Proposed Rule2023-23779
Retirement Security Rule: Definition of an Investment Advice Fiduciary
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 3, 2023
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document contains a proposed amendment to the regulation defining when a person renders "investment advice for a fee or other compensation, direct or indirect" with respect to any moneys or other property of an employee benefit plan, for purposes of the definition of a "fiduciary" in the Employee Retirement Income Security Act of 1974 (Title I of ERISA or the Act). The proposal also would amend the parallel regulation defining for purposes of Title II of ERISA, a "fiduciary" of a plan defined in Internal Revenue Code (Code) section 4975, including an individual retirement account. The Department also is publishing elsewhere in today's Federal Register proposed amendments to Prohibited Transaction Exemption 2020-02 (Improving Investment Advice for Workers & Retirees) and to several other existing administrative exemptions from the prohibited transaction rules applicable to fiduciaries under Title I and Title II of ERISA.
Full Text
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<title>Federal Register, Volume 88 Issue 212 (Friday, November 3, 2023)</title>
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[Federal Register Volume 88, Number 212 (Friday, November 3, 2023)]
[Proposed Rules]
[Pages 75890-75979]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-23779]
[[Page 75889]]
Vol. 88
Friday,
No. 212
November 3, 2023
Part IV
Department of Labor
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Employee Benefits Security Administration
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29 CFR Parts 2510, et al.
Retirement Security Rule: Definition of an Investment Advice Fiduciary;
Proposed Rule
Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 /
Proposed Rules
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2510
RIN 1210-AC02
Retirement Security Rule: Definition of an Investment Advice
Fiduciary
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Proposed rule.
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SUMMARY: This document contains a proposed amendment to the regulation
defining when a person renders ``investment advice for a fee or other
compensation, direct or indirect'' with respect to any moneys or other
property of an employee benefit plan, for purposes of the definition of
a ``fiduciary'' in the Employee Retirement Income Security Act of 1974
(Title I of ERISA or the Act). The proposal also would amend the
parallel regulation defining for purposes of Title II of ERISA, a
``fiduciary'' of a plan defined in Internal Revenue Code (Code) section
4975, including an individual retirement account. The Department also
is publishing elsewhere in today's Federal Register proposed amendments
to Prohibited Transaction Exemption 2020-02 (Improving Investment
Advice for Workers & Retirees) and to several other existing
administrative exemptions from the prohibited transaction rules
applicable to fiduciaries under Title I and Title II of ERISA.
DATES:
Public Comments. Comments are due on or before January 2, 2024.
Public Hearing. The Department anticipates holding a public hearing
approximately 45 days following the date of publication in the Federal
Register. Specific information regarding the date, location, and
submission of requests to testify will be published in the Federal
Register.
ADDRESSES: You may submit written comments, identified by RIN 1210-
AC02, by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
Follow the instructions for sending comments.
<bullet> Mail: Office of Regulations and Interpretations, Employee
Benefits Security Administration, Room N-5655, U.S. Department of
Labor, 200 Constitution Ave. NW, Washington, DC 20210, Attention:
Definition of Fiduciary--RIN 1210-AC02.
Instructions: All submissions must include the agency name and
Regulatory Identifier Number (RIN) for this rulemaking. If you submit
comments electronically, do not submit paper copies.
Warning: Do not include any personally identifiable information or
confidential business information that you do not want publicly
disclosed. Comments are public records posted on the internet as
received and can be retrieved by most internet search engines.
Docket: For access to the docket to read background documents,
including the plain-language summary of the proposed rule of not more
than 100 words in length required by the Providing Accountability
Through Transparency Act of 2023, or comments, go to the Federal
eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a>. Comments will be
available to the public, without charge, online at <a href="http://www.regulations.gov">http://www.regulations.gov</a> and <a href="http://www.dol.gov/agencies/ebsa">http://www.dol.gov/agencies/ebsa</a> and at the
Public Disclosure Room, Employee Benefits Security Administration, Room
N-1513, 200 Constitution Ave, NW, Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT:
<bullet> For questions regarding the proposed rule: contact Luisa
Grillo-Chope, Office of Regulations and Interpretations, Employee
Benefits Security Administration (EBSA), 202-693-8510. (Not a toll-free
number).
<bullet> For questions regarding the prohibited transaction
exemptions: contact Susan Wilker, Office of Exemption Determinations,
EBSA, 202-693-8540. (Not a toll-free number).
<bullet> For questions regarding the Regulatory Impact Analysis:
contact James Butikofer, Office of Research and Analysis, EBSA, 202-
693-8434. (Not a toll-free number).
Customer Service Information: Individuals interested in obtaining
information from the Department of Labor concerning Title I of ERISA
and employee benefit plans may call the Employee Benefits Security
Administration (EBSA) Toll-Free Hotline, at 1-866-444-EBSA (3272) or
visit the Department of Labor's website (<a href="http://www.dol.gov/agencies/ebsa">http://www.dol.gov/agencies/ebsa</a>).
SUPPLEMENTARY INFORMATION:
A. Executive Summary
The Department of Labor is proposing a new regulatory definition of
an investment advice fiduciary for purposes of Title 1 and Title II of
the Employee Retirement Income Security Act (ERISA). As compared to the
existing regulatory definition, which dates to 1975, the proposal
better reflects the text and the purposes of the statute and better
protects the interests of retirement investors, consistent with the
mission of the Department's Employee Benefits Security Administration
to ensure the security of the retirement, health, and other workplace-
related benefits of America's workers and their families.
The Department proposes that a person would be an investment advice
fiduciary under Title I and Title II of ERISA if they provide
investment advice or make an investment recommendation to a retirement
investor (i.e., a plan, plan fiduciary, plan participant or
beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary); the
advice or recommendation is provided ``for a fee or other compensation,
direct or indirect,'' as defined in the proposed rule; and the person
makes the recommendation in one of the following contexts:
<bullet> The person either directly or indirectly (e.g., through
or together with any affiliate) has discretionary authority or
control, whether or not pursuant to an agreement, arrangement, or
understanding, with respect to purchasing or selling securities or
other investment property for the retirement investor;
<bullet> The person either directly or indirectly (e.g., through
or together with any affiliate) makes investment recommendations to
investors on a regular basis as part of their business and the
recommendation is provided under circumstances indicating that the
recommendation is based on the particular needs or individual
circumstances of the retirement investor and may be relied upon by
the retirement investor as a basis for investment decisions that are
in the retirement investor's best interest; or
<bullet> The person making the recommendation represents or
acknowledges that they are acting as a fiduciary when making
investment recommendations.
The proposal is designed to ensure that ERISA's fiduciary standards
uniformly apply to all advice that retirement investors receive
concerning investment of their retirement assets in a way that ensures
that retirement investors' reasonable expectations are honored when
receiving advice from financial professionals who hold themselves out
as trusted advice providers. The Department's proposal fills an
important gap in those advice relationships where advice is not
currently required to be provided in the retirement investor's best
interest, and the investor may not be aware of that fact.
Together with proposed amendments to administrative exemptions from
the prohibited transaction rules applicable to fiduciaries under Title
I and Title II of ERISA published elsewhere in this issue of the
Federal Register, the
[[Page 75891]]
proposal is intended to protect the interests of retirement investors
by requiring investment advice providers to adhere to stringent conduct
standards and mitigate their conflicts of interest. The proposals'
compliance obligations are generally consistent with the best interest
obligations set forth in the Securities and Exchange Commission's
(SEC's) Regulation Best Interest and its Commission Interpretation
Regarding Standard of Conduct for Investment Advisers (SEC Investment
Adviser Interpretation), each released in 2019.
The Department anticipates that the most significant benefits of
the proposals will stem from the uniform application of the ERISA
fiduciary standard and exemption conditions to investment advice to
retirement investors. Under the proposals, advice providers would be
subject to a common fiduciary standard that would reduce retirement
investor exposure to conflicted advice that erodes investment returns
and would be obligated to adhere to protective conflict-mitigation
requirements.\1\ Requiring advice providers to compete under a common
fiduciary standard will be especially beneficial with respect to those
transactions that currently are not uniformly covered by fiduciary
protections consistent with ERISA's high standards, including
recommendations to roll over assets from a workplace retirement plan to
an IRA (e.g., in those cases in which the advice provider is not
subject to Federal securities law standards and, as is often the case,
does not have an ongoing and preexisting relationship with the
customer); investment recommendations with respect to many commonly
purchased retirement annuities, such as fixed index annuities; and
investment recommendations to plan fiduciaries.
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\1\ The references in this document to a ``fiduciary'' are
intended to mean an ERISA fiduciary unless otherwise stated.
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B. Background
1. Title I and Title II of ERISA and the 1975 Rule
ERISA\2\ is a ``comprehensive statute designed to promote the
interests of employees and their beneficiaries in employee benefit
plans.'' \3\ Under the statutory framework, Title I of ERISA imposes
duties and restrictions on individuals who are ``fiduciaries'' with
respect to employee benefit plans. In particular, fiduciaries to Title
I plans must adhere to duties of prudence and loyalty. ERISA section
404 provides that Title I plan fiduciaries must act with the ``care,
skill, prudence, and diligence under the circumstances then prevailing
that a prudent [person] acting in a like capacity and familiar with
such matters would use in the conduct of an enterprise of a like
character and with like aims,'' and they also must discharge their
duties with respect to a plan ``solely in the interest of the
participants and beneficiaries.'' \4\
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\2\ 29 U.S.C. 1001, et seq.
\3\ Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90 (1983).
\4\ ERISA section 404, 29 U.S.C. 1104.
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These fiduciary duties, which are rooted in the common law of
trusts, are reinforced by prohibitions against transactions involving
conflicts of interest because of the dangers such transactions pose to
plans and their participants. The prohibited transaction provisions of
ERISA, including Title II of ERISA which is codified in the Internal
Revenue Code (Code), ``categorically bar[]'' plan fiduciaries from
engaging in transactions deemed ``likely to injure the pension plan.''
\5\ These prohibitions broadly forbid a fiduciary from ``deal[ing] with
the assets of the plan in his own interest or for his own account,''
and ``receiv[ing] any consideration for his own personal account from
any party dealing with such plan in connection with a transaction
involving the assets of the plan.'' \6\ Congress also gave the
Department authority to grant conditional administrative exemptions
from the prohibited transaction provisions, but only if the Department
finds that the exemption is (1) administratively feasible for the
Department, (2) in the interests of the plan and of its participants
and beneficiaries, and (3) protective of the rights of participants and
beneficiaries of such plan.\7\
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\5\ Harris Trust Sav. Bank v. Salomon Smith Barney Inc., 530
U.S. 238, 241-42 (2000) (citation and quotation marks omitted).
\6\ ERISA section 406(b)(1), (3), 29 U.S.C. 1106(b)(1), (3).
\7\ ERISA section 408(a), 29 U.S.C. 1108(a).
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Title II of ERISA, codified in the Code,\8\ governs the conduct of
fiduciaries to plans defined in Code section 4975(e)(1), which includes
IRAs.\9\ Some plans defined in Code section 4975(e)(1) are also covered
by Title I of ERISA, but the definitions of such plans are not
identical. Although Title II, as codified in the Code, does not
directly impose specific duties of prudence and loyalty on fiduciaries
as in ERISA section 404(a), it prohibits fiduciaries from engaging in
conflicted transactions on many of the same terms as Title I.\10\ Under
the Reorganization Plan No. 4 of 1978, which Congress subsequently
ratified in 1984,\11\ the Department was generally granted authority to
interpret the fiduciary definition and issue administrative exemptions
from the prohibited transaction provisions in Code section 4975.\12\
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\8\ This proposal includes some references to the Code in the
context of discussions of Title II of ERISA involving specific
provisions codified in the Code. The Department understands that
references to the Code are useful but emphasizes that both Title I
and Title II are covered by the same definition of fiduciary and the
same general framework of prohibited transactions, and that, under
both Title I and Title II, fiduciaries must comply with the
conditions of an available prohibited transaction exemption in order
to engage in an otherwise prohibited transaction.
\9\ For purposes of the proposed rule, the term ``IRA'' is
defined as any account or annuity described in Code section
4975(e)(1)(B)-(F), and includes individual retirement accounts,
individual retirement annuities, health savings accounts, and
certain other tax-advantaged trusts and plans. However, for purposes
of any rollover of assets between a Title I Plan and an IRA
described in this preamble, the term ``IRA'' includes only an
account or annuity described in Code section 4975(e)(1)(B) or (C).
Additionally, while the Department uses the term ``retirement
investor'' throughout this document to describe advice recipients,
that is not intended to suggest that the fiduciary definition would
apply only with respect to employee pension benefit plans and IRAs
that are retirement savings vehicles. As discussed herein, the rule
would apply with respect to plans as defined in Title I and Title II
of ERISA that make investments. In this regard, see also proposed
paragraph (f)(11) that provides that the term ``investment
property'' ``does not include health insurance policies, disability
insurance policies, term life insurance policies, or other property
to the extent the policies or property do not contain an investment
component.''
\10\ 26 U.S.C. 4975(c)(1); cf. id. at 4975(f)(5), which defines
``correction'' with respect to prohibited transactions as placing a
plan or an IRA in a financial position not worse than it would have
been in if the person had acted ``under the highest fiduciary
standards.''
\11\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
\12\ 5 U.S.C. App. (2018).
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Many of the protections, duties, and liabilities in both Title I
and Title II of ERISA hinge on fiduciary status; therefore, the
determination of who is a ``fiduciary'' is of central importance. ERISA
includes a statutory definition of a fiduciary at section 3(21)(A),
which provides that a person is a fiduciary with respect to a plan to
the extent the person (i) exercises any discretionary authority or
discretionary control respecting management of such plan or exercises
any authority or control respecting management or disposition of its
assets, (ii) renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of
such plan, or has any authority or responsibility to do so, or (iii)
has any discretionary authority or discretionary responsibility in the
administration of such plan.\13\ The same
[[Page 75892]]
definition of a fiduciary is in Code section 4975(e)(3).\14\
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\13\ ERISA section 3(21)(A), 29 U.S.C. 1002(21)(A).
