DOL’s New Proposal Plans to Make Salespeople Fiduciaries Again

The Department of Labor is on a path that leads back to the courtroom. On Nov. 3, it proposed a uniform fiduciary standard and compliance regime on registered investment advisers, brokers, insurance agents, and other sellers of products and services in the individual retirement account marketplace.

The proposal’s sweeping expansion of who is a fiduciary mirrors the DOL’s 2016 Rule that was struck down by the US Court of Appeals for the Fifth Circuit. The court noted that offering “investment advice for a fee” had “distinguished salespeople from investment advisers during the period leading up to Employee Retirement Income Security Act’s 1974 passage.” The court also noted that “Congress is presumed to have acted against a background of shared understanding of the terms it uses in statutes” and the DOL’s 2016 interpretation conflicted with the statute because it swept in many salespeople.

The DOL views the new proposal as necessary and a way to protect retirement savers, who may be confused by the various standards the law imposes on entities providing retail financial services.

The agency also has expressed concern that its existing rules don’t always impose rollover recommendations to a fiduciary standard, and that the decision of whether to roll assets out of a 401(k) plan and into an individual retirement account or annuity is one of the most significant financial decisions a retirement saver makes.

The first part of the new proposal amends the definition of investment advice. Individuals and entities that provide such advice to retirement savers generally are deemed to be fiduciaries under either Title I or Title II of ERISA. The proposal seeks to expand the definition to capture one time interactions and rollover recommendations by amending the long-standing five-part test.

This test, which contains a regular-basis criterion that’s tied to individual relationships, would be replaced with an entity-wide test. Under the new proposal, the regular-basis criterion is satisfied when investment recommendations are made as a part of an entity’s business operations.

Under the revised test, a financial services provider would be an investment advice fiduciary under federal pension law if:

• The provider provides investment advice or makes an investment recommendation to a retirement investor
• The advice or recommendation is provided for a fee or other compensation
• The financial services provider makes a recommendation in the context of a professional relationship in which investors would reasonably expect to receive sound advice that’s in their best interest
• The provider has discretion over investment decisions for retirement investors
• The provider makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating the recommendation is based on 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
• The provider states they’re acting as a fiduciary when making investment recommendations

Under this test, almost every interaction a plan or an IRA holder has with a financial professional would be subject to DOL conditions. The agency does this by concluding that a fiduciary “relationship of trust and confidence” exists where two parties have agreed to such a relationship—such as a trustee who has already agreed to serve as trustee to a trust or an investment adviser who a client has already entered into an advisory or management contract—and wherever a retirement saver is interacting with a financial services professional who is subject to a best-interest care standard—such as a broker or insurance agent who calls a retirement saver and is selling a product.

Essentially, the DOL bootstraps off the best-interest care standards of regulators such as the Securities and Exchange Commission or groups such as the National Association of Insurance Commissioners, saying retirement savers automatically should get a higher standard simply because the DOL doesn’t like the standards others have adopted.

The proposal also raises the consequence of being a fiduciary by narrowing the existing pathways for compliance.

Traditionally, there have been several paths for a fiduciary to receive compensation while providing investment advice. Mutual fund distributors have used steps described in PTE 77-4 and insurance agents have used a disclosure-based compliance pathway described in PTE 84-24.

In 2020, the DOL adopted a new pathway, PTE 2020-02, which wasn’t product-specific and contained novel conditions such as impartial conduct standards, retrospective reviews, additional disclosures, disqualification provisions, and a complex correction regime.

In the proposal, the DOL largely has eliminated the paths to compliance except for PTE 2020-02, and has added new conditions to PTE 2020-02. The other remaining pathway is an amended PTE 84-24, which now largely mirrors PTE 2020-02 and only covers independent agents distributing insurance products.

The DOL seems to have merely addressed the gaps it has identified in its ERISA guidance and instead appears to be trying to rewrite ERISA to identify gaps that Congress may have created.

While it’s important to refine the proposal and ultimately comply with it if it’s finalized, we expect the proposal will encounter resistance and that courts will have to decide if the DOL is within its jurisdiction.

Meanwhile, interested parties can submit comments in support of, against, or suggesting changes to the proposal until Jan. 2, 2024.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Allison Itami is principal at Groom Law Group, Chartered, counseling on fiduciary standards and prohibited transactions applied by ERISA and the Internal Revenue Code to retirement plans and IRAs.

Kevin Walsh is principal at Groom Law Group, Chartered, advising financial institutions on distribution challenges in the face of evolving care standards.

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