The Department of Labor in December adopted a rule regarding fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA). It seems entirely doubtful, however, that this guidance will be the final word on these issues, as it is susceptible to reversal during the Biden administration.
The so-called “Rule 3.0" is the latest iteration of the DOL’s undertaking, at its own initiative, to expand the circumstances in which financial intermediaries act as ERISA “investment advice fiduciaries.” (The backstory is that Rule 1.0 was abandoned by DOL in 2011 before it was finalized and Rule 2.0 was the iteration adopted in April 2016 but vacated by the U.S. Court of Appeals for the Fifth Circuit in March 2018 as regulatory overreach.)
Rule 3.0 focuses on the fiduciary status of rollover advice. It takes the interpretive position that advice to roll over retirement savings from an existing to a new retirement arrangement—e.g., from an ERISA retirement plan to an individual retirement account (IRA)—is fiduciary investment advice if it meets the five-part test in DOL’s 1975 regulation defining that status.
The rule also includes a new exemption that permits regulated financial services companies and their representatives to provide conflicted investment advice, which otherwise is prohibited for ERISA plans and IRAs by ERISA and the Internal Revenue Code. The PTE is subject to a number of substantive and procedural conditions, including a requirement that the advice not place the financial interest of the adviser or firm ahead of the investor’s interest.
As published, the rule is effective Feb. 16. However, because the DOL took this action so late in the outgoing Trump administration, it is susceptible to reversal in the coming months.
Congressional Review Act
Under the Congressional Review Act (CRA), Congress may overturn a rule within 60 legislative days of adoption. Congress can follow special “fast track” procedures to pass in both chambers a joint resolution of disapproval, send that resolution to the president for signature or veto, and potentially override any veto.
Under the CRA, a disapproved rule “shall not take effect (or continue).” The statistical chance that the CRA will be successfully invoked is effectively nil—only 15 rules have been reversed under the CRA since its 1996 enactment. However, 14 of those instances occurred in 2017 and 2018 to overturn Obama administration rules.
The more likely path to any reversal would make use of the usual “midnight regulation” protocol, which the Biden administration already announced. As has become customary, the White House, shortly after the inauguration, instructed federal agencies to issue no new rules until approved by a Biden appointee and to extend for 60 days from Jan. 20 the effective date of any recently adopted rules that have been published in the Federal Register but not yet taken effect.
By way of example, Rule 3.0 would be within scope of any such instruction, while the Securities and Exchange Commission’s Regulation Best Interest would not. The incoming appointees to the DOL might then use the department’s rulemaking authority to further defer the effective date and reopen the public comment process, as suggested in the White House memorandum, and then to amend or rescind the PTE, without initiating a new Administrative Procedure Act process.
For example, in 2009 and at the instruction of the Obama White House, the DOL deferred the effective date of and ultimately withdrew a Bush administration regulation implementing and extending the ERISA participant investment advice exemptions enacted in the Pension Protection Act of 2006.
The retirement security plank in the Democratic Party’s 2020 platform specifically provides that when workers are saving for retirement, the financial advisers they consult should be legally obligated to put their client’s best interests first. It also says that immediate action will be taken to reverse the Trump administration’s regulations allowing financial advisers to prioritize their self-interest over their clients’ financial well-being.
Inasmuch as Rule 3.0 explicitly requires conflicted advisers not to place their own interests ahead of the interests of the retirement investor or to subordinate the retirement investor’s interests to their own, it is unclear what approach President Biden might prefer, within the parameters allowed by the Fifth Circuit’s opinion.
The conflicted advice issue has drawn the attention of political actors, however, and it now seems probable that this debate will be continued well into its second decade. Accordingly, the next step for the regulated community likely will be responding to a request for another round of public comment letters—which would be, by our count, the 12th such (largely repetitive) request since the DOL launched this undertaking in 2010.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Carol T. McClarnon is a partner and W. Mark Smith is of counsel at Eversheds Sutherland. They cover all aspects of compliance with the Employee Retirement Income Security Act from the employer and the retirement services industry perspectives.