\14\ 26 U.S.C. 4975(e)(3).
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These statutory definitions broadly assign fiduciary status for
purposes of Title I and Title II of ERISA. Thus, ``any authority or
control'' over plan assets is sufficient to confer fiduciary status,
and any person who renders ``investment advice for a fee or other
compensation, direct or indirect'' is an investment advice fiduciary,
regardless of whether they have direct control over the plan's assets,
and regardless of their status under another statutory or regulatory
regime. In the absence of fiduciary status, persons who provide
investment advice would neither be subject to Title I of ERISA's
fundamental fiduciary standards, nor responsible under Title I and
Title II of ERISA for avoiding prohibited transactions. The broad
statutory definition, prohibitions on conflicts of interest, and core
fiduciary obligations of prudence and loyalty (as applicable) all
reflect Congress' recognition in 1974, when it passed ERISA, of the
fundamental importance of investment advice to protect the interests of
retirement savers.
In 1975, shortly after ERISA was enacted, the Department issued a
regulation at 29 CFR 2510.3-21(c)(1) that defined the circumstances
under which a person renders ``investment advice'' to an employee
benefit plan within the meaning of section 3(21)(A)(ii) of ERISA, such
that said person would be a fiduciary under ERISA.\15\ The regulation
narrowed the plain and expansive language of section 3(21)(A)(ii),
creating a five-part test that must be satisfied in order for a person
to be treated as a fiduciary by reason of rendering investment advice.
Under the five-part test, a person is a fiduciary only if they: (1)
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 (2) on a regular basis (3)
pursuant to a mutual agreement, arrangement, or understanding with the
plan or a plan fiduciary that (4) the advice will serve as a primary
basis for investment decisions with respect to plan assets, and that
(5) the advice will be individualized based on the particular needs of
the plan. The Department of the Treasury issued a virtually identical
regulation under Code section 4975(e)(3), at 26 CFR 54.4975-9(c)(1),
which applies to plans defined in Code section 4975.\16\
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\15\ 40 FR 50842 (Oct. 31, 1975).
\16\ 40 FR 50840 (Oct. 31, 1975). The issuance of this
regulation pre-dated The Reorganization Plan No. 4 of 1978, and thus
authority to issue this regulatory definition under Title II of
ERISA was still with the Department of the Treasury.
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Since 1975, the retirement plan landscape has changed
significantly, with a shift from defined benefit plans (in which
decisions regarding investment of plan assets are primarily made by
professional asset managers) to defined contribution/individual account
plans such as 401(k) plans (in which decisions regarding investment of
plan assets are often made by plan participants themselves). In 1975,
IRAs had only recently been created (by ERISA itself), and 401(k) plans
did not yet exist. Retirement assets were principally held in pension
funds controlled by large employers and professional money managers.
Now, IRAs and participant-directed plans, such as 401(k) plans, have
become more common retirement vehicles as opposed to traditional
pension plans, and rollovers of employee benefit plan assets to IRAs
are commonplace. Individuals, regardless of their financial literacy,
have thus become increasingly responsible for their own retirement
savings.
The shift toward individual control over retirement investing (and
the associated shift of risk to individuals) has been accompanied by a
dramatic increase in the variety and complexity of financial products
and services, which has widened the information gap between investment
advice providers and their clients. Plan participants and other
retirement investors may be unable to assess the quality of the advice
they receive or be aware of and guard against the investment advice
provider's conflicts of interest. However, as a result of the five-part
test in the 1975 rule, many investment professionals, consultants, and
financial advisers have no obligation to adhere to the fiduciary
standards in Title I of ERISA or to the prohibited transaction rules,
despite the critical role they play in guiding plan and IRA
investments. In many situations, this disconnect serves to undermine
the reasonable expectations of retirement investors in today's
marketplace; a retirement investor may reasonably expect that the
advice they are receiving is fiduciary advice even when it is not. If
these investment advice providers are not fiduciaries under Title I or
Title II of ERISA, they do not have obligations under Federal pension
law to either avoid prohibited transactions or comply with the
protective conditions in a prohibited transaction exemption (PTE).
Recently, other regulators have recognized the need for change in
the regulation of investment recommendations and have imposed enhanced
conduct standards on financial professionals that make investment
recommendations, including broker-dealers and insurance agents. As a
result, the regulatory landscape today is very different than it was
even five years ago. In 2019, the SEC adopted Regulation Best Interest,
which established an enhanced best interest standard of conduct
applicable to broker-dealers when making a recommendation of any
securities transaction or investment strategy involving securities to
retail customers.\17\ The SEC also issued its SEC Investment Adviser
Interpretation, which addressed the conduct standards applicable to
investment advisers under the Investment Advisers Act of 1940 (Advisers
Act).\18\ As the SEC has repeatedly stated, ``key elements of the
standard of conduct that applies to broker-dealers under Regulation
Best Interest will be substantially similar to key elements of the
standard of conduct that applies to investment advisers pursuant to
their fiduciary duty under the Advisers Act.'' \19\ In this connection,
the SEC has also stressed that Regulation Best Interest ``aligns the
standard of conduct with retail customers' reasonable expectations[.]''
\20\
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\17\ Regulation Best Interest: The Broker-Dealer Standard of
Conduct, 84 FR 33318 (July 12, 2019).
\18\ Commission Interpretation Regarding Standard of Conduct for
Investment Advisers, 84 FR 33669 (July 12, 2019).
\19\ Regulation Best Interest release, 84 FR 33318, 33330 (July
12, 2019).
\20\ Id. at 33318.
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In 2020, the National Association of Insurance Commissioners (NAIC)
also revised its Suitability In Annuity Transactions Model Regulation
to provide that insurance agents must act in the consumer's best
interest, as defined by the Model Regulation, when making a
recommendation of an annuity. Under the Model Regulation, insurers
would also be expected to establish and maintain a system to supervise
recommendations so that the insurance needs and financial objectives of
consumers at the time of the transaction are effectively addressed.\21\
The goal of the NAIC working group was ``to seek clear, enhanced
standards for annuity sales so consumers understand the products they
purchase, are made aware of any material conflicts of interest, and are
assured those selling the products do not place their financial
[[Page 75893]]
interests above consumers' interests.'' \22\ According to the NAIC, as
of August 23, 2023, 43 jurisdictions have implemented the revisions to
the model regulation.\23\
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\21\ Available at <a href="http://www.naic.org/store/free/MDL-275.pdf">www.naic.org/store/free/MDL-275.pdf</a>.
\22\ See <a href="https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard">https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard</a>.
\23\ NAIC Annuity Suitability & Best Interest Standard web page,
<a href="https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard">https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard</a>.
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These regulatory efforts reflect the understanding that broker-
dealers and insurance agents commonly make recommendations to their
customers for which they are compensated as a regular part of their
business; that investors rely upon these recommendations; and that
regulatory protections are important to ensure that the advice is in
the best interest of the retail customer, in the case of broker-
dealers, or consumers, in the case of insurance agents.\24\ After
careful review of the existing regulatory landscape, the Department too
has concluded that existing regulations should be revised to reflect
current realities in light of the text and purposes of Title I of ERISA
and the Code.
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\24\ The SEC stated in the Regulation Best Interest release that
``there is broad acknowledgment of the benefits of, and support for,
the continuing existence of the broker-dealer business model,
including a commission or other transaction-based compensation
structure, as an option for retail customers seeking investment
recommendations.'' 84 FR 33318, 33319 (July 12, 2019). The NAIC
Model Regulation, section 6.5.M defines a recommendation as ``advice
provided by a producer to an individual consumer that was intended
to result or does result in a purchase, an exchange or a replacement
of an annuity in accordance with that advice.'' Section 5.B.,
defines ``cash compensation'' as ``any discount, concession, fee,
service fee, commission, sales charge, loan, override, or cash
benefit received by a producer in connection with the recommendation
or sale of an annuity from an insurer, intermediary, or directly
from the consumer.'' (Emphasis added).
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In the current landscape, the existing 1975 regulation no longer
serves ERISA's purpose to protect the interests of retirement
investors, especially given the growth of participant-directed
investment arrangements and IRAs, the conflicts of interest associated
with investment recommendations, and the pressing need for plan
participants, IRA owners, and their beneficiaries to receive sound
advice from sophisticated financial advisers when making critical
investment decisions in an increasingly complex financial marketplace.
As the SEC and NAIC recognized, many different types of financial
professionals, including insurance agents, broker-dealers, advisers
subject to the Advisers Act, and others, make recommendations to
investors for which they are compensated, and investors rightly rely
upon these recommendations with an expectation that they are receiving
advice that is in their interest. Like these other regulators, the
Department has concluded that it is appropriate to revisit the existing
regulatory structure to ensure that it properly and uniformly protects
the financial interests of retirement investors as Congress intended.
As reflected in this regulatory package, after evaluation of the types
of investment advisory relationships that should give rise to ERISA
fiduciary status, the Department has concluded that it is appropriate
to revise the regulatory definition of an investment advice fiduciary
under Title I and Title II of ERISA in the manner set forth herein.
2. Prior Rulemakings
The Department began the process of reexamining the regulatory
definition of an investment advice fiduciary under Title I and Title II
of ERISA in 2010. After issuing two notices of proposed rules,
conducting multiple days of public hearings, and over six years of
deliberations, on April 8, 2016, the Department replaced the 1975
regulation with a new regulatory definition (the ``2016 Final Rule''),
which applied under Title I and Title II of ERISA.\25\ In the preamble
to the 2016 Final Rule, the Department noted that the 1975 five-part
test had been created in a very different context and investment advice
marketplace. The Department expressed concern that specific elements of
the five-part test--which are not found in the text of Title I or Title
II of ERISA--worked to defeat retirement investors' legitimate
expectations when they received investment advice from trusted advice
providers in the modern marketplace for financial advice.
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\25\ Definition of the Term ``Fiduciary''; Conflict of Interest
Rule--Retirement Investment Advice, 81 FR 20946 (Apr. 8, 2016). The
Department issued its first proposal to amend the regulatory
definition of an investment advice fiduciary in 2010. 75 FR 65263
(Oct. 22, 2010). The first proposed rulemaking provided for a 90-day
comment period, from October 22, 2010, through January 20, 2011. The
comment period was extended for 14 days. The Department held a
public hearing in Washington, DC, on March 1-2, 2011, after which
the Department welcomed public comment for 15 days in order for
commenters to supplement hearing testimony or otherwise provide
additional comments. That proposal was withdrawn, and the Department
issued a second proposal in 2015 along with related proposed
prohibited transaction exemptions and proposed amendments to
existing exemptions. 80 FR 21928 (Apr. 20, 2015). The 2015 proposal
and proposed related exemptions initially provided for 75-day
comment periods, ending on July 6, 2015, but the Department extended
the comment periods to July 21, 2015. Before finalizing the 2015
proposals, the Department held a public hearing in Washington, DC on
August 10-13, 2015, at which over 75 speakers testified. The
transcript of the hearing was made available on September 8, 2015,
and the Department provided additional opportunity for interested
persons to submit comments on the proposal and proposed related
exemptions or on the transcript until September 24, 2015. A total of
over 3,000 comment letters were received on the 2015 proposals.
There were also over 300,000 submissions made as part of 30 separate
petitions submitted on the proposals. These comments and petitions,
which came from consumer groups, plan sponsors, financial services
companies, academics, elected government officials, trade and
industry associations, and others, were both in support of and in
opposition to the 2015 proposals.
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The Department identified the ``regular basis'' element \26\ in the
five-part test as a particularly important example of the 1975
regulation's shortcomings. The Department stated that the requirement
that advice be provided on a ``regular basis'' had failed to draw a
sensible line between fiduciary and non-fiduciary conduct and had
undermined the Act's protective purpose. The Department pointed to
examples of transactions in which a discrete instance of advice can be
of critical importance to the plan, such as a one-time purchase of a
group annuity to cover all of the benefits promised to substantially
all of a plan's participants for the rest of their lives when a defined
benefit plan terminates, or a plan's expenditure of hundreds of
millions of dollars on a single real estate transaction based on the
recommendation of a financial adviser hired for purposes of that one
transaction.
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\26\ This refers to the requirement in the 1975 regulation that,
in order for fiduciary status to attach, investment advice must be
provided by the person ``on a regular basis.'' 29 CFR 2510.3-
21(c)(1)(ii)(B).
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The Department likewise expressed concern that the requirements in
the 1975 regulation of a ``mutual agreement, arrangement, or
understanding'' that advice would serve as ``a primary basis for
investment decisions'' had encouraged investment advice providers in
the current marketplace to use fine print disclaimers as potential
means of avoiding ERISA fiduciary status, even as they marketed
themselves as providing tailored or individualized advice based on the
retirement investor's best interest. Additionally, the Department noted
that the ``primary basis'' element of the five-part test appeared in
tension with the statutory text and purposes of Title I and Title II of
ERISA. If, for example, a prudent plan fiduciary hires multiple
specialized advisers for an especially complex transaction, it should
be able to rely upon any or all of the consultants that it hired to
render advice regardless of arguments about whether one could
characterize the advice, in some sense, as primary, secondary, or
tertiary.
In adopting the 2016 Final Rule, the Department presented an
economic
[[Page 75894]]
analysis demonstrating that investment advice providers are compensated
in ways that create conflicts of interest, which can bias investment
advice and erode plan and IRA investment results.\27\ The Department
noted that many of the consultants and advisers who provide investment-
related advice and recommendations received compensation from the
financial institutions whose investment products they recommend, and
that this can give the consultants and advisers a strong bias,
conscious or unconscious, to favor investments that provide them
greater compensation rather than those that may be most appropriate for
the retirement investors. The Department also found that consolidation
of the financial services industry and developments in compensation
arrangements multiplied the opportunities for self-dealing and reduced
the transparency of fees. Most significantly, the Department explained
in its analysis that, in the absence of the 2016 Final Rule, the
underperformance associated with conflicts of interest in the mutual
funds segment alone could have cost IRA investors between $95 billion
and $189 billion over the following 10 years and between $202 billion
and $404 billion over the following 20 years. While these projected
losses were substantial, they represented only a portion of what IRA
investors stood to lose as a result of conflicted investment advice.
