The Department of Labor (DOL) is once again heading toward potential legal challenges following its latest proposal of a standard uniform fiduciary and compliance regime. As per the Department’s official dossier from November 3, registered investment advisers, brokers, insurance agents, and other sellers of services in the individual retirement account marketplace could all find themselves impacted.
This new proposal notably expands the definition of who qualifies as a fiduciary, mirroring elements of the DOL’s 2016 Rule that was previously overturned by the US Court of Appeals for the Fifth Circuit. The court had argued at the time that the 2016 Rule’s interpretation conflicted with the statute since it indiscriminately categorised many salespeople as fiduciaries.
The recent proposal from the DOL presents an expansion of the term investment advice in the retirement savings context. The Department proposes an entity-wide test, replacing the ongoing five-part test used to capture one-time interactions and rollover recommendations. This test, intrinsically connected to individual relationships, will now be applicable when investment recommendations correlate to an entity’s entire business operation.
The new test implies that any financial service provider offering investment advice to a retirement saver may default to the status of an investment advice fiduciary under federal pension law. Factors that necessitate this include the provision of investment advice or recommendations to a retirement investor, recommendations provided for a fee or other compensation, and regular advice provision as part of the provider’s business operations.
The proposal also includes the possibility of narrowing existing compliance pathways, increasing the legal consequences of fiduciary status. Typical compensation avenues, described in PTE 77-4 for mutual fund distributors and PTE 84-24 for insurance agents, have been largely eliminated, save for PTE 2020-02. This path has undergone further tightening via the addition of new conditions.
Although the proposal’s finalization will require significant refinement and compliance, it is expected to face legal resistance. These potential courtroom battles will be set to determine whether the DOL’s redefinition is within its scope of authority.
Until January 2, 2024, all interested parties are invited to submit their comments to support, refute, or suggest changes to the proposal. Yet, with the DOL seemingly crossing over from gap-filling in its ERISA guidance to outright rewriting parts of ERISA, only time will tell how this matter evolves.