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Melanie Waddell

Regulation and Compliance > Federal Regulation > DOL

The 2 Biggest Fights Brewing Over DOL’s New Fiduciary Rule

By Melanie Waddell

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What You Need to Know

  • A rollover recommendation qualifying as fiduciary advice will likely spark lawsuits, industry experts agree.
  • The beefed-up PTE 84-24 breaks insurance agents into two categories.
  • PTE 2020-02, one of the exemtptions modified by the new rule, still faces a challenge in court.

Industry officials have been poring over the Labor Department’s new fiduciary rule since it was released on Oct. 31, and while there are many noteworthy aspects to the plan, its treatment of rollover advice and insurance agent status is catching the most attention.

One of the most glaring parts is that Labor’s new fiduciary proposal, the Retirement Security Rule: Definition of an Investment Advice Fiduciary, “makes a single recommendation a fiduciary recommendation,” ERISA attorney Fred Reish of Faegre Drinker told me in a recent interview. “That is particularly important regarding rollover recommendations.”

This aspect of the new rule will be challenged in court, Reish and others, including Ed Slott of Ed Slott & Co., predict.

As Slott told me, “Yes, it’s a single rollover, but it also may be the single largest financial transaction a client has ever made — it’s their life savings on that advisor doing what’s in their best interest. And it often doesn’t happen again.”

Slott agreed that the single recommendation requirement will likely spark a lawsuit and that “it’s overregulation and it hurts the advisors that are doing the right thing already.” That being said, “financial advisors should be doing this anyway with such a large financial move the client is making,” Slott continued. “Often this rollover amount is larger than the purchase of their home.”

Labor, Slott has said, “is putting rollover advice right up there with investment advice.”

Yet the DOL has anticipated potential lawsuits, Reish relayed, and has drafted the rule’s preamble accordingly.

For instance, Labor points out “how their new proposals are aligned with the SEC’s Regulation Best Interest,” Reish said. Reg BI “says a rollover recommendation is subject to the best-interest standard of care.”

Tim Hauser, associate solicitor at Labor’s Employee Benefits Security Administration, stated at a recent event 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 at the American Law Institute’s life insurance products conference in Washington.

DOL also points out that its new fiduciary definition “is based on a fiduciary having a relationship of trust and confidence with the investor,” Reish continued, and “that is exactly out of the [U.S. Court of Appeals] Fifth Circuit decision” that torpedoed Labor’s 2016 rule.

The Fifth Circuit decision, Reish explained, said that “it takes a relationship of trust and confidence to have a fiduciary” arrangement. “Short of that, you’re not in a fiduciary relationship, you’re in a sales relationship.”

‘Regular Basis’ and One-Time Advice

Attorneys at K&L Gates agreed in a recent alert that Labor’s plan will face challenges from the industry and in the courts.

The proposed rule would replace an almost 50-year-old regulation — known as the “five-part test” — defining when a person is deemed to provide fiduciary investment advice under the Employee Retirement Income Security Act, the K&L Gates attorneys explain.

Under the five-part test, the attorneys explain, a person is a fiduciary only if:

  • They render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
  • The advice is given on a regular basis;
  • The advice is given pursuant to a mutual agreement, arrangement, or understanding with the plan or a plan fiduciary
  • The advice will serve as a primary basis for investment decisions with respect to plan assets; and
  • The advice will be individualized based on the particular needs of the plan.

Notably, the K&L Gates attorneys point out, Labor’s new “change from the five-part test’s ‘regular basis’ prong to persons providing investment recommendations ‘on a regular basis as part of their business’ (as opposed to regular advice to any particular client) would accomplish DOL’s goal of making one-time advice, such as rollover advice, covered by the fiduciary standard.”

Insurance Agents and the ‘Single Biggest Fight’

Another significant change in Labor’s fiduciary package is the changes to Prohibited Transaction Exemption 84-24. “Historically, if an insurance agent became a fiduciary by virtue of recommendations, they could use [PTE] 84-24 to be able to get their commission,” Reish explained.

The new proposed amendments to 84-24, however, “break insurance agents into two categories,” Reish said.

In one category, which Labor refers to as employees or statutory employees of insurance companies, “they have to go over to PTE 2020-02 — they’re no longer under 84-24 as proposed.”

PTE 2020-02 is the Trump-era rule that declared rollover advice fiduciary advice.

What’s a statutory employee? Basically “a career agent — in other words, an agent who’s contracted to sell the products of one insurance company,” Reish explained.

As a statutory employee, “they can then be in that insurance company’s 401(k) plan or get health care benefits because they are deemed to be an employee,” Reish said.

The opposite, then, is an “independent producer or agent,” Reish continued. “The difference being, from the DOL perspective, they view employees and statutory employees as being close enough to the insurance companies that the insurance company can act if they supervise their activities — and therefore the insurance company can sign on as a co-fiduciary under PTE 2020-02.”

However, the insurance industry, “and I think rightly so, has convinced the Department of Labor that independent agents aren’t close to the insurance companies — they have 5 or 10 different insurance companies to sell different products from and they get to pick which ones they want to sell. So there’s really no hands-on supervision by any one insurance company,” Reish explained.

So for independent agents, “they’re still under 84-24, but it’s beefed up — a lot; this will be the single biggest fight of everything to do with these new proposals,” Reish opined.

Why? “Not only must the independent agent do more, … but, the insurance company selling through that independent agent doesn’t have to be a co-fiduciary but they have heightened supervisory responsibility.”

Bottom line, according to Reish: “Nobody under 84-24, under these proposals, going forward is going to be happy.”

PTE 2020-02

Relief under PTE 84-24 “would also require compliance with ‘impartial conduct standards’ that match requirements in PTE 2020-02,” according to the K&L Gates attorneys.

PTE 2020-02, meanwhile, under the new proposal, “would be expanded to cover certain transactions involving pooled employer plans and transactions involving ‘pure’ robo-advice providers,” the K&L Gates attorneys explain.

Proposed amendment to PTE 2020-02 in Labor’s new rule also includes changes and clarifications regarding the exemption’s conditions, such as clarifications regarding the fiduciary acknowledgment requirement and a new requirement to provide a written statement of the best interest standard of care owed by the investment professional to the retirement investor, the K&L Gates attorneys write.

PTE 2020-02, which was partly overturned by a Florida district court decision, still faces a challenge in court. In February 2022, the Federation of Americans for Consumer Choice, an advocacy group representing independent insurance distributors, filed its challenge in the U.S. District Court for the Northern District of Texas.

The Federation’s case asked the court to vacate PTE 2020-02 in its entirety and enjoin DOL from implementing or enforcing it in any manner.

Kim O’Brien, president of FACC, told me that the trade group was “given the go-ahead” in early November to brief the Texas federal court on Labor’s newly proposed fiduciary rule.

“Our suit is very much alive, challenging the preamble to PTE 2020-02,” O’Brien told me in a Nov. 10 email message. Labor’s “current guidance on who is a fiduciary is contained in the preamble to PTE 2020-02, which is theoretically in force today. We are arguing the current guidance is overreaching and attempts to turn most agents into fiduciaries contrary to ERISA and the Fifth Circuit decision.”

It’s FACC’s “position that all these attempts by DOL to turn everyday agents into fiduciaries cross the line and [are] not allowed by ERISA,” O’Brien explained. “As we say in our pleadings, the DOL keeps trying to do the same thing in different ways, which we characterize as the ‘same old wine in a new bottle.’”

Melanie Waddell

@Think_MelanieW

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