---------------------------------------------------------------------------
\27\ U.S. Department of Labor, Fiduciary Investment Advice
Regulatory Impact Analysis (2016), available at <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf</a>.
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The Department expected that compliance with the 2016 Final Rule
would deliver large gains for retirement investors by reducing these
losses. The Department cited evidence that holding broker-dealer
representatives to fiduciary standards at the State level does not
impair access to their services. Additionally, the Department noted
that financial services firms already were moving toward more fee-based
advice models, considering flatter compensation models, and integrating
technology. The Department anticipated that the rule would accelerate
these types of innovations for the benefit of plan and IRA investors.
The 2016 Final Rule defined an investment advice fiduciary for
purposes of Title I or Title II of ERISA in a way that would apply
fiduciary status in a wider array of advice relationships than the
five-part test in the 1975 regulation. The 2016 Final Rule generally
covered: (1) recommendations by a person who represents or acknowledges
that they are acting as a fiduciary within the meaning of ERISA; (2)
advice rendered pursuant to a written or verbal agreement, arrangement
or understanding that the advice is based on the particular investment
needs of the retirement investor; and, most expansively, (3)
recommendations directed to a specific retirement investor or investors
regarding the advisability of a particular investment or management
decision with respect to securities or other investment property of the
plan or IRA.
One main issue highlighted in the 2016 Final Rule involved the
protection of retirement investors in the context of recommendations to
roll over assets from workplace retirement plans to IRAs.\28\ As the
Department noted, decisions to take a benefit distribution or engage in
rollover transactions are among the most, if not the most, important
financial decisions that plan participants and beneficiaries and IRA
owners and beneficiaries are called upon to make. The Department
explained that when an individual is a participant in a workplace
retirement plan, their employer or other plan sponsor has both the
incentive and the fiduciary duty to facilitate sound investment
choices, while in an IRA, both good and bad investment choices are more
numerous, and investment advice providers often operate under conflicts
of interest. The Department illustrated the consequence of these
rollovers to both individuals and investment advice providers, by
pointing out that rollovers from employee benefit plans to IRAs were
expected to approach $2.4 trillion cumulatively from 2016 through
2020.\29\ Investment advice providers have a strong economic incentive
to recommend that investors roll over assets into one of their
institutions' IRAs, whether from a plan or from an IRA account at
another financial institution, or even between different account types.
The 2016 Final Rule also specifically superseded a 2005 Advisory
Opinion, 2005-23A (commonly known as the Deseret Letter) which had
opined that it is not fiduciary investment advice under Title I of
ERISA to make a recommendation as to distribution options from an
employee benefit plan, even if accompanied by a recommendation as to
where the distribution would be invested.\30\
---------------------------------------------------------------------------
\28\ See 81 FR 20946, 20964 (Apr. 8, 2016).
\29\ Id. at 20949 fn. 7 (citing Cerulli Associates, ``U.S.
Retirement Markets 2015'').
\30\ Id.
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On the same date it published the 2016 Final Rule, the Department
also published two new administrative class exemptions from the
prohibited transaction provisions of Title I and Title II of ERISA: the
Best Interest Contract Exemption (BIC Exemption) \31\ and the Class
Exemption for Principal Transactions in Certain Assets Between
Investment Advice Fiduciaries and Employee Benefit Plans and IRAs
(Principal Transactions Exemption).\32\ The Department granted the new
exemptions with the objective of promoting the provision of investment
advice that is in the best interest of retail investors such as plan
participants and beneficiaries, IRA owners and beneficiaries, and
certain plan fiduciaries, including small plan sponsors.
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\31\ 81 FR 21002 (Apr. 8, 2016).
\32\ 81 FR 21089 (Apr. 8, 2016).
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The new exemptions included conditions designed to protect the
interests of the retirement investors receiving advice. The exemptions
required investment advice fiduciaries to adhere to the following
``Impartial Conduct Standards'': providing advice in retirement
investors' best interest; charging no more than reasonable
compensation; and making no misleading statements about investment
transactions and other important matters. In the case of IRAs and non-
Title I plans, the exemption required these standards to be set forth
in an enforceable contract with the retirement investor, which also was
required to include certain warranties and disclosures. The exemption
further provided that parties could not rely on the exemption if they
included provisions in their contracts disclaiming liability for
compensatory remedies or waiving or qualifying retirement investors'
right to pursue a class action or other representative action in court.
In conjunction with the new exemptions, the Department also made
amendments to pre-existing exemptions, namely PTEs 75-1, 77-4, 80-83,
83-1, 84-24 and 86-128, to require compliance with the Impartial
Conduct Standards and to make certain other changes.\33\
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\33\ 81 FR 21139 (Apr. 8, 2016); 81 FR 21147 (Apr. 8, 2016); 81
FR 21181 (Apr. 8, 2016); 81 FR 21208 (Apr. 8, 2016).
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3. Litigation Over the 2016 Rulemaking
The 2016 Final Rule and related new and amended exemptions
(collectively, the 2016 Rulemaking) was challenged in multiple
lawsuits. In National Association for Fixed Annuities v. Perez, a
district court in the District of
[[Page 75895]]
Columbia upheld the 2016 Rulemaking in the context of a broad challenge
on multiple grounds.\34\ Among other things, the court found that the
2016 Final Rule comports with both the text and the purpose of ERISA,
and it noted ``if anything, it is the five-part test--and not the
current rule--that is difficult to reconcile with the statutory text.
Nothing in the phrase `renders investment advice' suggests that the
statute applies only to advice provided `on a regular basis.' '' \35\
Relatedly, in Market Synergy v. United States Department of Labor, the
U.S. Court of Appeals for the Tenth Circuit affirmed a district court's
decision similarly upholding the 2016 Rulemaking as it applied to fixed
indexed annuities.\36\
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\34\ Nat'l Assoc. for Fixed Annuities v. Perez, 217 F.Supp.3d 1
(D.D.C. 2016) [hereinafter NAFA]. On December 15, 2016, the U.S.
Court of Appeals for the District of Columbia denied an emergency
request to stay application of the definition or the exemptions
pending an appeal of the district court's ruling. Nat'l Assoc. for
Fixed Annuities v. Perez, No. 16-5345, 2016 BL 452075 (D.C. Cir.
2016).
\35\ NAFA, 217 F. Supp. 3d at 23, 27-28.
\36\ 885 F.3d 676 (10th Cir. 2018); see Thrivent Financial for
Lutherans v. Acosta, No. 16-CV-03289, 2017 WL 5135552 (D. Minn. Nov.
3, 2017) (granting the Department's motion for a stay and the
plaintiff's motion for a preliminary injunction, with respect to
Thrivent's suit challenging the BIC Exemption's bar on class action
waivers as exceeding the Department's authority and as unenforceable
under the Federal Arbitration Act).
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On March 15, 2018, however, the U.S. Court of Appeals for the Fifth
Circuit (Fifth Circuit) overturned a district court's decision
upholding the validity of the 2016 Final Rule \37\ and vacated the 2016
Rulemaking in toto, in Chamber of Commerce v. United States Department
of Labor (Chamber).\38\ The Fifth Circuit held that the 2016 Final Rule
conflicted with ERISA section 3(21)(A)(ii) and Code section
4975(e)(3)(B). Specifically, the Fifth Circuit found that the 2016
Final Rule swept too broadly and extended to relationships that lacked
``trust and confidence,'' which the court stated were hallmarks of the
common law fiduciary relationship that Congress intended to incorporate
into the statutory definitions. The court concluded that ``all relevant
sources indicate that Congress codified the touchstone of common law
fiduciary status--the parties' underlying relationship of trust and
confidence--and nothing in the statute `requires' departing from the
touchstone.'' \39\
---------------------------------------------------------------------------
\37\ Chamber of Commerce v. Hugler, 231 F. Supp. 3d 152 (N.D.
Tex. Feb. 8, 2017) (finding, among other things, that in the 2016
Final Rule, the Department reasonably removed the ``regular basis''
requirement; and noting, ``if anything, however, the five-part test
is the more difficult interpretation to reconcile with who is a
fiduciary under ERISA.'').
\38\ See Chamber, 885 F.3d 360 (5th Cir. 2018). But see id. at
391 (``Noting in the phrase `renders investment advice for a fee or
other compensation' suggests that the statute applies only in the
limited context accepted by the panel majority.'') (Stewart, C.J.,
dissenting).
\39\ Id. at 369 (citing Nationwide Mut. Ins. Co. v. Darden, 503
U.S. 318, 322 (1992)); see id. at 376 (``In short, whether one looks
at DOL's original regulation, the SEC, Federal and state legislation
governing investment adviser fiduciary status vis-[agrave]-vis
broker-dealers, or case law tying investment advice for a fee to
ongoing relationships between adviser and client, the answer is the
same: `investment advice for a fee' was widely interpreted hand in
hand with the relationship of trust and confidence that
characterizes fiduciary status.''). But see id. at 392 (``One area
in which Congress has departed from the common law of trusts is with
the statutory definition of `fiduciary.' ERISA does not define
`fiduciary' `in terms of formal trusteeship, but in functional terms
of control and authority over the plan, . . . thus expanding the
universe of persons subject to fiduciary duties . . .'') (Stewart,
C.J., dissenting) (quoting Mertens v. Hewitt Assocs., 508 U.S. 248,
262 (1993)). As discussed herein, in the period since the Fifth
Circuit decision, the SEC and the National Association of Insurance
Commissioners (NAIC) have moved forward with strengthened standards
for recommendations provided by broker-dealers and insurance agents,
respectively.
---------------------------------------------------------------------------
In addition to holding that the 2016 Final Rule conflicted with the
statutory definitions in Title I and Title II of ERISA, the Fifth
Circuit in Chamber also determined that the 2016 Rulemaking failed to
honor the difference in the Department's authority over employee
benefit plans under Title I of ERISA and IRAs under Title II, by
imposing ``novel and extensive duties and liabilities on parties
otherwise subject only to the prohibited transactions penalties.'' \40\
These included the conditions of the BIC Exemption and Principal
Transactions Exemption that required financial institutions and
individual fiduciary advisers to enter into contracts with their
customers with specific duties, warranties, and disclosures, and
forbade damages limitations and class action waivers.\41\ Under the
Code, IRA investors do not have a private right of action.\42\ Instead,
the primary remedy for a violation of the prohibited transaction
provisions under the Code is the assessment of an excise tax.\43\ In
the Fifth Circuit's view, the Department had effectively exceeded its
authority by giving IRA investors the ability to bring a private cause
of action that Congress had not authorized.\44\
---------------------------------------------------------------------------
\40\ Id. at 384.
\41\ Id.
\42\ See id.
\43\ Code section 4975(a), (b).
\44\ Chamber, 885 F.3d 360, 384-85 (5th Cir. 2018); see Code
section 4975.
---------------------------------------------------------------------------
4. Field Assistance Bulletin No. 2018-02
In response to the Fifth Circuit's vacatur of the 2016 Rulemaking,
on May 7, 2018, the Department issued Field Assistance Bulletin 2018-
02, Temporary Enforcement Policy on Prohibited Transactions Rules
Applicable to Investment Advice Fiduciaries (FAB 2018-02).\45\ FAB
2018-02 announced that, pending further guidance, the Department would
not pursue prohibited transaction claims against fiduciaries who were
working diligently and in good faith to comply with the Impartial
Conduct Standards for transactions that would have been exempted in the
BIC Exemption and Principal Transactions Exemption, or treat such
fiduciaries as violating the applicable prohibited transaction rules.
In adopting the temporary enforcement policy, the Department cited
uncertainty about fiduciary obligations and the scope of exemptive
relief following the court's opinion that could disrupt existing
investment advice arrangements to the detriment of retirement plans,
retirement investors, and financial institutions, as well as the
significant resources some financial institutions had devoted towards
compliance with the BIC Exemption and the Principal Transactions
Exemption.
---------------------------------------------------------------------------
\45\ Available at <a href="https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-02">https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-02</a>.
---------------------------------------------------------------------------
5. Subsequent Actions by the Department
On July 7, 2020, the Department proposed a new prohibited
transaction class exemption under Title I and Title II of ERISA for
investment advice fiduciaries with respect to employee benefit plans
and IRAs, called ``Improving Investment Advice for Workers &
Retirees.'' \46\ The proposal stated it was in response to informal
industry feedback seeking a permanent administrative class exemption
based on FAB 2018-02.\47\ On the same day, the Department issued a
technical amendment to the Code of Federal Regulations (CFR)
reinserting the 1975 regulation, reflecting the Fifth Circuit's vacatur
of the 2016 Final Rule.\48\ The technical amendment also reinserted
into the CFR Interpretive Bulletin 96-1 (IB 96-1) relating to
participant investment education, which had been removed and largely
incorporated into the text of the 2016 Final Rule. Additionally, the
Department updated its website to reflect the fact that the pre-
existing prohibited transaction exemptions that had been amended in the
2016 Rulemaking had been restored to their pre-amendment form, and also
to reflect that the Department had withdrawn the Deseret Letter.
---------------------------------------------------------------------------
\46\ 85 FR 40834 (July 7, 2020).
\47\ Id. at 40835.
\48\ 85 FR 40589 (July 7, 2020).
---------------------------------------------------------------------------
On December 18, 2020, the Department adopted the Improving
[[Page 75896]]
Investment Advice for Workers & Retirees exemption as PTE 2020-02.\49\
The exemption provides relief that is similar in scope to the BIC
Exemption and the Principal Transactions Exemption, but it does not
include contract or warranty provisions. The exemption expressly covers
prohibited transactions resulting from both rollover advice and advice
on how to invest assets within a plan or IRA, and imposes new
conditions on investment advice fiduciaries providing such advice. In
particular, PTE 2020-02 mirrors the core of the BIC and Principal
Transaction exemptions' requirements of best interest standards of
conduct and policies and procedures to ensure the advice is provided
consistent with those standards.
---------------------------------------------------------------------------
\49\ 85 FR 82798 (Dec. 18, 2020).
