On June 29, the U.S. Department of Labor issued its re-proposal to regulate investment advice fiduciaries under the Employee Retirement Income Security Act (ERISA). The new proposal includes two major regulatory actions: a class exemption and reinstating the so-called “five-part test,” which determines whether a person renders investment advice under ERISA.
The DOL’s overhaul of the fiduciary rule—which was originally adopted in 1975—has been in the works since 2010, proceeding in fits and starts as the department proposes, revises, and implements different variations of the rule. The most recent attempt was implemented in 2017, but was vacated by the U.S. Court of Appeals for the Fifth Circuit in 2018. That rule dramatically expanded the types of situations where communications with customers may be deemed “investment advice” subject to the rule.
The Court ruled the DOL overreached in promulgating the rule, rather than deferring to the SEC’s regulations. Since then, affected bankers and investment advisors have followed the DOL’s Field Assistance Bulletin No. 2018-02.
The new proposal’s exemption would be available to banks, among other investment advice fiduciaries. It would permit banks to receive compensation as a result of providing fiduciary investment advice, including advice to roll over a participant’s account in an employee benefit plan to an IRA and other similar types of rollover recommendations.
The class exemption would require fiduciary investment advice to be provided in accordance with certain “impartial conduct standards” in order to protect retirement customers. The three standards are:
- A best interest standard,
- A reasonable compensation standard, and
- A requirement to make no materially misleading statements about recommended investment transactions.
The proposed exemption would also include other protections requiring disclosures to retirement investors, conflict mitigation, and a retrospective compliance review.
This proposal is a step in the right direction after the previous rule’s overly broad definition of investment advice. Comments on the proposal are due 30 days after the proposal is published in the Federal Register.