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Rollovers Are Fiduciary Advice Under New DOL Rule

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Advisors, take heed: The recently approved Trump Labor Department fiduciary prohibited transaction exemption, which took effect Tuesday, treats rollovers as fiduciary advice.

“People have made the argument that rollovers cannot be fiduciary advice because it’s a one-time recommendation,” Brad Campbell, partner at Faegre Drinker in Washington, said Tuesday on the firm’s webcast, “What Lies Ahead for RIAs: The DOL and SEC Regulatory Landscape.”

The Trump administration guidance that the Biden administration has allowed to stand, at least for now, says “that’s not quite correct,” said Campbell, a former head of Labor’s Employee Benefits Security Administration.

The exemption says: “If you and the participant that you’re recommending rollover to, even though you advised them to do the rollover now, when you entered into that arrangement to give that advice, did both of you intend that you would meet again in the future to give more advice? To actually manage the assets or advise about managing the assets in the IRA?” Campbell relayed.

“If the answer is yes, we both intend to meet in the future, then DOL views it as an anticipated ongoing relationship. In other words, the beginning of an advice relationship that is fiduciary from the initial advice,” Campbell explained.

Another Labor Department example said: “If you’d previously been advising this participant on qualified retirement issues, then this new bit of advice related to the rollover was part of that ongoing relationship and therefore was fiduciary from the beginning,” Campbell said.

The new exemption “replaced the old notion that most rollovers are not fiduciary with the new interpretation: which is, unless this is truly a one-time sales transaction in which there will be no future advice, DOL’s view is, in fact, it is fiduciary advice to recommend a rollover.”

This fact raises “a lot of new issues, because now most rollover recommendations, at least a significant fraction of them, based on facts and circumstances under this guidance, likely become ERISA fiduciary [advice] and therefore … you have a conflict; you have a prohibited transaction if the recommendation to the rollover is going to affect your compensation,” Campbell said.

Fred Reish, partner at Faegre Drinker in Los Angeles, added on the webcast that “most investment advisors who recommend that a participant take a distribution and roll over with them are going to satisfy” the conditions of Labor’s exemption regarding compensation. “Unless there’s some reason you won’t, I think you have to start off thinking you will and you’re going to have to satisfy the conditions of the exemption.”

A week ago, Reish continued, “we didn’t think it [the Trump PTE] was going to come into effect, and if you make a rollover recommendation tomorrow it is the rule. So how can you possibly comply with all these complex details and conditions?”

Labor’s nonenforcement policy gives advisors until Dec. 20 before some of these rules must be followed, Reish said.