---------------------------------------------------------------------------
The preamble to PTE 2020-02 also included the Department's
interpretation of when advice to roll over assets from an employee
benefit plan to an IRA would constitute fiduciary investment advice
under the 1975 regulation's five-part test. As in the 2016 Rulemaking,
the Department again made clear in 2020 that rollover recommendations
were a central concern in the regulation of fiduciary investment
advice. Accordingly, the Department emphasized the importance to a
retirement investor of the rollover decision, as well as the fact that
investment advice providers may have a strong economic incentive to
recommend that investors roll over assets into one of their
institutions' IRAs.
The preamble interpretation confirmed the Department's continued
view that the Deseret Letter was incorrect, and that a recommendation
to roll assets out of a Title I Plan is advice with respect to moneys
or other property of the plan and, if provided by a person who
satisfies all of the requirements of the regulatory test, constitutes
fiduciary investment advice. The preamble interpretation also discussed
when a recommendation to roll over assets from an employee benefit plan
to an IRA would satisfy the ``regular basis'' requirement.
Additionally, the preamble set forth the Department's interpretation of
the 1975 regulation's requirement of ``a mutual agreement, arrangement,
or understanding'' that the investment advice will serve as ``a primary
basis for investment decisions.'' In April 2021, the Department issued
Frequently Asked Questions (FAQs) that, among other things, summarized
aspects of the preamble interpretation.\50\
---------------------------------------------------------------------------
\50\ New Fiduciary Advice Exemption: PTE 2020-02 Improving
Investment Advice for Workers & Retirees Frequently Asked Questions,
<a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption</a>.
---------------------------------------------------------------------------
The Department's preamble interpretation and certain FAQs were
challenged in two lawsuits filed after the issuance of PTE 2020-02.\51\
On February 13, 2023, the U.S. District Court for the Middle District
of Florida issued an opinion vacating the policy referenced in FAQ 7
(entitled ``When is advice to roll over assets from an employee benefit
plan to an IRA considered to be on a `regular basis'?'') and remanded
it to the Department for future proceedings.\52\ On June 30, 2023, a
magistrate judge in the Northern District of Texas filed a report with
the judge's findings, conclusions, and recommendations, including that
the court should vacate portions of PTE 2020-02 that permit
consideration of actual or expected Title II investment advice
relationships when determining Title I fiduciary status.\53\
---------------------------------------------------------------------------
\51\ Compl., Am. Sec. Ass'n. v. U.S. Dep't of Labor, No. 8:22-
CV-330VMC-CPT, 2023 WL 1967573 (M.D. Fla. Feb. 13, 2023); Compl.,
Fed'n of Ams. for Consumer Choice v. U.S. Dep't of Labor, No. 3:22-
CV-00243-K-BT (N.D. Tex. Feb. 2, 2022).
\52\ Am. Sec. Ass'n. v. U.S. Dep't of Labor, 2023 WL 1967573, at
* 22-23.
\53\ See Findings, Conclusions, and Recommendations of the
United States Magistrate Judge, Fed'n of Ams. for Consumer Choice v.
U.S. Dep't of Labor, No. 3:22-CV-00243-K-BT, 2023 WL 5682411, at
*27-29 (N.D. Tex. June 30, 2023) [hereinafter FACC]. As of the date
of this proposal, the district court judge has not yet taken action
regarding the magistrate judge's report and recommendations.
---------------------------------------------------------------------------
6. Other Regulatory Developments
U.S. Securities and Exchange Commission
Since the vacatur of the Department's 2016 Rulemaking, other
regulators have considered and adopted enhanced standards of conduct
for investment professionals as a method of addressing, among other
things, conflicts of interest. At the Federal level, on June 5, 2019,
the SEC finalized a regulatory package relating to conduct standards
for broker-dealers and investment advisers. The package included
Regulation Best Interest, which established a best interest standard
applicable to broker-dealers when making a recommendation of any
securities transaction or investment strategy involving securities to
retail customers.\54\ The SEC also issued its SEC Investment Adviser
Interpretation regarding the conduct standards applicable to investment
advisers under the Advisers Act.\55\ As part of the package, the SEC
adopted new Form CRS, which requires registered investment advisers
under the Advisers Act and registered broker-dealers to provide retail
investors with a short relationship summary with specified information
(SEC Form CRS).\56\
---------------------------------------------------------------------------
\54\ 84 FR 33318 (July 12, 2019).
\55\ 84 FR 33669 (July 12, 2019).
\56\ Form CRS Relationship Summary; Amendments to Form ADV, 84
FR 33492 (July 12, 2019).
---------------------------------------------------------------------------
According to the SEC, these actions were designed to enhance and
clarify the standards of conduct applicable to broker-dealers and
investment advisers, help retail investors better understand and
compare the services offered and make an informed choice of the
relationship best suited to their needs and circumstances, and foster
greater consistency in the level of protections provided by each
regime, particularly at the point in time that a recommendation is
made.\57\
---------------------------------------------------------------------------
\57\ Regulation Best Interest release, 84 FR 33318, 33321 (July
12, 2019).
---------------------------------------------------------------------------
The SEC's Regulation Best Interest enhanced the broker-dealer
standard of conduct ``beyond existing suitability obligations.'' \58\
According to the SEC, this
---------------------------------------------------------------------------
\58\ Id. at 33318.
[A]lign[ed] the standard of conduct with retail customers'
reasonable expectations by requiring broker-dealers, among other
things, to: Act in the best interest of the retail customer at the
time the recommendation is made, without placing the financial or
other interest of the broker-dealer ahead of the interests of the
retail customer; and address conflicts of interest by establishing,
maintaining, and enforcing policies and procedures reasonably
designed to identify and fully and fairly disclose material facts
about conflicts of interest, and in instances where [the SEC has]
determined that disclosure is insufficient to reasonably address the
conflict, to mitigate or, in certain instances, eliminate the
conflict.\59\
---------------------------------------------------------------------------
\59\ Id.
Regulation Best Interest's ``best interest obligation'' includes a
Disclosure Obligation, a Care Obligation, a Conflict of Interest
Obligation, and a Compliance Obligation. The Care Obligation requires
broker-dealers, in making recommendations, to exercise reasonable
---------------------------------------------------------------------------
diligence, care, and skill to:
<bullet> Understand the potential risks, rewards, and costs
associated with the recommendation, and have a reasonable basis to
believe that the recommendation could be in the best interest of at
least some retail customers;
<bullet> Have a reasonable basis to believe that the
recommendation is in the best interest of a particular retail
customer based on that
[[Page 75897]]
retail customer's investment profile and the potential risks,
rewards, and costs associated with the recommendation and does not
place the financial or other interest of the broker, dealer, or such
natural person ahead of the interest of the retail customer; and
<bullet> Have a reasonable basis to believe that a series of
recommended transactions, even if in the retail customer's best
interest when viewed in isolation, is not excessive and is in the
retail customer's best interest when taken together in light of the
retail customer's investment profile and does not place the
financial or other interest of the broker, dealer, or such natural
person making the series of recommendations ahead of the interest of
the retail customer.\60\
---------------------------------------------------------------------------
\60\ Id. at 33372.
The Conflict of Interest Obligation requires the broker-dealer to
establish, maintain and enforce written policies and procedures
---------------------------------------------------------------------------
reasonably designed to:
<bullet> Identify and at a minimum disclose, or eliminate, all
conflicts of interest associated with such recommendations;
<bullet> Identify and mitigate any conflicts of interest
associated with such recommendations that create an incentive for a
natural person who is an associated person of a broker or dealer to
place the interest of the broker, dealer, or such natural person
ahead of the interest of the retail customer;
<bullet> Identify and disclose any material limitations placed
on the securities or investment strategies involving securities that
may be recommended to a retail customer and any conflicts of
interest associated with such limitations, and prevent such
limitations and associated conflicts of interest from causing the
broker, dealer, or a natural person who is an associated person of
the broker or dealer to make recommendations that place the interest
of the broker, dealer, or such natural person ahead of the interest
of the retail customer; and
<bullet> Identify and eliminate any sales contests, sales
quotas, bonuses, and non-cash compensation that are based on the
sales of specific securities or specific types of securities within
a limited period of time.\61\
---------------------------------------------------------------------------
\61\ Id. at 33476.
A conflict of interest is defined as ``an interest that might
incline a broker, dealer, or a natural person who is an associated
person of a broker or dealer--consciously or unconsciously--to make a
recommendation that is not disinterested.'' \62\
---------------------------------------------------------------------------
\62\ 17 CFR 240.15l-1.
---------------------------------------------------------------------------
The SEC stated that ``[t]he Commission has crafted Regulation Best
Interest to draw on key principles underlying fiduciary obligations,
including those that apply to investment advisers under the Advisers
Act, while providing specific requirements to address certain aspects
of the relationships between broker-dealers and their retail
customers.'' \63\ The SEC emphasized that, ``[i]mportantly, regardless
of whether a retail investor chooses a broker-dealer or an investment
adviser (or both), the retail investor will be entitled to a
recommendation (from a broker-dealer) or advice (from an investment
adviser) that is in the best interest of the retail investor and that
does not place the interests of the firm or the financial professional
ahead of the interests of the retail investor.'' \64\ The SEC also
noted that the standard of conduct cannot be satisfied through
disclosure alone.\65\
---------------------------------------------------------------------------
\63\ Regulation Best Interest release, 84 FR 33318, 33320 (July
12, 2019).
\64\ Id. at 33321.
\65\ Id. at 33390.
---------------------------------------------------------------------------
The best interest standard in the SEC's Regulation Best Interest
applies to broker-dealers and their associated persons when they make a
recommendation to a retail customer of any ``securities transaction or
an investment strategy involving securities (including account
recommendations).'' According to the SEC, this language encompasses
recommendations to roll over or transfer assets in a workplace
retirement plan account to an IRA, and recommendations to take a plan
distribution.\66\ However, the SEC also stated that while Regulation
Best Interest applies to advice regarding a person's own retirement
account such as a 401(k) account or IRA, it does not cover advice to
workplace retirement plans themselves or to their legal representatives
when they are receiving advice on the plan's behalf.\67\
---------------------------------------------------------------------------
\66\ Id. at 33337.
\67\ Id. at 33343-44.
---------------------------------------------------------------------------
The SEC Investment Adviser Interpretation, published simultaneously
with Regulation Best Interest, reaffirmed and in some cases clarified
aspects of the fiduciary duty of an investment adviser under the
Investment Advisers Act.\68\ The SEC stated that ``an investment
adviser's fiduciary duty under the Investment Advisers Act comprises
both a duty of care and a duty of loyalty.'' \69\ According to the SEC,
``[t]his fiduciary duty is based on equitable common law principles and
is fundamental to advisers' relationships with their clients under the
Advisers Act.'' \70\ The fiduciary duty under the Federal securities
laws requires an adviser ``to adopt the principal's goals, objectives,
or ends.'' \71\ The SEC stated:
---------------------------------------------------------------------------
\68\ 84 FR 33669 (July 12, 2019).
\69\ Id. at 33671 (footnote omitted).
\70\ Id. at 33670.
\71\ Id. at 33671.
This means the adviser must, at all times, serve the best
interest of its client and not subordinate its client's interest to
its own. In other words, the investment adviser cannot place its own
interests ahead of the interests of its client. This combination of
care and loyalty obligations has been characterized as requiring the
investment adviser to act in the ``best interest'' of its client at
all times.\72\
---------------------------------------------------------------------------
\72\ Id. (footnote omitted).
The SEC further stated, ``[t]he investment adviser's fiduciary duty
is broad and applies to the entire adviser-client relationship.'' \73\
---------------------------------------------------------------------------
\73\ Id at 33670. See also id. n 17 citing authorities where the
Commission previously recognized the broad scope of section 206 of
the Advisers Act in a variety of contexts.
---------------------------------------------------------------------------
The SEC also adopted a new required disclosure of a ``Form CRS
Relationship Summary,'' under which registered investment advisers
under the Advisers Act and broker-dealers must provide retail investors
with certain information about the nature of their relationship with
their financial professional. One of the purposes of the Form CRS is to
help retail investors better understand and compare the services and
relationships that investment advisers and broker-dealers offer in a
way that is distinct from other required disclosures under the Federal
securities laws.\74\ Form CRS also includes a link to a dedicated page
on the SEC's investor education website, <a href="http://Investor.gov">Investor.gov</a>, which offers
educational information about broker-dealers and investment advisers,
and other materials.\75\
---------------------------------------------------------------------------
\74\ 84 FR 33492, 33493 (July 12, 2019).
\75\ Id. SEC staff has since issued guidance on Regulation Best
Interest, Form CRS, and related interpretations, including staff
bulletins on care obligations, conflicts of interest, and account
recommendations for retail investors, which are available at <a href="https://www.sec.gov/regulation-best-interest">https://www.sec.gov/regulation-best-interest</a>.
---------------------------------------------------------------------------
State Legislative and Regulatory Developments
Also, since the vacatur of the Department's 2016 Rulemaking, there
have been legislative and regulatory developments at the State level
involving conduct standards. The Massachusetts Securities Division
amended its regulations to apply a fiduciary conduct standard under
which broker-dealers and their agents must ``[m]ake recommendations and
provide investment advice without regard to the financial or any other
interest of any party other than the customer.'' \76\
---------------------------------------------------------------------------
\76\ 950 Mass. Code Regs. 12.204 & 12.207 as amended effective
March 6, 2020; see Consent Order, In the Matter of Scottrade, Inc.,
No. E-2017-0045 (June 30, 2020); see also Enf't Section of
Massachusetts Sec. Div. of Office of Sec'y of Commonwealth v.
Scottrade, Inc., 327 F. Supp. 3d 345, 352 (D. Mass. 2018)
(discussing enforcement actions under Massachusetts securities and
other consumer protection laws). A challenge to the regulation was
rejected by the Massachusetts Supreme Judicial Court. See Robinhood
Fin. LLC v. Sec'y of Commonwealth of Mass, No. SJC-13381, 2023 WL
5490571 (Mass. Aug. 25, 2023).
