s “best interest.”




• Additional Retrospective Review Conditions and
  Considerations:
  

  • Requirement that the “Senior Executive Officer”
    certification must include a certification related to the timely
    filing of Form 5330s reporting for any non-exempt prohibited
    transactions, the correction of those transactions, and payment of
    any related excise taxes.

Finally, while the broadened definition of investment advice
fiduciary and the narrowing of certain exemptions may cause more
service providers to seek exemptive relief under PTE 2020-02, the
DOL has expanded ineligibility and disqualification criteria for
the exemption. For example, the DOL has broadened the crimes that
could cause ineligibility by enumerating specific crimes (including
foreign crimes) that could cause ineligibility. While current PTE
2020-02 provides for different amounts of time before ineligibility
as well as a one-year winding down period, the DOL is proposing
that all entities become ineligible six months after the conviction
date, the date of the DOL’s written determination regarding a
foreign conviction, or the date of the Department’s written
ineligibility notice regarding other misconduct.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.