The Department of Labor said late Monday afternoon that it is proposing a new exemption for investment advice fiduciaries, allowing them to receive “a wide variety of payments that would otherwise violate the prohibited transaction rules.”
Those payments include “commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue sharing payments from investment providers or third parties” and would extend to rollover advice, according to the proposal.
“Today’s proposed exemption would give Americans more choices for investment advice arrangements, while protecting the retirement savings of American workers,” said Labor Secretary Eugene Scalia, in a statement. “The exemption would add to the tools individuals need to make the right decisions for their financial future.”
In a tweet, Barbara Roper, director of investor protection for the Consumer Federation of America, said the rule “reopens loopholes in the definition of fiduciary investment advice, making the standard easy to evade. It creates a new exemption to allow advisers to get conflicted compensation, subject only to Reg BI’s weak, non-fiduciary standard.”
Roper added in an email to ThinkAdvisor that under Labor’s plan, “many if not most rollover recommendations wouldn’t be covered….At the same time, the DOL is creating a new exemption that will allow fiduciary advisers to earn conflicted compensation, subject only to the weak ‘best interest’ standard and conflict ‘mitigation’ requirements of Reg. BI.”
The SEC, Roper continued, “was explicit in adopting Reg BI that it was not a fiduciary standard, and it includes only minimal restrictions on conflicts of interest. That’s a huge watering down of the strong fiduciary protections that are supposed to apply under ERISA to retirement advice.”
Labor’s Employee Benefits Security Administration plans to soon send its proposed new exemption to align with the Securities and Exchange Commission’s Regulation Best Interest to the Federal Register, which will open it up for a public comment period, a senior Labor official told reporters Monday.
Dale Brown, president and CEO of the Financial Services Institute, said in a Monday statement that FSI is ”thoroughly reviewing the rule proposal. However, we expect the Department heeded the concerns outlined by the Fifth Circuit Court of Appeals and consulted with the SEC to avoid conflicts” with Reg BI.
“These regulations must work in tandem to prevent conflicting requirements for financial advisors working to diligently comply with the rules and to avoid creating confusion among investors,” Brown said. “This will also ensure Main Street Americans have access to the quality, affordable financial advice they need to achieve their financial goals.”
The senior Labor official explained that under the proposed new exemption from ERISA’s prohibited transaction rules, Labor ”is not changing the definition of fiduciary,” and the 5-part test under ERISA “remains intact.”
The Labor official also explained that the best interest standard in DOL’s exemption “is aligned” with Reg BI “and the existing fiduciary duty of SEC-registered investment advisors.”
Labor’s rule, which is in the form of a prohibited transaction exemption, fulfills two important policy goals, according to a senior Labor Department official who briefed reporters. A fact sheet about the exemption is available here.
First, it facilitates a wide range of beneficial investment advice and services to ERISA plans and IRA investors, the senior official said.
Second, “it ensures that when retirement investors receive advice pursuant to the exemption, that advice is in their best interest,” the senior official said.
The proposed exemption offers a new prohibited transaction class exemption for investment advice fiduciaries and is based on an existing temporary policy adopted after the U.S. 5th Circuit Court of Appeals vacated Labor’s 2016 fiduciary rule package.
“The proposal would allow investment advice fiduciaries to give more choices for retirement using impartial conduct standards,” Labor explained.
Impartial conduct standards are a best-interest standard; a reasonable compensation standard; and a requirement to make no materially misleading statements.
The standards in Labor’s proposed exemption “align with standards of other regulators, including the SEC,” Labor said.
The exemption also expresses Labor’s “views on when rollover advice could be considered fiduciary advice” under the Employee Retirement Income Security Act and the Internal Revenue Code.
The exemption includes additional conditions requiring “a clear acknowledgement of the advisor’s fiduciary status,” policies and procedures to mitigate conflicts of interest and a retrospective compliance review by financial institutions to ensure ongoing compliance with the exemption condition, the senior Labor official explained.
The exemption also includes a “disqualification provision,” the senior official said.
Labor is also amending the Code of Federal Regulations to implement the U.S. Court of Appeal’s 5th Circuit’s order and reinstating Labor’s 1975 regulation defining who is an investment advice fiduciary under ERISA and the Code, commonly known as the “five-part test.”
The court’s order “also had the effect of reinstating the Department’s Interpretive Bulletin 96-1 regarding participant investment education,” Labor explained.
SEC Chairman Jay Clayton said of the proposal: “I commend the Department of Labor for their efforts to clarify and align the standards of conduct that investment professionals must follow in providing advice to Main Street investors. The proposed exemption announced today reflects in part the Commission’s constructive and ongoing engagement with the Department. I look forward to continuing our work with the Department so that collectively we can enhance investor choice and increase investor protections.”