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[[Page 75898]]
The NAIC Model Regulation, updated in 2020, provides that insurance
agents must act in the consumer's ``best interest,'' as defined by the
Model Regulation, when making a recommendation of an annuity, and
insurers must establish and maintain a system to supervise
recommendations so that the insurance needs and financial objectives of
consumers at the time of the transaction are effectively addressed.\77\
According to the NAIC, as of August 23, 2023, 43 jurisdictions have
implemented the revisions to the model regulation.\78\
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\77\ Available at <a href="http://www.naic.org/store/free/MDL-275.pdf">www.naic.org/store/free/MDL-275.pdf</a>.
\78\ NAIC Annuity Suitability & Best Interest Standard web page,
<a href="https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard">https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard</a>.
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The NAIC Model Regulation includes a best interest obligation
comprised of a care obligation, a disclosure obligation, a conflict of
interest obligation, and a documentation obligation, applicable to an
insurance producer.\79\ If these specific obligations are met, the
producer is treated as satisfying the overarching best interest
standard as expressed in the NAIC Model Regulation. The care obligation
states that the producer, in making a recommendation, must exercise
reasonable diligence, care and skill to:
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\79\ A producer is defined in section 5.L. of the Model
Regulation as ``a person or entity required to be licensed under the
laws of this state to sell, solicit or negotiate insurance,
including annuities.'' Section 5.L. further provides that the term
producer includes an insurer where no producer is involved.
<bullet> Know the consumer's financial situation, insurance
needs and financial objectives;
<bullet> Understand the available recommendation options after
making a reasonable inquiry into options available to the producer;
<bullet> Have a reasonable basis to believe the recommended
option effectively addresses the consumer's financial situation,
insurance needs and financial objectives over the life of the
product, as evaluated in light of the consumer profile information;
and
<bullet> Communicate the basis or bases of the
recommendation.\80\
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\80\ NAIC Model Regulation, at section 6(A)(1)(a).
The conflict of interest obligation requires the producer to
``identify and avoid or reasonably manage and disclose material
conflicts of interest, including material conflicts of interest related
to an ownership interest.'' \81\ ``Material conflict of interest'' is
defined as ``a financial interest of the producer in the sale of an
annuity that a reasonable person would expect to influence the
impartiality of a recommendation,'' but the definition expressly carves
out ``cash compensation or non-cash compensation'' from treatment as
sources of conflicts of interest.\82\ The NAIC Model Regulation also
provides that it does not apply to transactions involving contracts
used to fund an employee pension or welfare plan covered by ERISA.\83\
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\81\ Id. at section 6(A)(3).
\82\ Id. at section 5(I).
\83\ Id. at section 4(B)(1).
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The NAIC expressly disclaimed that its standard creates fiduciary
obligations, and the obligations in the Model Regulation differ in
significant respects from those applicable to broker-dealers in the
SEC's Regulation Best Interest.\84\ For example, in addition to
disregarding compensation as a source of conflicts of interest, the
specific care, disclosure, conflict of interest, and documentation
requirements do not expressly incorporate the obligation not to put the
producer's or insurer's interests before the customer's interests, even
though compliance with their terms is treated as meeting the ``best
interest'' standard. Similarly, the Model Regulation's care obligation
does not repeat the ``best interest'' requirement but instead includes
a requirement to ``have a reasonable basis to believe the recommended
option effectively addresses the consumer's financial situation,
insurance needs and financial objectives . . . .'' \85\ Additionally,
the obligation to comply with the ``best interest'' standard is limited
to the individual producer, as opposed to the insurer responsible for
supervising the producer.
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\84\ Section 6(d) of the Model Regulation provides, ``[t]he
requirements under this subsection do not create a fiduciary
obligation or relationship and only create a regulatory obligation
as established in this regulation.'' In recent insurance industry
litigation against the Department, plaintiff Federation of Americans
for Consumer Choice, Inc., stated that ``[t]here is a world of
difference'' between the NAIC Model Regulation and ERISA's fiduciary
regime. See Pls.' (1) Br. In Opp'n to Defs.' Cross-Motion to Dismiss
for Lack of Jurisdiction or, in the Alternative, for Summ. J., and
(2) Reply Br. in Supp. of Pls. Mot. for Summ. J, 40, Fed'n of Ams.
for Consumer Choice v. U.S. Dep't of Labor, No. 3:22-CV-00243-K-BT
(Nov. 7, 2022) (comparing ERISA's best interest requirement to NAIC
Model Regulation 275, Sections 2.B and 6.A.(1)(d)).
\85\ Id. at section 6(A)(1)(a)(iii).
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These regulatory changes cover many, but not all, of the assets
held by retirement plans. Further, the SEC's Regulation Best Interest
and the NAIC Model Regulation are each limited in important ways in
terms of application to advice provided to ERISA plan fiduciaries
although this is not the case with the Advisers Act fiduciary
obligations. For example, Regulation Best Interest does not cover
advice to workplace retirement plans or their representatives (such as
an employee of a small business who is a fiduciary of the business's
401(k) plan).\86\ The NAIC Model Regulation does not apply to
transactions involving contracts used to fund an employee pension or
welfare plan covered by ERISA.\87\ The Department believes that
retirement investors and the regulated community are best served by an
ERISA fiduciary standard that applies uniformly to all investments that
retirement investors may make with respect to their retirement
accounts. Amendments to the ERISA regulation are necessary to achieve
that result.
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\86\ Regulation Best Interest release, 84 FR 33318, 33343-44
(July 12, 2019). Regulation Best Interest would apply, however, to
retail customers receiving recommendations for their own retirement
accounts. Id.
\87\ NAIC Model Regulation, at section 4(B)(1).
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7. Coordination With Other Agencies
Under Title I and Title II of ERISA, the Department has primary
responsibility for the regulation of fiduciaries' advice to retirement
investors. Because of the fundamental importance of retirement
investments to workers' financial security and the tax-preferred status
of plans and IRAs, Congress defined the scope of fiduciary coverage
broadly and imposed stringent obligations on fiduciaries, including
prohibitions on conflicted transactions that do not have direct
analogues under the securities and insurance laws. The fiduciary
standards and prohibited transaction rules set forth in Title I and
Title II of ERISA, as applicable, broadly apply to covered fiduciaries,
irrespective of the particular investment product they recommend or
their status as investment advisers under the Advisers Act, broker-
dealers, insurance agents, bankers, or other status. This proposed
regulatory approach is designed to ensure that the standards and rules
applicable under Title I and Title II of ERISA are broadly uniform as
applied to retirement investors across different categories of
investment advice providers and advisory relationships.
At the same time, however, many stakeholders have stressed the need
to harmonize the Department's efforts with potential rulemaking and
rulemaking activities by other regulators, including the SEC's
standards of care for providing investment advice and the Commodity
Futures Trading Commission's (CFTC) business conduct standards for swap
dealers (and comparable SEC standards for security-based swap dealers).
In addition, commenters have urged coordination with other agencies
regarding IRA products and services.
As the SEC has adopted regulatory standards for broker-dealers that
are
[[Page 75899]]
based on fiduciary principles of care and loyalty also applicable to
investment advisers under the Advisers Act, and the NAIC has adopted a
model law that includes a best interest standard, the Department
believes that it is possible to honor the unique regulatory structure
imposed by the law governing tax-preferred retirement investments,
adopt a regulatory approach that provides a broadly uniform standard
for all retirement investors, as contemplated by Title I and Title II
of ERISA, and avoid the imposition of obligations that conflict with
investment professionals' obligations under other applicable laws. In
particular, in the Department's view, PTE 2020-02 is consistent with
the requirements of the SEC's Regulation Best Interest and the
fiduciary obligations of investment advisers under the Advisers Act.
Therefore, broker-dealers and investment advisers that have already
adopted meaningful compliance mechanisms for Regulation Best Interest
and the Advisers Act fiduciary duty, respectively, should be able to
adapt easily to comply with the PTE.
Nevertheless, to better understand whether the proposed rule and
exemptions would subject investment advice providers to requirements
that conflict with or add to their obligations under other Federal
laws, the Department has continued consulting and coordinating with the
SEC; other securities, banking, and insurance regulators; the
Department of the Treasury, including the Federal Insurance Office; and
the Financial Industry Regulatory Authority (FINRA), the independent
regulatory authority of the broker-dealer industry.
The Department has also continued consulting and coordinating with
the Department of the Treasury and the Internal Revenue Service (IRS),
particularly on the subject of IRAs, and will continue to do so through
the rulemaking process. Although the Department has responsibility for
issuing regulations and prohibited transaction exemptions under section
4975 of the Code, which applies to IRAs, the IRS maintains general
responsibility for enforcing the excise tax applicable to prohibited
transactions. The IRS's responsibilities extend to the imposition of
excise taxes on fiduciaries who participate in prohibited transactions.
As a result, the Department and the IRS share responsibility for
addressing self-dealing by investment advice fiduciaries to tax-
qualified plans and IRAs.
C. Purpose of the Proposed Rule and Summary of the Major Provisions
1. Purpose of the Proposed Rule
Since the 1975 rule was adopted, developments in retirement savings
vehicles and in the investment advice marketplace have altered the way
retirement investors interact with investment advice providers. In
1975, retirement plans were primarily defined benefit plans, which were
typically managed by sophisticated investment professionals. IRAs were
not major market participants and 401(k) plans were not yet in
existence. Today, however, plan participants, IRA owners, and their
beneficiaries exercise direct authority over their investments, and
depend upon a wide range of investment professionals, including broker-
dealers, advisers subject to the Advisers Act, insurance agents, and
others on how to make complex decisions about the management of
retirement assets.
These individual investors have far greater responsibility for
decisions about their retirement savings than was true in 1975, when
investment professionals directly managed plan investments. Individual
investors routinely depend on the quality of the advice they receive
from financial professionals who commonly hold themselves out as
trusted advice providers. Because these professionals have inherent
conflicts of interest, however, there is an ever-present danger that
the investment advice the retirement investor receives will be driven,
not by the best interest of the investor, but by the financial
interests of the investment professional or firm whom they depend upon
for advice that is in their interest.
Certainly, when an investment professional satisfies all five
conditions of the 1975 regulation with respect to a given instance of
advice, the investment professional is properly treated as a fiduciary
in accordance with the parties' reasonable understanding of the nature
of their relationship. However, the 1975 test, as applied to the
current marketplace is underinclusive because it fails to capture many
circumstances in which an investor would reasonably believe they were
receiving advice from an investment professional who was rendering
services to the investor based upon the investor's best interest. The
Department's experience in the current marketplace is that the five-
part test--in particular, the ``regular basis'' requirement and the
requirement of ``a mutual agreement, arrangement, or understanding''
that the investment advice will serve as ``a primary basis for
investment decisions''--too often work to defeat legitimate retirement
investor expectations of impartial advice and allow some advice
relationships to occur where there is no best interest standard.
These components of the five-part test are not found in the
statute's text, and in today's marketplace, undermine legitimate
investor understandings of a professional relationship centered around
the investor's best interest. In other words, there are currently many
situations where the retirement investor reasonably expects that their
relationship with the advice provider is one in which the investor can
(and should) place trust and confidence in the recommendation, yet
which are not covered by the current regulation. This proposal attempts
to reconcile the regulatory text with the both the reasonable
expectations of the retirement investor along with the statutory text
and purpose.
The proposed revised definition of an investment advice fiduciary
under ERISA, as discussed in detail below, is consistent with the
express text of the statutory definition and better protects the
interests of retirement investors. The proposal comports with the broad
language and protective purposes of the statute, while at the same time
limiting the treatment of recommendations as ERISA fiduciary advice to
those objective circumstances in which a retirement investor would
reasonably believe that they can rely upon the advice as rendered by an
investment professional who is acting in the investor's best interest,
rather than merely promoting their own competing financial interests at
the investor's expense.
An important premise of Title I and Title II of ERISA is that
fiduciaries' conflicts of interest should not be left unchecked, but
rather should be carefully regulated through rules requiring adherence
to basic fiduciary norms and avoidance of prohibited transactions. The
specific duties imposed on fiduciaries by Title I and Title II of ERISA
stem from Congress' judgment regarding the best way to protect the
public interest in tax-advantaged benefit arrangements that are
critical to workers' financial and physical health. In contrast to the
Federal securities laws and other regulatory regimes which can permit
certain conflicts if prescribed disclosure obligations are met, the
statutory prohibited transaction provisions in Title I and Title II of
ERISA contemplate a more stringent approach for the protection of these
tax-advantaged retirement savings. In this context, an
[[Page 75900]]
appropriately constructed regulatory definition of an investment advice
fiduciary under Title I and Title II of ERISA is essential.
While Congress enacted ERISA to give special protections to
retirement investors based on the central importance of retirement
assets to individuals' financial security and the broader marketplace,
ERISA's regulation of advice has failed to keep up with changes in the
marketplace, in marked contrast to other regulatory regimes. As noted
above, the Department's proposal follows the acts of other regulators
who have similarly recognized the need to change the standards
applicable to investment professionals to reflect current realities. It
is appropriate that the Department, too, update its regulation to
reflect the current marketplace, and to ensure that ERISA and the Code
serve their protective purposes. When Congress enacted ERISA, it chose
to impose a uniquely protective regime on the management and oversight
of plan assets. The law's aim was to protect the interests of plan
participants and beneficiaries by imposing especially high standards on
those who exercise functional authority over plan investments,
including rendering investment advice for a fee. As many Courts have
noted, ERISA's obligations are the ``highest known to the law.'' \88\
The 1975 rule as applied to current market conditions, however,
undermines ERISA's protective goals and defeats legitimate investor
expectations of professional advice based upon their best interest. As
discussed in more detail in the RIA, some retirement investors remain
vulnerable to harm from conflicts of interest in the investment advice
they receive because of the outdated 1975 regulation. The Department,
as opposed to other regulators, remains uniquely positioned to create a
regulatory definition of an investment advice fiduciary under ERISA
that is uniformly applicable to all the types of investments that
retirement investors make.
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\88\ Donovan v. Bierwirth, 680 F.2d 263, 272 n. 8 (2d. Cir.
