Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor
Piggy bank on side in front of Department of Labor sign

Regulation and Compliance > Federal Regulation > DOL

DOL to Appeal Rollover Decision; New Fiduciary Rule Expected by End of Summer

By Melanie Waddell

X
Your article was successfully shared with the contacts you provided.

The recent federal court decision in Florida striking down the Department of Labor’s guidance that declared rollover advice fiduciary advice “will force the DOL’s hand” in releasing a new fiduciary definition rule, likely by the end of summer, predicts Fred Reish, partner at Faegre Drinker.

Labor filed a notice of appeal Friday with the U.S. District Court for the Middle District of Florida, which decided the rollover case. The appeal would be heard by the U.S. Court of Appeals for the 11th Circuit.

The move was expected, Reish said.

“As a result, broker-dealers, investment advisers and insurance agents are left with uncertain outcomes for rollover recommendations,” Reish said. “If they do not continue to satisfy the requirements of the DOL’s PTE 2020-02 for rollover recommendations, they are at risk that the DOL will win the appeal and any recommended rollovers will be prohibited transactions. We will likely remain in this regulatory limbo for a year or more.”

Reish said he also expects Labor to release a proposal soon “to toughen the DOL’s PTE 84-24 for recommendations of annuities for rollovers.” With this plan, the DOL “will require more of both the insurance agents and the insurance companies.”

We caught up with Reish to check on how firms are complying with Labor’s fiduciary PTE after his colleague, Brad Campbell, stated in a recent webcast that the interpretation is not “dead” in the wake of the Florida ruling.

THINKADVISOR: What’s the latest with the DOL fiduciary PTE?

FRED REISH: A Florida federal district court found that the DOL’s interpretation of fiduciary advice for rollovers was not supported by the existing regulation.

While that was quite a blow to the DOL’s goal of providing a heightened standard of care for rollover recommendations, the court did find that, if an advisor is a fiduciary, the processes described in PTE 2020-02 were supportable.

For example, a fiduciary advisor would still need to have plan information and compare it to the investments, services and costs in a rollover IRA, in light of the needs and circumstances of the participant.

In addition, the court did not extend its ruling to conflicted recommendations to plans or IRAs; the holding was only about rollover recommendations. As a result, investment advice that is provided on a regular basis to plans and IRAs will still be fiduciary advice and, where there are financial conflicts, the protection of PTE 2020-02 will still be needed.

It would be risky for anyone to rely on [the Florida court] decision and make rollover recommendations without complying with the PTE. It may be a year or so before we hear from an appellate court.

In addition, the court’s decision is an incentive for the Department of Labor to issue a new proposed regulation that specifically says that a rollover recommendation is a fiduciary act. However, the DOL has been very quiet about its work on a new fiduciary regulation.

Do you have any concerns now about advisors’ compliance with the fiduciary PTE?

I am concerned about smaller broker-dealers and investment advisory firms. I am also concerned about independent insurance agents. These rules — and PTE 2020-02 in particular — require significant work by the firms, as well as compliant processes by the individual advisors and agents. Larger firms, with their attorneys and compliance personnel, are well equipped to comply with the fiduciary and prohibited transaction requirements.

Most large firms have cultures where the home office can set policies and practices. But when you get to smaller financial service providers with just one or two or three financial professionals, the requirements are more burdensome and expensive. As a result, I am worried that there may be inadvertent noncompliance.

What’s the biggest issue for broker-dealers now, in terms of compliance?

It depends somewhat on the size and culture of the broker-dealer.

For all broker-dealers, I think it is challenging to ensure that all recommendations, including rollover recommendations, are made through a best-interest process and are, in fact, in the best interest of the retirement investor.

In addition, there is a requirement to mitigate conflicts of interest. In the broker-dealer world, almost all compensation is transaction based, which in turn means that it is conflicted. As a result, broker-dealers must have reasonable policies and procedures — as well as supervision — in place to reasonably ensure that the compensation is not motivating the individual representatives to make recommendations that are in their interest, as opposed to being in the best interest of the retirement investor.

For smaller firms, some of the other requirements are also burdensome. An example would be the annual retrospective review and report.

Melanie Waddell

@Think_MelanieW

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.