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DOL to Redefine 'Fiduciary' in New Rule

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What You Need to Know

  • A new rule would take into account the practices of investment advisors.
  • The DOL plan would amend the regulatory definition of the term fiduciary.
  • Former EBSA head Phyllis Borzi expects Labor to issue for notice and comment an update of the five-part rule on who’s a fiduciary.

The Labor Department plans to issue a proposed rulemaking to update the definition of “fiduciary,” according to its just-released regulatory flexibility agenda filed with the Office of Management and Budget’s Office of Information and Regulatory Affairs.

According to Labor, its planned rulemaking would amend the regulatory definition of the term fiduciary “to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code.”

The amendment, Labor said, “would take into account practices of investment advisors, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisors are compensated that can subject advisors to harmful conflicts of interest.”

In conjunction with the rulemaking, EBSA also will evaluate “available prohibited transaction class exemptions and consider proposing amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors.”

Labor is “working on redefining ‘fiduciary,’” said ERISA attorney Fred Reish, partner at Faegre Drinker. The anticipated rule is slated as “significant” and may be finished by December, he says.

Phyllis Borzi, the former head of Labor’s Employee Benefits Security Administration under the Obama administration, told ThinkAdvisor Friday in an email that she expects Labor to propose “for notice and comment an update of the five-part rule [on who’s a fiduciary] to formally incorporate the evolution of their thinking on several aspects of the five-part test that they discussed in the preamble to PTE 2020-02.”

Borzi said she also expect Labor to issue “some additional FAQs since they really want to give the regulated community more guidance on what they’ll expect for them to do to bring themselves into compliance with the conditions of the PTE.”

Also expect Labor to propose for notice and comment “changes/additions to several existing PTEs to incorporate the impartial conduct standards (especially PTE 84-24 for insurance companies),” Borzi relayed.

Borzi added that finishing a new rule by December will depend “on the nature of the public comments they [DOL] receive and how long it takes them internally to analyze, assess and incorporate them,” adding that Labor will likely hold a public hearing on the plan “since that invariably will be requested and that will of course extend the time.”

Labor, she said, “will not try to stifle comment by using the same unreasonably short 30-day comment periods that the Trump folks used” under former Labor Secretary Eugene Scalia.