On October 31, 2023, the Department of Labor (DOL) released its “Proposed Retirement Security Rule: Definition of an Investment Advice Fiduciary,” along with proposed revisions to Prohibited Transaction Exemptions (PTEs) 2020-02, as well as other fiduciary-advice-related PTEs (i.e., 84-24, 75-1, 77-4, 80-83, 83-1, and 86-128).

If finalized, a new definition of an “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA) would apply, likely resulting in more individuals becoming fiduciaries. Amendments to certain PTEs would provide pathways for fiduciaries to receive otherwise prohibited compensation and fees.

At a high level, the proposed regulation would replace the current “Five- Part Test” for determining fiduciary status with the following. A person would be an ERISA investment advice fiduciary and, therefore, subject to ERISA’s “best interest” standard of conduct, disclosure and reporting if:

• A person makes a recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property…to [a] plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary;
• For a fee or other compensation, direct or indirect;
• In one of the following contexts:
  • The person either directly or indirectly...has discretionary authority or control…with respect to purchasing or selling securities or other investment property for the retirement investor.
  • The person either directly or indirectly…makes investment recommendations to investors on a regular basis as part of their business and the recommendation is provided under circumstances indicating that the recommendation is based on the 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 person making the recommendation represents or acknowledges that he/she is acting as a fiduciary when making investment recommendations.

Recall that under the DOL’s current Five-Part Test, a person is a fiduciary only if he or she satisfies all of the following requirements:

1. Renders advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property
2. On a regular basis
3. Pursuant to a mutual agreement, arrangement, or understanding with the plan or a plan fiduciary where
4. The advice will serve as a primary basis for investment decisions with respect to plan assets, and where
5. The advice will be individualized based on the particular needs of the plan.

DOL has expressed particular concern about requirements 2, 3 and 4. According to the DOL, these elements "…too often work to defeat legitimate retirement investor expectations of impartial advice and allow some advice relationships to occur where there is no best interest standard.”

Under the proposal, these concerns are addressed in the following ways. First, the “regular basis” rule would change to simply require the advice fiduciary to be in the business of providing advice on a regular basis. Thus, someone in the “advice business” would satisfy this requirement even if the advice in question was a one-time occurrence ( e.g., a recommendation to take a rollover). Second, as to the “mutual agreement or understanding” requirement, the proposed rule would remove this clause and focus on the advisee’s reliance on an advisor’s recommendation as financial advice, and provide that disclaimers by the advisor, “…will not control to the extent they are inconsistent with the person’s oral communications, marketing materials, applicable State or Federal law, or other interactions with the retirement investor.” Finally, “a primary basis” requirement would become, instead, “…a basis for investment decisions that are in the retirement investor’s best interest.”

What you need to know:

• These are proposed changes at this time. They are not in effect and investors, plan sponsors and financial professionals may not rely on them.
• There is a 60-day comment period for each piece of the fiduciary package. Many comments from industry players are expected, and an extension to the comment period has been requested.
• A public hearing will be held on December 12, 2023.
• Advisors operate under the direction of their affiliated firms. For those that are providing fiduciary investment advice for a fee as defined under current guidance (the Five-Part Test), they are (or should be) following a current statutory exemption [e.g., ERISA Sec. 408(g) fiduciary adviser] or a PTE (e.g., PTE 2020-02, PTE 84-24, etc.) as instructed by their firms. The proposals do not affect current advice activity.