The Latest DOL Fiduciary Advice News
Regulators continue to debate the definition of “fiduciary,” even as some related regulations become enforceable.
But insurance and retirement planning professionals who take a wait-and-see approach could end up out of compliance.
The U.S. Department of Labor (DOL) announced in mid-June 2021 that it would begin the rulemaking process to amend the fiduciary definition for individuals providing advice to employee benefit plans and individual retirement accounts (IRAs). According to its regulatory agenda at that time, the DOL also would evaluate changes or additions to existing Prohibited Transaction Exemptions (PTEs), possibly including amendments to PTE 84-24, which provides an exemption for an insurance agent to receive a commission paid as result of fiduciary advice given to a plan or IRA holder.
A more recent DOL regulatory agenda, released in January 2023, again included rulemaking to amend the fiduciary definition as one of its regulatory goals for the coming months. While no timeline was given, some industry experts expect the proposed fiduciary regulation to be unveiled in the near future and to take another year to finalize.
Meanwhile, a federal court in Florida in February 2023 struck down the DOL’s current guidance that characterizes a rollover recommendation as fiduciary investment advice, and the DOL in April 2023 appealed that decision With the current guidance under court review, experts suggest that the DOL will be prompted to quickly, perhaps by the end of summer 2023, to release its new proposed fiduciary definition.
Compliance Necessary Now
Agents and advisors should not interpret the Florida court ruling and the ongoing uncertainty as reasons to avoid adherence to current guidelines, which were adopted in 2021 and became effective February 1, 2022.
The DOL on Feb. 16, 2021, adopted Prohibited Transaction Exemption 2020-02 (PTE 2020-02), which expanded the definition of advice covered under Employee Retirement Income Security Act (ERISA) law to include recommendations about retirement plan and IRA rollovers. PTE 2020-02 is a new class exemption that allows those giving fiduciary advice to receive otherwise-prohibited compensation if they follow certain policies and procedures. However, the DOL included guidance within that class exemption that expanded the previous fiduciary test to include rollover recommendations made to retirement investors. After several extended deadlines and temporary enforcement policies, PTE 2020-02 took effect Feb. 1, 2022, meaning the DOL can start holding agents and advisors responsible for meeting documentation and disclosure requirements.
In an April 2021 statement, the DOL emphasized the importance of adherence to the “impartial conduct standards” as it continues to shape regulations: “While the Department intends to revisit PTE 2020-02 and other exemptions relating to advice, the Department believes that core components of PTE 2020-02, including the Impartial Conduct Standards and the requirement for strong policies and procedures, are fundamental investor protections which should not be delayed while the Department considers additional protections or clarifications.”
The impartial conduct standards are: acting in the client’s best interest, refraining from making misleading statements, and receiving only reasonable compensation.
So What Does This Mean for You?
If you advise clients on rollovers and want to receive commissions, you’ll need to pick an available prohibited transaction exemption and make sure you’re acting compliantly. While clarification is expected, SMS expects that for now, PTE 84-24 will remain the most-appropriate exemption in the insurance context and that the newer PTE 2020-02 will not supersede PTE 84-24 in importance.
Each rollover recommendation will need to be evaluated according to the particular circumstances to determine whether an advisor or producer is acting as a fiduciary. Whether a fiduciary relationship exists between you and a client — and therefore, whether the fiduciary standard of care applies to you — depends on a variety of facts and circumstances specific to individual situations. In other words, if you’re a financial professional who provides advice to retirement investors, it’s important that you understand any new requirements so that you can ensure you’re in compliance.
A History of the Changing Definition of ‘Fiduciary’
The definition of “fiduciary” has changed multiple times in the past decade.
President Barack Obama in 2010 directed his DOL to craft a fiduciary rule. The resulting rule expanded the definition of an “investment advice fiduciary” under 1974’s ERISA to require many more advisors and producers to act as fiduciaries. But that version of the fiduciary rule was vacated by the U.S. Fifth Circuit of Appeals in June 2018 as regulatory overreach, effectively killing it.
