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Compliance September 11, 2023
New Fiduciary Proposal Could Alter Participant-to-Adviser Relationships
The DOL sent a new fiduciary rule for an interagency review before its publication in the Federal Register.
Reported by Paul Mulholland
The Department of Labor sent the Office of Management and Budget a rule proposal the DOL says is designed to “more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries,” with a focus on “the ways advisers are compensated that can subject advisers to harmful conflicts of interest.”
The proposal is a third take at a fiduciary rule finalized in 2016. That rule would have applied fiduciary status as understood under the Employee Retirement Income Security Act to advisers who recommend that a client transfer assets from an ERISA-governed retirement plan to an IRA, as well as advisers who provide continuing advice on how to invest those assets once the rollover is complete.
But in 2018, the U.S. 5th Circuit Court of Appeals overturned the rule and stated that it overstepped the DOL’s authority to regulate IRAs under ERISA because the financial professionals swept up by the rule did not have a “special relationship of trust and confidence,” and recommendations for rollovers are one-time advice.
Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute, notes that whatever the proposal says, the DOL is looking to “bring more financial professionals under the fiduciary status of ERISA.” He adds that making the proposal “consistent with the 5th Circuit ruling is going to be a challenge for them.” Nevertheless, Berkowitz expects “they will propose some sort of change to the five-part test.”
According to the Berkowitz, the “key thing” for the new proposal to survive judicial review is that it cannot assign ERISA fiduciary status unless “there is a relationship of trust and confidence,” a phrase which appears many times in the 5th Circuit opinion when discussing the common law definition of fiduciary.
Berkowitz adds that the frequent proposals and re-proposals in this domain “create an air of greater uncertainty and risk for advisers and the consumers they work with.”