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Labor Agency’s New Rule Follows SEC ‘Best Interest’ Standard (1)

Dec. 15, 2020, 9:40 PMUpdated: Dec. 15, 2020, 11:11 PM

The Labor Department has released its contentious fiduciary exemption that broadens the kinds of retirement plan investments from which financial advisers can profit.

The fiduciary rule DOL officials announced Tuesday opens federally protected retirement plan participants and beneficiaries to once-prohibited financial advice and follows a newly imposed best interest rule the Securities and Exchange Commission approved in June.

The regulation, which cleared a three-week White House Office of Management and Budget review late Monday, was part of a package that formally reinstated DOL’s five-part test defining financial advice under the Employee Retirement Income Security Act of 1974 in July. An Obama-era rule subjected all financial professionals who work on ERISA-covered plans to fiduciary duties, but, after delays, the U.S. Court of Appeals for the Fifth Circuit vacated the rule in 2018.

“The final exemption would allow a wide range of investment advice and services to ERISA plans and IRA investors and ensure that retirement investors receiving advice under the exemption get advice that is in their best interest,” Acting Assistant Secretary for the Employee Benefits Security Administration Jeanne Klinefelter Wilson said during a media conference call Tuesday.

Tuesday’s final regulation, the Improving Investment Advice for Workers and Retirees Exemption [RIN: 1210-ZA29], creates a new transaction class exemption for registered investment advisers, broker-dealers, banks, insurance companies, and their affiliates. It allows advisers in those roles to receive compensation even if they provide “conflicted” investment advice that they may benefit from, so long as it is in the best interests of the investors.

It also allows financial institutions and their affiliates to trade with ERISA-shielded plans and individual retirement accounts on a principal basis—out of their own inventories or proprietary accounts.

Changes From Proposal

The Obama administration’s failed 2016 rule also introduced class exemptions for commissions and principal trades in order to mitigate the effect of adding a new spate of fiduciaries. The new rule will apply exemptive relief to a wider body of financial advisers while still using a narrower definition of fiduciaries.

The exemption covers transactions that roll over plan assets to privately controlled IRAs, an emerging market the department says accounted for $2.4 trillion in shifting assets from 2016-2020.

Only minor changes were made to the original proposal published in July. The department eased record-keeping and disclosure requirements and clarified a retroactive review provision to apply to all senior executive officers at an institution.

It will take effect 60 days after it’s been published in the Federal Register, well after President-elect Joe Biden has taken office.

Senior DOL officials Tuesday wouldn’t directly answer reporters’ questions about the significance of the 60-day window.

Stephen Saxon, principal at Groom Law Group in Washington, D.C., who worked with the department to draft the exemption, said he expects the administration to put a hold on the rule’s implementation by issuing a request for information. But this exemption will act as a “gold standard” for issuing exemptive relief in the future, he said.

But that process, like other DOL rules this summer and fall, was rushed, says David Meyer, president of the Public Investors Advocate Bar Association. By issuing a “best interest” exemption that falls in line with SEC requirements, DOL is effectively renouncing ERISA, the law intended to define fiduciary duties.

“This new rule under this outgoing administration literally lowered the standard of care of investment advice fiduciaries,” he said. “That’s just a dramatic reversal of the intent of Congress in enacting ERISA. That’s going to hurt all the retirement savers in the country.”

Two stakeholder groups told Bloomberg Law that meetings they had scheduled with the White House about the rule were abruptly canceled in the last 36 hours.

(Updated with additional reporting throughout. )

To contact the reporter on this story: Austin R. Ramsey in Washington at

To contact the editor responsible for this story: Martha Mueller Neff at