1982), cert denied, 459 U.S. 1069 (1982).
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For example, the Department's proposal fills an important gap
regarding advice to plans and plan fiduciaries. Advice from broker-
dealers to plans and plan fiduciaries is not protected by the SEC's
Regulation Best Interest. And the NAIC Model Regulation does not apply
to transactions involving contracts used to fund retirement plans
covered by ERISA. The fiduciary advice definition in Title I and Title
II of ERISA, however, extends more broadly to cover advice to plan and
IRA fiduciaries as well as plan participants, beneficiaries, and IRA
owners and beneficiaries. This provides important protections to the
retirement investors saving through these plans. The proposed rule
would apply uniformly to advice to retirement investors within the
ambit of Title I and Title II of ERISA, as is consistent with the text
of the statutory definition which draws no distinctions between these
different categories of retirement investors.
The proposal also takes on special importance in creating uniform
standards for investment transactions that are not covered by the
Federal securities laws. Some types of plan and IRA investments, such
as real estate, fixed indexed annuities, certificates of deposit, and
other bank products, may not be subject to the SEC's Regulation Best
Interest, and there are a number of persons who provide investment
advice services that are neither subject to the SEC's Regulation Best
Interest nor to the fiduciary obligations in the Advisers Act. An
update to the regulatory definition of an investment advice fiduciary,
for purposes of Title I and Title II of ERISA, will enhance protections
of retirement investors. This approach reflects both the statutory
text, which adopts a uniform approach to all assets held in tax-
advantaged retirement plans, as well as sound public policy. When
investment professionals hold themselves out to retirement investors as
making recommendations based on the retirement investors' best
interests, their recommendations should be driven by a uniform
fiduciary obligation, and not by perceptions that one category of
investment product is subject to lower regulatory standards than
another.
Since ERISA's enactment, the Department has been expressly given
the authority under Title I of ERISA to issue regulations defining
terms in Title I and to grant administrative exemptions from the
prohibited transactions provisions. Pursuant to the President's
Reorganization Plan No. 4 of 1978,\89\ which Congress ratified in
1984,\90\ the Department's authority was expanded to include authority
to issue regulations, rulings, and opinions on the definition of a
fiduciary with respect to Title II plans under the Code (including
IRAs) and to grant administrative prohibited transaction exemptions
applicable to them.\91\ Thus, the Department has clear authority to
promulgate the regulatory definition of a fiduciary under both Title I
and Title II of ERISA, and the Department has taken care in this
proposal to honor the text and purposes of Title I and Title II of
ERISA.
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\89\ 5 U.S.C. App. 1 (2018).
\90\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
\91\ Sec. 102, 5 U.S.C. App. 1.
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2. Summary of the Major Provisions of the Proposed Rule
The Department proposes that a person would be an investment advice
fiduciary if they provide investment advice or make an investment
recommendation to a retirement investor (i.e., a plan, plan fiduciary,
plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA
fiduciary); the advice or recommendation is provided ``for a fee or
other compensation, direct or indirect,'' as defined in the proposed
rule; and the person provides the advice or makes the recommendation in
one of the following contexts:
<bullet> The person either directly or indirectly (e.g., through
or together with any affiliate) has discretionary authority or
control, whether or not pursuant to an agreement, arrangement, or
understanding, with respect to purchasing or selling securities or
other investment property for the retirement investor;
<bullet> The person either directly or indirectly (e.g., through
or together with any affiliate) makes investment recommendations to
investors on a regular basis as part of their business and the
recommendation is provided under circumstances indicating that the
recommendation is based on the particular needs or individual
circumstances of the retirement investor and may be relied upon by
the retirement investor as a basis for investment decisions that are
in the retirement investor's best interest; or
<bullet> The person making the recommendation represents or
acknowledges that they are acting as a fiduciary when making
investment recommendations.\92\
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\92\ This proposed rule is accompanied by proposals (published
elsewhere in the Federal Register) related to prohibited transaction
exemptive relief. The proposals would amend existing PTEs, including
PTE 2020-02, that allow, subject to protective conditions,
investment advice fiduciaries to receive compensation and engage in
transactions that otherwise would be prohibited. Unlike the PTEs
that were a part of the 2016 Rulemaking, these PTEs do not, and the
amendments would not, include required contracts or warranties that
the Fifth Circuit objected to. These prohibited transaction
exemptions also do not exempt a party from status as a fiduciary,
and therefore, the proposals do not affect the scope of the
regulatory definition of an investment advice fiduciary. Rather, the
exemption proposals involve an exercise of the statutory authority
afforded to the Department by Congress to grant administrative
relief from the strict prohibited transaction provisions in Title I
and Title II of ERISA for beneficial transactions involving plans
and IRAs. See section 408(a) of ERISA (requiring the Department to
make findings before granting an exemption that the exemption is
administratively feasible, in the interests of the plan or IRA and
of its participants and beneficiaries, and protective of the rights
of participants and beneficiaries of such plan or IRA); section
4975(c)(2) of the Code (same).
[[Page 75901]]
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It is important to note that each required component of the new
proposed regulatory definition would have to be satisfied with respect
to any particular recommendation for the recommendation to constitute
fiduciary investment advice. In accordance with the statute, fiduciary
status is determined on a transactional basis. Under the statutory
text, a person is a fiduciary with respect to advice ``to the extent .
. . [they] render[] investment advice for a fee or other compensation,
direct or indirect.'' The proposed rule, like the statute, applies
fiduciary status on a transaction-by-transaction basis. One is only a
fiduciary ``to the extent'' the person making the recommendation meets
the rule's requirements with respect to the particular advice
transaction at issue.
The Department believes the test that it is proposing here better
honors the statute and retirement investors' legitimate expectations of
impartial investment advice from trusted advice providers than the 1975
rule, while avoiding the danger of sweeping too broadly and covering
recommendations that Congress might not have intended to cover.
The Department's proposal is also intended to be responsive to the
Fifth Circuit's emphasis on relationships of trust and confidence. The
current proposal is much more narrowly tailored than the 2016 Final
Rule, which treated as fiduciary advice, any compensated investment
recommendation as long as it was directed to a specific retirement
investor regarding the advisability of a particular investment or
management decision with respect to securities or other investment
property of the plan or IRA. In contrast, the proposal provides that
fiduciary status would attach only if compensated recommendations are
made in certain specified contexts, each of which describes
circumstances in which the retirement investor can reasonably place
their trust and confidence in the advice provider. The Department
believes the approach in this proposal is consistent with the statutory
definition that applies fiduciary status on a functional (and
therefore, transactional) basis.\93\
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\93\ Mertens v. Hewitt Assocs., 508 U.S. 248 (1993). In this
regard, the Department notes that the SEC's Regulation Best Interest
also applies on a transactional basis. As stated by the SEC, ``the
provision of recommendations in a broker-dealer relationship is
generally transactional and episodic, and therefore the final rule
requires that broker-dealers act in the best interest of their
retail customers at the time a recommendation is made and imposes no
duty to monitor a customer's account following a recommendation.''
84 FR 33318, 33331 (July 12, 2019).
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The proposed regulatory definition of an investment advice
fiduciary includes the following paragraphs, which are discussed in
greater detail below. Paragraph (c) of the proposed regulation defines
the term ``investment advice.'' Paragraph (d) retains the provision in
the existing regulation regarding ``execution of securities
transactions.'' Paragraph (e) defines the phrase ``for fee or other
compensation, direct or indirect.'' Paragraph (f) sets forth
definitions used in the regulation. Paragraph (g) addresses
applicability of the regulation. Paragraph (h) confirms the continued
applicability of State law regulating insurance, banking, and
securities.
3. Covered Advice and Recommendations
Paragraph (c)(1) of the proposed regulation provides that a person
renders ``investment advice'' with respect to moneys or other property
of a plan or IRA if the person makes a recommendation of any securities
or other investment transaction or any investment strategy involving
securities or other investment property to the plan, plan fiduciary,
plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA
fiduciary, subject to certain specified criteria. Paragraphs (c)(1)(i),
(ii), and (iii) set forth three alternative contexts under which
covered recommendations would constitute investment advice for purposes
of the statutory definitions of an investment advice fiduciary in Title
I and Title II of ERISA. As discussed herein, under each of these three
contexts, the Department believes that retirement investors could
reasonably place their trust and confidence in the advice provider. The
proposal also makes clear that fiduciary status under Title I and/or
Title II of ERISA may result from recommendations to any of the
relevant plan actors, including not only the plan fiduciary, but also
plan participants, IRA owners, and their beneficiaries. This is
consistent with the Department's longstanding position that advice to a
plan participant or beneficiary is advice to the plan.\94\
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\94\ IB 96-1, 29 CFR 2509.96-1. For purposes of this definition,
a participant or beneficiary of the plan is not a ``plan fiduciary''
with respect to the plan.
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Paragraph (c)(1)(i)
In the first context, which is set forth in proposed paragraph
(c)(1)(i), a person renders fiduciary ``investment advice'' within the
meaning of ERISA section 3(21) if the person rendering advice either
directly or indirectly (e.g., through or together with any affiliate)
has discretionary authority or control, whether or not pursuant to an
agreement, arrangement or understanding, with respect to purchasing or
selling securities or other investment property for the retirement
investor.
This proposed provision is similar to a provision in the 1975 rule
that provides for investment advice fiduciary status if a covered
recommendation is made and the person making the recommendation either
directly or indirectly has ``discretionary authority or control,
whether or not pursuant to an agreement, arrangement, or understanding,
with respect to purchasing or selling securities or property for the
plan.'' \95\ The proposal would broaden this provision by referencing
securities or other investment property of the retirement investor, not
just an investment through a plan or IRA.
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\95\ See 29 CFR 2510.3-21(c)(1)(ii)(A) and 26 CFR 54.4975-
9(c)(1)(ii)(A) (emphasis added). See also paragraph (d) of the
proposal, which provides that a person is not a fiduciary merely
because they have certain specific discretion in connection with the
execution of securities transactions.
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Persons that have discretionary authority or control over the
investment of a retirement investor's assets necessarily are in a
relationship of trust and confidence with respect to the retirement
investor.\96\ Further, like the 1975 provision, the proposal would
extend to circumstances in which the person making the recommendation
``indirectly (e.g., through or together with any affiliate)'' has
discretionary authority or control over securities or other investment
property; in this context, the use of ``indirectly'' generally refers
to an arrangement in which an affiliate has discretionary authority or
control.
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\96\ As discussed below, the proposed rule would not impose on a
fiduciary an automatic fiduciary obligation to continue to monitor
an investment or a retirement investor's activities to ensure the
recommendations remain prudent and appropriate for the plan or IRA.
The extent of a monitoring obligation would depend on whether the
facts and circumstances indicate that the fiduciary has undertaken
that responsibility. A fiduciary that assumes discretion over plan
or IRA assets, however, would generally be viewed as assuming a
monitoring obligation.
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Paragraph (c)(1)(ii)
The second context, in proposed paragraph (c)(1)(ii), sets forth
that a person provides fiduciary ``investment advice'' if the person
making the recommendation directly or indirectly (e.g., through or
together with an affiliate) makes investment recommendations to
investors on a
[[Page 75902]]
regular basis as part of their business and the recommendation is
provided under circumstances indicating the recommendation is based on
the particular needs or individual circumstances of the retirement
investor and may be relied upon by the retirement investor as a basis
for investment decisions that are in the retirement investor's best
interest.
The proposed provision applies only to advice rendered by a person
who makes investment recommendations to investors ``on a regular basis
as part of their business.'' As compared to the ``regular basis'' prong
of the 1975 regulation, which the Department believes can work to
undermine the current reasonable expectations of retirement investors,
this proposed provision is properly focused on whether the advice
provider is in the business of providing investment recommendations.
The proposal's updated regular basis requirement avoids concerns that
the rule could sweep so broadly as to cover, for example, the car
dealer who suggests that a consumer finance a purchase by tapping into
retirement funds. Retirement investors would not typically view such
persons as making investment recommendations based on the retirement
investors' individual financial interests, and the rule would not treat
them as fiduciaries. Similarly, the human resources employees of a plan
sponsor would not be considered investment advice fiduciaries under the
proposed regulatory definition, because they do not regularly make
investment recommendations to investors as part of their business.\97\
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\97\ The Department also would not consider salaries of human
resources employees of the plan sponsor to be a fee or other
compensation in connection with or as a result of the educational
services and materials that they provide to plan participants and
beneficiaries. Further, the proposed rule does not alter the
principles articulated in ERISA Interpretive Bulletin 75-8, D-2 (29
CFR 2509.75-8) (IB 75-8). IB 75-8 provides that persons who perform
purely administrative functions for an employee benefit plan, within
a framework of policies, interpretations, rules, practices and
procedures made by other persons, but who have no power to make
decisions as to plan policy, interpretations, practices or
procedures, are not fiduciaries with respect to the plan by virtue
of those purely ministerial functions.
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However, the proposal's regular basis requirement would not defeat
legitimate investor expectations by automatically excluding one-time
advice from treatment as fiduciary investment advice.\98\ For example,
the proposed rule would treat an insurance agent's recommendation to
invest a retiree's retirement savings in an annuity as fiduciary advice
if the agent regularly makes investment recommendations to investors,
and the circumstances indicate that the recommendation is based on the
retiree's particular needs and circumstances and may be relied upon for
making an investment decision that is in the investor's best interest.
Similarly, if the agent told the retiree that they were rendering
fiduciary advice, the proposal would treat the recommendation as
fiduciary advice even if was one-time advice. Over time, the Department
has become concerned that 1975 regulation's regular basis test served
to defeat objective understandings of the nature of the professional
relationship and the reliability of the advice as based on the
investor's best interest.
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\98\ As noted by the magistrate judge in Federation of Americans
for Consumer Choice v. United States Dept. of Labor, the Fifth
Circuit's opinion ``did not foreclose that Title I duties may reach
those fiduciaries who, as aligned with Title I's text, render
advice, even for the first time, `for a fee or other
compensation.''' Findings, Conclusions, and Recommendations of the
United States Magistrate Judge, FACC, No. 3:22-CV-00243-K-BT, 2023
WL 5682411, at *22 (N.D. Tex. June 30, 2023) (quoting ERISA section
3(21)(A)(ii), 29 U.S.C. 1002(21)(A)(ii)) (emphasis in original).