The Trump administration’s guidance within PTE 2020-02, while not as far-reaching as the Obama-era fiduciary rule, expanded the fiduciary definition to include certain advisors handling retirement plan rollovers — a move that surprised many.
While the financial services industry expected the incoming Biden administration to withdraw the Trump administration’s rule regarding the fiduciary investment advice exemption, the DOL on Feb. 12, 2021, surprised many by announcing that it would allow the regulation to go into effect on Feb. 16, 2021.
If You Advise on Rollovers, Pay Attention
In the past, advice regarding rollovers has typically been seen by the DOL as a one-time recommendation, and therefore not fiduciary advice. But the DOL abandoned that position within its discussion of PTE 2020-02.
For example, if you recommend a rollover and then intend to meet with that client in the future, the DOL views that as an anticipated ongoing relationship, or the beginning of an investment advice relationship subject to fiduciary standards, explained Brad Campbell, partner at Faegre Drinker in Washington during a webcast on the topic.
Because the new rule essentially tosses out the old notion that most rollovers are not fiduciary advice, you should, going forward, evaluate each rollover according to the particular circumstances to determine whether you’re acting as a fiduciary.
Exemption for Compensation
Despite the industry attention due to its impact on rollover recommendations, the Trump administration’s PTE 2020-02 is primarily an exemption to allow investment advice fiduciaries a new method to receive compensation that would otherwise be prohibited under ERISA and/or the IRS Code. PTE 2020-02 is a class exemption that requires financial institutions (including banks, broker-dealers, registered investment advisers and insurance companies) to adopt certain policies and procedures to receive this exemption.
Registered representatives and investment advisor representatives (IARs) should consult with their broker-dealers and RIAs for guidance.
Insurance-only agents may not need to use the new exemption, however, because of other existing exemptions, such as PTE 84-24. It provides an exemption for an insurance agent to get paid a commission on the sale of an annuity or life insurance contract to a qualified plan participant and IRA holder and requires a disclosure document be signed by the owner. The new exemption is an additional way for fiduciaries to receive commissions compliantly, not a new required way that trumps older ones.
In this way, PTE 2020-02 may have little impact on annuity and certain life insurance sales. You may see carriers providing forms for PTE 2020-02, and you may choose to use that exemption instead of existing ones.
Complying with a Higher Standard of Care
Here’s a helpful way to boil down your obligations to help you move forward. If your dealings qualify you as a fiduciary under the new investment advice regulation, there are two issues:
- The prohibited transaction – receiving compensation for the recommendation(s) subject to the fiduciary standard of care
- The fiduciary standard of care
For the issue of the fiduciary standard of care, you’ll need to document these recommendations to show how the sale or recommendations were developed.
The Broader Landscape of Standards
The latest DOL guidance has come at a time when other federal and state regulators and industry organizations are making significant progress on issuing various standards, whether called “fiduciary,” “enhanced suitability” or “best interest” standards.
The Securities and Exchange Commission’s Regulation Best Interest, which took effect June 2020, requires that four factors be considered in making a recommendation: the retail customer’s investment profile, potential risks, potential rewards and costs. While separate, PTE 2020-02 is modeled after the SEC’s Regulation Best Interest — an example of how regulations are increasingly aligning and being refined. In April 2023, the SEC released guidance for advisors on meeting their care obligations of Regulation Best Interest.
In yet another example of the constantly changing environment, in February 2020, the Executive Committee of the National Association of Insurance Commissioners (NAIC), the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from all 50 states, the District of Columbia and five U.S. territories, finalized revisions to its suitability in annuity transactions model law. Many states have adopted the model law, which aims to require producers to act in the best interest of the consumer when making a recommendation of an annuity.
Support to Keep You Moving Forward
Stay up-to-date with the latest developments, knowing that changes to the definition of “fiduciary” and anticipated amendments to PTE 84-24 could require changes to your current process and new ways of staying compliant. Staying informed, even amid the uncertainty, will help you make changes when necessary.
To help you, Senior Market Sales® (SMS) will continue to monitor rulemaking efforts and communicate any significant developments as soon as possible. Subscribe to the SMS eNewsletter to receive updates.