Here Are the ‘Big-Picture’ Principles of New Fiduciary Rule: DOL Official

Tim Hauser, associate solicitor at the Labor Department’s Employee Benefits Security Administration, described Friday the “big-picture” principles behind Labor’s new fiduciary definition.

The “animating principle” behind the definition, Hauser said at the American Law Institute’s life insurance products conference in Washington, is that “if you’re holding yourself out as an investment professional, providing an individualized recommendation to somebody, that you’re holding yourself as being based on their best interest as a retirement investor, you ought to be held to that.”

Such an investment professional “ought to actually be subject to a best-interest standard,” Hauser said.

Under the Employee Retirement Income Security Act, which Labor is charged with administering, that means such an investment professional “should be a fiduciary,” Hauser continued. “That’s how ERISA regulates and protects employee benefit plans and the people that have important authority with respect to those plans.”

If a professional is treated as a fiduciary under ERISA, it’s “pretty straightforward,” Hauser stated, citing four guiding principles of the new rule:

Prudence: “That means when you make an investment recommendation, for example, did somebody purchase an annuity? That you should adhere to an expert standard of care,” Hauser said.

Loyalty: “When you make that recommendation, it needs to put the retirement investor, the plan participant, the IRA owner first,” Hauser stated. “You can’t subordinate their financial interest to your own interest.”

Compensation: “Your compensation should not be more than reasonable,” Hauser said.

Don’t mislead: “You shouldn’t be misleading in your communications about the investment or anything relevant to the investments,” Hauser relayed.

Regulatory ‘Gaps’

Another objective of the new fiduciary rulemaking, Hauser explained, “is to make sure there’s a level playing field, and that at least when it comes to advice on retirement assets — on plan and IRA assets — there’s one uniform federal standard that applies across the board to everybody.”

If you’re making a recommendation, in Labor’s view, “it really shouldn’t matter if you’re recommending to the investor that they buy real estate, crypto, commodities, a security or nonsecurities like a fixed indexed annuity — everyone should be competing under a common best-interest standard to the extent they’re holding themselves out as a trusted advisor,” Hauser said.

Right now, he continued, “there are gaps.”

The Securities and Exchange Commission’s Regulation Best Interest, as part of securities law, “is limited to retail investors,” Hauser explained. “It doesn’t cover nonsecurities.”

Then there’s state insurance laws, which are “limited to insurance products,” as well as “questions about the applicability of ERISA to rollover advice,” Hauser said.

Reg BI “doesn’t cover advice to the small plan sponsor, or any plan sponsor, [as to] what to put on their 401(k) plan menu,” Hauser relayed, adding that Labor’s goal was to “significantly” align Labor’s new fiduciary rule with Reg BI.

Labor “felt like to the extent advisors in this marketplace were making a strong, good-faith effort to comply with what Reg BI requires, they ought to be in good shape” in complying with Labor’s new fiduciary rule, Hauser said.

Labor “did not want to write a rule that penalized people who actually made the effort to come into compliance” with Reg BI, Hauser added. “I think we have tried to avoid that.”

Further, Hauser added, “No question about it, we wanted to make sure that what we say about the reg, how we wrote the reg, corresponds both with the text of the statute and the substance of the Fifth Circuit [Court of Appeals] decision,” which struck down Labor’s 2016 fiduciary rule.