In April of 2024, the U.S. Department of Labor (DOL) released the Retirement Security Rule (Rule) which sought to broaden the definition of an investment advice fiduciary for purposes of the Employee Retirement Income Security Act (ERISA). Also released were final amendments and restrictions to class Prohibited Transaction Exemptions (PTEs) available to investment advice fiduciaries, including PTE 2020-02, “Improving Investment Advice for Workers & Retirees.” The Rule and amendments to the PTEs were to generally take effect on September 23, 2024, with a one-year transition period after the effective date for certain conditions in the PTEs.
Background of New DOL Rule
The Rule and amended PTEs were designed to protect retirement investors by requiring trusted advice providers to follow high standards of care and loyalty when they make investment recommendations. The Rule comes as other regulators have recently updated rules that apply to financial professionals providing investment advice or recommendations. These actions reflect the understanding that broker-dealers, insurance agents and investment advisers provide advice to their customers for which they are paid as a regular part of their business. Investors rely upon their recommendations and regulatory protections to ensure that the advice provided is in the investor’s best interest.
Current Status of Rule
Due to lawsuits brought by insurance groups against the DOL, the Rule is currently under a national injunction with its future uncertain. If the Rule is not upheld, that will result in the IRAs and other IRS retirement alternatives not being put under DOL oversight. Nevertheless, the DOL will still have jurisdiction over ERISA plans (401ks & Qualified Plans), and financial services firms are obligated to continue to act as a DOL fiduciary with regards to ERISA accounts.
Despite the uncertainty, it is important to note that the current regulatory definition of a fiduciary and the current versions of exemptions will continue to apply. Additionally, the original definition of “investment advice,” with the five-part test to determine who is a fiduciary, is still in effect, which results in continued confusion on behalf of the financial services industry.
Regulation BI and Fiduciary Standard for Advisers
As participants in the financial industry are aware, the Securities and Exchange Commission (SEC) issued “Regulation Best Interest” in 2019 (Reg BI), which established an enhanced best interest standard applicable to broker-dealers when recommending any securities transactions or investment strategies to retail customers, and the Investment Advisers Act of 1940 (Act) imposed a fiduciary duty on the activities of registered investment advisers.
Both the SEC and the Financial Industry Regulatory Authority (FINRA) have taken the position, based on the fiduciary duties imposed on registered investment advisers by the Act, and the Best Interest Standard of Reg BI for brokerage firms, that the advice given by broker-dealers and registered investment advisers regarding retirement plans and rollovers have to be in the clients best interest, regardless of whether it’s an ERISA account, or an Internal Revenue Service retirement plan (IRA, etc.). Additionally, in keeping with the historical regulatory oversight guidelines of those two regulators, those recommendations need to be evidenced in writing.
Takeaway
The standards and requirements imposed by the DOL on fiduciary recommendations to retirement investors are in alignment with the SEC under Reg BI and the Investment Adviser’s Act. Therefore, investment professionals and financial institutions that are already complying with the SEC’s standards should continue to comply with these requirements. While it is possible that the DOL will not win on appeal and the Rule will not be enacted as drafted, it is important to note that regardless of whether the Rule does go into effect, investment advisers and broker-dealer financial institutions will still be required to comply with either the Act or Reg-BI, which means that they must continue to act in the best interest of their clients with regards to retirement accounts. In the alternatives, should the DOL win on appeal, both investment advisers and broker-dealers will be readily able to adapt to those additional requirements of the new Rule.