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By limiting the scope of those who may be an investment advice
fiduciary to those who make investment recommendations as a regular
part of their business, the Department believes that the proposed
definition is appropriately tailored to those advice providers in whom
retirement investors may reasonably place their trust and confidence.
Whether someone gives investment recommendations on a regular basis as
part of their business is an objective test based on the totality of
facts and circumstances.\99\ The Department invites comment on this
approach, including the extent to which the Department should consider
the investor's understandings as to whether the adviser regularly makes
investment recommendations as part of their business. The Department
seeks comment regarding examples of financial professionals who may be
reasonably viewed by investors as giving investment advice but would
not in fact meet the requirements laid out in this provision.
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\99\ The reference to ``investment recommendations'' here and
elsewhere in the proposal does not indicate that the proposal is
limited to broker-dealers, or parties who regularly provide advice
or make recommendations in the securities or banking industries. The
scope of the regulation would extend to recommendations involving
securities or other investment property. Therefore, for example,
insurance agents who regularly make recommendations to customers
with respect to the purchase of annuity contracts would be
considered to make investment recommendations to investors on a
regular basis as part of their business. Proposed paragraph (f)(11)
provides that the term ``investment property'' does not include
health insurance policies, disability insurance policies, term life
insurance policies, or other property to the extent the policies or
property do not contain an investment component.
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Proposed paragraph (c)(1)(ii) further provides that, to count as
fiduciary advice, the recommendation must be provided ``under
circumstances indicating that the recommendation is based on the
particular needs or individual circumstances of the retirement investor
and may be relied upon by the retirement investor as a basis for
investment decisions that are in the retirement investor's best
interest.''
This provision of the proposal is similar to, but improves upon,
the parts of the 1975 regulation that require a ``mutual agreement,
arrangement or understanding'' that the advice will serve as ``a
primary basis'' for the retirement investor's investment decisions.
Instead of the ``mutual agreement, arrangement, or understanding''
requirement--which over time has encouraged investment professionals to
hold themselves out as trusted advisers while disclaiming fiduciary
status in the fine print--the proposal would focus on the objective
``circumstances'' surrounding the recommendation, including how the
investment professional held themselves out to the retirement investor
and described the services offered. The Department believes that the
proposed language will better avoid loopholes and fine print
disclaimers, while properly focusing on a reasonable understanding of
the nature of their relationship.
Further, the proposal does not include the 1975 regulation's
``primary basis'' requirement, which has proved difficult to interpret
and untethered from the extent to which the recommendation was
presented as advice upon which the investor could rely in making a
decision.\100\ Instead, the proposal has a requirement that the
circumstances indicate that the recommendation ``may be relied upon by
the retirement investor as a basis for investment decisions that are in
the retirement investor's best interest.'' Recommendations that meet
this test can be outcome-determinative for the investor and are
appropriately treated as fiduciary advice when the elements of the
proposed rule are satisfied.
---------------------------------------------------------------------------
\100\ See Preamble to Prohibited Transaction Exemption 2020-02,
Improving Investment Advice for Workers & Retirees, 85 FR 82798,
82808 (Dec. 18, 2020) (discussing comments on whether the test
focuses on ``a'' primary basis or ``the'' primary basis).
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In determining whether proposed paragraph (c)(1)(ii) is satisfied,
the Department intends to examine the
[[Page 75903]]
ways investment advice providers market themselves and describe their
services. For example, some stakeholders have previously expressed
concern that investment advice providers that adopt titles such as
financial consultant, financial planner, and wealth manager, are
holding themselves out as acting in positions of trust and confidence
while simultaneously disclaiming status as an ERISA fiduciary.\101\ In
the Department's view, an investment advice provider's use of such
titles routinely involves holding themselves out as making investment
recommendations that will be based on the particular needs or
individual circumstances of the retirement investor and may be relied
upon as a basis for investment decisions that are in the retirement
investor's best interest.
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\101\ See id. at 82803.
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Of course, whether a recommendation is provided under circumstances
indicating that it is based on the particular needs or individual
circumstances of the retirement investor and that it may be relied upon
as a basis for investment decisions that are in the retirement
investor's best interest is only part of the consideration. Even if a
recommendation satisfies a portion of the definition, it is not
fiduciary investment advice unless each aspect is satisfied (e.g., to
satisfy paragraph (c)(1)(ii), the person must also (directly or
indirectly) make investment recommendations on a regular basis as part
of their business).
The Department invites comments on the extent to which particular
titles are commonly perceived to convey that the investment
professional is providing individualized recommendations that may be
relied upon as a basis for investment decisions in a retirement
investor's best interest (and if not, why such titles are used). The
Department also requests comment on whether other types of conduct,
communication, representation, and terms of engagement of investment
advice providers should merit similar treatment.
Paragraph (c)(1)(iii)
The third context identified in the proposal, in proposed paragraph
(c)(1)(iii), is if the person making recommendations represents or
acknowledges that they are acting as a fiduciary when making investment
recommendations. An investment advice provider that acknowledges
fiduciary status has expressly agreed that the customer may place trust
and confidence in them. Furthermore, as discussed in the Fifth
Circuit's opinion, honesty is a general premise of a common law
fiduciary relationship.\102\ This provision of the proposal would
ensure that parties making a fiduciary representation or acknowledgment
cannot subsequently deny their fiduciary status if a dispute arises,
but rather must honor their words.
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\102\ Chamber, 885 F.3d 360, 370 (5th Cir. 2018) (citing George
M. Turner, Revocable Trusts Sec. 3:2 (Sept. 2016 Update)).
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For purposes of the proposal, paragraph (c)(1)(iii) is not limited
to the circumstances in which the person specifically represents that
they are a fiduciary for purposes of Title I or Title II of ERISA, or
specifically cites any particular statutory provisions. It is enough
that the investment advice provider told the retirement investor that
the investment advice or investment recommendations were or will be
made in a fiduciary capacity. As with the other contexts identified in
proposed paragraph (c)(1), this is intended to align fiduciary status
with the retirement investor's reasonable expectations. A retirement
investor who is told by a person that the person will be acting as a
fiduciary reasonably and appropriately places their trust and
confidence in such a person.
In the retirement context, the Department has stressed the
importance of clarity regarding the nature of an advice relationship
and has encouraged retirement investors to ask advice providers about
their status as an ERISA fiduciary with respect to retirement accounts
and seek a written statement of the advice provider's fiduciary status.
The Department's FAQs entitled Choosing the Right Person to Give You
Investment Advice: Information for Investors in Retirement Plans and
Individual Retirement Accounts state ``A written statement helps ensure
that the fiduciary nature of the relationship is clear to both you and
the investment advice provider at the time of the transaction, and
limits the possibility of miscommunication.'' \103\
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\103\ Available at <a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/choosing-the-right-person-to-give-you-investment-advice">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/choosing-the-right-person-to-give-you-investment-advice</a>.
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Many retirement investors may receive a written fiduciary
acknowledgment due to compliance obligations of an investment advice
provider. For example, retirement investors that are plan fiduciaries
entering into an investment advice services arrangement on behalf of
the plan are likely to receive an acknowledgment of fiduciary status
from the provider as part of the disclosure obligations under ERISA
section 408(b)(2) and the regulations thereunder.\104\ Further, an
upfront written acknowledgment of fiduciary status is a requirement of
several prohibited transaction exemptions available to investment
advice fiduciaries, including the statutory exemption added by Congress
at ERISA section 408(b)(14) \105\ and the Department's broad
administrative exemption, PTE 2020-02.\106\
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\104\ 29 CFR 2550.408b-2(c)(1)(iv)(B).
\105\ See ERISA section 408(g)(6)(A)(vii), 29 U.S.C.
1108(g)(6)(A)(vii) (``[T]he fiduciary adviser [must] provide[] to a
participant or a beneficiary before the initial provision of the
investment advice with regard to any security or other property
offered as an investment option, a written notification (which may
consist of notification by means of electronic communication) . . .
that the adviser is acting as a fiduciary of the plan in connection
with the provision of the advice . . . .'').
\106\ Section II(b)(1).
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As discussed in the preamble to PTE 2020-02, the Department
believes that parties seeking to provide investment advice to
retirement investors and relying on the exemption should, at a minimum,
make a conscious up-front determination of whether they are acting as
fiduciaries; tell their retirement investor customers that they are
rendering advice as fiduciaries; and, based on their conscious decision
to act as fiduciaries, implement and follow the exemption's
conditions.\107\
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\107\ 85 FR 82798, 82827 (Dec. 18, 2020).
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Disclaimers
Paragraph (c)(1)(v) of the proposal addresses the impact of
disclaimers on parties' status as investment advice fiduciaries. The
proposed paragraph provides that written statements by a person
disclaiming status as a fiduciary under the Act, the Code, or this
regulation, or disclaiming any of the conditions set forth in paragraph
(c)(1)(ii), will not control to the extent they are inconsistent with
the person's oral communications, marketing materials, applicable State
or Federal law, or other interactions with the retirement investor. The
Department's intent in including this paragraph in the proposal is to
permit parties to define the nature of their relationship, but also to
ensure that any disclaimer be consistent with oral communications or
actions, marketing material, State and Federal law, and other
interactions based on all relevant facts and circumstances. When the
disclaimer is at odds with the investment advice provider's oral
communications, marketing material, State or Federal law, or other
interactions, the disclaimer is insufficient to defeat the retirement
investor's legitimate expectations.\108\
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\108\ This discussion of disclaimers applies to the regulation
proposed herein, defining an investment advice fiduciary, and would
not extend to a circumstance in which a financial professional has
investment discretion over a retirement investor's assets.
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[[Page 75904]]
4. Recommendations Regarding Securities Transactions or Other
Investment Transactions or Investment Strategies
The definition of ``investment advice'' in proposed paragraph
(c)(1) requires that there be ``a recommendation regarding securities
transactions or other investment transactions or investment
strategies.''
Recommendation
Whether a person has made a ``recommendation'' is a threshold
element in establishing the existence of fiduciary investment advice.
For purposes of the proposed rule, the Department views a
recommendation as a communication that, based on its content, context,
and presentation, would reasonably be viewed as a suggestion that the
retirement investor engage in or refrain from taking a particular
course of action. The analysis would apply equally to a communication
that is made orally or in writing and would include electronic
communications. The determination of whether a recommendation has been
made would be an objective rather than a subjective inquiry.
In this regard, the more individually tailored the communication is
to a specific retirement investor or investors about, for example, a
security, investment property, or investment strategy, the more likely
the communication will be viewed as a recommendation; however, the
Department cautions that the fact that a communication is made to a
group rather than an individual would not be dispositive of whether a
recommendation exists. Additionally, providing a selective list of
securities to a particular retirement investor as appropriate for the
investor would be a recommendation as to the advisability of acquiring
securities even if no recommendation is made with respect to any one
security. Furthermore, a series of actions, taken directly or
indirectly (e.g., through or together with any affiliate), that may not
constitute a recommendation when each action is viewed individually may
amount to a recommendation when considered in the aggregate. Even if an
action rises to the level of a recommendation, the advice is only
fiduciary investment advice if the rest of the regulatory test is met.
In evaluating whether a recommendation has been made under the
proposal, the Department intends to take an approach similar to that
taken by the SEC and FINRA in the broker-dealer context. In the SEC's
Regulation Best Interest, the SEC stated that it would apply the term
as currently interpreted with respect to broker-dealer regulation for
purposes of the suitability obligations, to achieve efficiencies for
broker-dealers.\109\ The Department likewise believes that efficiencies
will apply if it adopts a similar approach.
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\109\ Regulation Best Interest release, 84 FR 33318, 33335 (July
12, 2019); see id. at fn. 161 (providing citations to relevant FINRA
guidance, including on the definition and contours of the term
``recommendation'').
---------------------------------------------------------------------------
In the Regulation Best Interest release, the SEC stated,
[T]he determination of whether a broker-dealer has made a
recommendation that triggers application of Regulation Best Interest
should turn on the facts and circumstances of the particular
situation and therefore, whether a recommendation has taken place is
not susceptible to a bright line definition. Factors considered in
determining whether a recommendation has taken place include whether
the communication ``reasonably could be viewed as a `call to action'
'' and ``reasonably would influence an investor to trade a
particular security or group of securities.'' The more individually
tailored the communication to a specific customer or a targeted
group of customers about a security or group of securities, the
greater the likelihood that the communication may be viewed as a
``recommendation.'' \110\
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\110\ Id.
The SEC did not include a formal definition of a recommendation in
Regulation Best Interest, based on its view that the concept of a
recommendation is fact-specific and not conducive to an express
definition.\111\ In drafting this proposal, the Department has worked
to ensure alignment with the regulatory regimes of the SEC and other
regulatory agencies, and is proposing a similar approach.
---------------------------------------------------------------------------
\111\ Id.
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In the Department's view, the framework established by the SEC for
broker-dealers is consistent with ordinary understandings of ``advice''
and familiar to the broker-dealers that are regulated by the SEC.
Accordingly, the Department would consider a recommendation for
purposes of the SEC's Regulation Best Interest as a recommendation for
purposes of this proposed regulation. The Department seeks comment on
whether the approach taken in the proposal is sufficiently clear, or
whether an express definition would be preferable.
Definition of the phrase ``recommendation of any securities
transaction or other investment transaction or any investment strategy
involving securities or other investment property.''
Proposed paragraph (f)(10) defines the phrase ``recommendation of
any securities transaction or other investment transaction or any
investment strategy involving securities or other investment
property.'' This phrase largely parallels the language in the SEC's
Regulation Best Interest, which applies to broker-dealers'
``recommendation of any securities transaction or investment strategy
involving securities (including account recommendations).'' \112\ The
phrase's broader reference to ``other investment property'' reflects
the differences in jurisdiction between the SEC and the Department.
---------------------------------------------------------------------------
\112\ 17 CFR 240.15l-1(a)(1).
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Under proposed paragraph (f)(10), the phrase ``recommendation of
any securities transaction or other investment transaction or any
investment strategy involving securities or other investment property''
is defined as recommendations:
<bullet> As to the advisability of acquiring, holding, disposing
of, or exchanging, securities or other investment property, as to
investment strategy, or as to how securities or other investment
property should be invested after the securities or other investment
property are rolled over, transferred, or distributed from the plan
or IRA;
<bullet> As to the management of securities or other investment
property, including, among other things, recommendations on
investment policies or strategies, portfolio composition, selection
of other persons to provide investment advice or investment
management services, selection of investment account arrangements
(e.g., account types such as brokerage versus advisory) or voting of
proxies appurtenant to securities; and
<bullet> As to rolling over, transferring, or distributing
assets from an employee benefit plan or IRA, including
recommendations as to whether to engage in the transaction, and the
amount, the form, and the destination of such a rollover, transfer,
or distribution.
Components of these proposed covered recommendations are discussed
below.
Recommendations Involving Securities, Other Investment Property, and
Investment Strategy
Paragraph (f)(10)(i) of the proposal describes, as covered
recommendations, recommendations as to ``the advisability of acquiring,
holding, disposing of, or exchanging, securities or other investment
property, as to investment strategy, or as to how securities or other
investment property should be invested after the securities or other
investment property are rolled over, transferred, or
[[Page 75905]]
distributed from the plan or IRA.'' Similar to the SEC and FINRA, the
Department intends to interpret ``investment strategy'' broadly, to
include ``among others, recommendations generally to use a bond ladder,
day trading . . . or margin strategy involving securities, irrespective
of whether the recommendations mention particular securities.'' \113\
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\113\ Regulation Best Interest release, 84 FR 33318, 33339 (July
12, 2019) (citing FINRA Rule 2111.03 and FINRA Regulatory Notice 12-
25, available at <a href="https://www.finra.org/rules-guidance/notices/12-2">https://www.finra.org/rules-guidance/notices/12-2</a>).
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The reference to ``other investment property'' is intended to
capture other investments made by plans and IRAs that are not
securities. This includes, but would not be limited to, non-securities
annuities, banking products, and digital assets (regardless of status
as a security). The Department does not see any basis for
differentiating advice regarding investments in CDs, including
investment strategies involving CDs (e.g., laddered CD portfolios),
from other investment products, and therefore would interpret paragraph
(f)(10) to cover such recommendations.
The Department proposes that the term investment property, however,
not include health insurance policies, disability insurance policies,
term life insurance policies, and other property to the extent the
policies or property do not contain an investment component. This is
confirmed in a proposed definition of ``investment property'' in
paragraph (f)(11). Although there can be situations in which a person
recommending group health or disability insurance, for example,
effectively exercises such control over the decision that the person is
functionally exercising discretionary control over the management or
administration of the plan as described in ERISA section 3(21)(A)(i) or
section 3(21)(A)(iii), the Department does not believe that the
definition of investment advice in ERISA's statutory text is properly
interpreted or understood to cover a recommendation to purchase group
health, disability, term life insurance, or similar insurance policies
that do not have an investment component.
Recommendations as to How Securities or Other Investment Property
Should Be Invested After Rollover, Transfer, or Distribution
Proposed paragraph (f)(10)(i) also references recommendations ``as
to how securities or other investment property should be invested after
the securities or other investment property are rolled over,
transferred, or distributed from the plan or IRA.'' This proposed
provision addresses an important concern of the Department that
investment advice providers should not be able to avoid fiduciary
responsibility for a rollover recommendation by focusing solely on the
investment of assets after they are rolled over from the plan. In many
or most cases, a recommendation to a plan participant or beneficiary
regarding the investment of securities or other investment property
after a rollover, transfer, or distribution involves an implicit
recommendation to the participant or beneficiary to engage in the
rollover, transfer, or distribution. Certainly, a prudent and loyal
fiduciary generally could not make a recommendation on how to invest
assets currently held in a plan after a rollover, without even
considering the logical alternative of leaving the assets in the plan
or evaluating how that option compares with the retirement investor's
likely investment experience post-rollover. A fiduciary would violate
ERISA's 404 obligations if it recommended that a retirement investor
roll the money out of the plan without proper consideration of how the
money might be invested after the rollover.
Moreover, even in those relatively rare circumstances in which
there is no implicit rollover recommendation, advice to a plan
participant on how to invest assets currently held in an ERISA-covered
plan is ``advice with respect to moneys or other property of such
plan'' within the meaning of section 3(21)(A)(ii) of ERISA, inasmuch as
the assets at issue are still held by the plan. The Department requests
comments on the proposed language, and on whether this approach will
appropriately protect the interests of plan participants and
beneficiaries, or whether another approach would be more protective.
Recommendations on Strategies, Management of Securities or Other
Investment Property, and Account Types
Paragraph (f)(10)(ii) of the proposed rule describes, as covered
recommendations, recommendations as to the management of securities or
other investment property, including, among other things,
recommendations on investment policies or strategies, portfolio
composition, selection of other persons to provide investment advice or
investment management services, selection of investment account
arrangements (e.g., account types such as brokerage versus advisory),
or the voting of proxies appurtenant to securities. The statutory text
broadly refers to ``investment advice . . . with respect to any moneys
or other property of such plan.'' Recommendations as to investment
management or strategy fall within the most straightforward reading of
the statutory text. Accordingly, the proposed regulation makes clear
that covered investment advice is not artificially limited solely to
recommendations to buy, sell, or hold particular securities or
investment property to the exclusion of all the other important
categories of investment advice that investment professionals routinely
provide.
This provision of the proposed regulation also makes clear that
recommendations as to the selection of investment account arrangements
would be covered. Accordingly, a recommendation to move from a
commission-based account to an advisory fee-based account (or vice
versa) would be a covered recommendation. The provision is consistent
with the SEC's Regulation Best Interest and the Advisers Act's
fiduciary obligations.\114\
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\114\ 17 CFR 240.15l-1(a)(1) (``A broker, dealer, or a natural
person who is an associated person of a broker or dealer, when
making a recommendation of any securities transaction or investment
strategy involving securities (including account recommendations) to
a retail customer, shall act in the best interest of the retail
customer at the time the recommendation is made, without placing the
financial or other interest of the broker, dealer, or natural person
who is an associated person of a broker or dealer making the
recommendation ahead of the interest of the retail customer.'')
(emphasis added); SEC Investment Adviser Interpretation, 84 FR at
33674 (``An adviser's fiduciary duty applies to all investment
advice the investment adviser provides to clients, including advice
about investment strategy, engaging a sub-adviser, and account
type.'').
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Recommendation on the Selection of Other Persons To Provide Investment
Advice or Investment Management
Proposed paragraph (f)(10)(ii) extends to recommendations as to
``selection of other persons to provide investment advice or investment
management services.'' Consistent with the Department's longstanding
position, the proposed regulation would cover the recommendation of
another person to be entrusted with investment advice or investment
management authority over retirement assets. Such recommendations are
often critical to the proper management and investment of those assets
and are fiduciary in nature if the other conditions of the proposed
definition are satisfied. Recommendations of investment advisers or
managers are no different than recommendations of investments that the
plan or IRA may acquire and are often, by virtue of the track record or
[[Page 75906]]
information surrounding the capabilities and strategies that are
employed by the recommended fiduciary, inseparable from recommendations
as to the types of investments that the plan or IRA will acquire. For
example, the assessment of an investment fund manager or management is
often a critical part of the analysis of which fund to pick for
investing plan or IRA assets.
Under this proposal, the Department does not intend to suggest,
however, that a person could become a fiduciary merely by engaging in
the normal activity of marketing themselves as a potential fiduciary to
be selected by a plan fiduciary or IRA owner, without making a
recommendation of a securities transaction or other investment
transaction or any investment strategy involving securities or other
investment property. Touting the quality of one's own advisory or
investment management services would not trigger fiduciary obligations.
This view is made clear by the language in proposed paragraph
(f)(10)(ii) that extends to recommendations of ``other persons'' to
provide investment advice or investment management services.
However, this discussion should not be read to exempt a person from
being a fiduciary with respect to any of the investment recommendations
covered by proposed paragraphs (c)(1) and defined in proposed paragraph
(f)(10). There is a line between an investment advice provider making
claims as to the value of its own advisory or investment management
services in marketing materials, on the one hand, and making
recommendations to retirement investors on how to invest or manage
their savings, on the other. An investment advice provider can
recommend that a retirement investor enter into an advisory
relationship with the provider without acting as a fiduciary. But when
the investment advice provider recommends, for example, that the
investor pull money out of a plan or invest in a particular fund, that
advice may be given in a fiduciary capacity even if part of a
presentation in which the provider is also recommending that the person
enter into an advisory relationship. As proposed, the complete facts
and circumstances surrounding each piece of advice would be considered.
The Department believes that this is consistent with the functional
fiduciary test laid out in the statute in which an entity is an
investment advice fiduciary to the extent that they satisfy the
definition. Just because one piece of advice is not fiduciary
investment advice (here, the ``hire me'' recommendation) does not mean
that the rest of the advice is necessarily excluded from the definition
(here, the advice to pull money out of the plan and invest in a
particular fund). The investment advice fiduciary could not prudently
recommend that a plan participant roll money out of a plan into
investments that generate a fee for the fiduciary but leave the
participant in a worse position than if the participant had left the
money in the plan. Thus, when a recommendation to ``hire me''
effectively includes a recommendation on how to invest or manage plan
or IRA assets (e.g., whether to roll assets into an IRA or plan or how
to invest assets if rolled over), that recommendation would need to be
evaluated separately under the provisions in the proposed
regulation.\115\
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\115\ The Department believes this approach is consistent with
the SEC's approach in Regulation Best Interest. In FAQs, the SEC
described a scenario involving broker-dealer communications with a
prospective retail customer that would not rise to the level of a
recommendation. However, the SEC cautioned that a recommendation
made in the context of a ``hire me'' conversation or otherwise would
be subject to Regulation Best Interest. See Questions on Regulation
Best Interest, available at <a href="https://www.sec.gov/tm/faq-regulation-best-interest">https://www.sec.gov/tm/faq-regulation-best-interest</a>.
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Proxy Voting Appurtenant to Ownership of Shares of Corporate Stock
Proposed paragraph (f)(10)(ii) also extends to recommendations as
to the ``voting of proxies appurtenant to securities.'' The Department
has long viewed the exercise of ownership rights as a fiduciary
responsibility; consequently, advice or recommendations on the exercise
of proxy or other ownership rights are appropriately treated as
fiduciary in nature if the other conditions of the regulation are
satisfied.\116\
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\116\ See Fiduciary Duties Regarding Proxy Voting and
Shareholder Rights, 85 FR 81658 (Dec. 16, 2020) (``In connection
with proxy voting, the Department's longstanding position is that
the fiduciary act of managing plan assets includes the management of
voting rights (as well as other shareholder rights) appurtenant to
shares of stock.'').
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Similar to other types of broad, generalized guidance that would
not rise to the level of investment advice, however, guidelines or
other information on voting policies for proxies that are provided to a
broad class of investors without regard to a client's individual
interests or investment policy and that are not directed or presented
as a recommended policy for the plan or IRA to adopt, would not rise to
the level of a covered recommendation under the proposal. Similarly, a
recommendation addressed to all shareholders in an SEC-required proxy
statement in connection with a shareholder meeting of a company whose
securities are registered under Section 12 of the Exchange Act, for
example, soliciting a shareholder vote on the election of directors and
the approval of other corporate action, would not, under the proposed
rule, constitute fiduciary investment advice from the person who
creates or distributes the proxy statement.
Recommendations on Rollovers, Benefit Distributions, or Transfers From
Plan or IRA
Proposed paragraph (f)(10)(iii) describes, as a category of covered
recommendations, recommendations ``as to rolling over, transferring, or
distributing assets from an employee benefit plan or IRA, including
recommendations as to whether to engage in the transaction, and the
amount, the form, and the destination of such a rollover, transfer, or
distribution.'' This aspect of the proposal is consistent with the
Department's longstanding interest in protecting retirement investors
in the context of a recommendation to roll over employee benefit plan
assets to an IRA, as well as other recommendations to roll over,
transfer, or distribute assets from a plan or IRA.
The Department continues to believe that decisions to take a
benefit distribution or engage in rollover transactions are among the
most, if not the most, important financial decisions that plan
participants and beneficiaries, and IRA owners and beneficiaries are
called upon to make. The Department continues to believe that advice
provided in connection with a rollover decision, even if not
accompanied by a specific recommendation on how to invest assets,
should be treated as fiduciary investment advice. A distribution
recommendation involves either advice to change specific investments in
the plan or to change fees and services directly affecting the return
on those investments. Even if the assets would not be covered by Title
I or Title II of ERISA when they are moved outside the plan or IRA, the
recommendation to change the plan or IRA investments is investment
advice under Title I or Title II of ERISA.
Thus, recommendations on distributions (including rollovers or
transfers into another plan or IRA) or recommendations to entrust plan
assets to a particular IRA provider would fall within the scope of
investment advice in this proposed regulation, and would be covered by
Title I of ERISA, including the enforcement provisions of section
502(a). Further, in the Department's view, the evaluation of whether a
recommendation constitutes
[[Page 75907]]
fiduciary investment advice should be the same regardless of whether it
is a recommendation to take a distribution or make a rollover to an IRA
or a recommendation not to take a distribution or to keep assets in a
plan.
The proposal's approach also aligns with the SEC's Regulation Best
Interest and Advisers Act fiduciary obligations, which extend to
account recommendations generally as well as recommendations to roll
over or transfer assets from one type of account to another.\117\
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\117\ Regulation Best Interest release, 84 FR 33318, 33339 (July
12, 2019); SEC Investment Adviser Interpretation, 84 FR 33669, 33674
(July 12, 2019).
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5. Application of Paragraph (c)(1)
The proposal provides a general rule under which investment advice
providers could determine their status through application of the facts
and circumstances surrounding their interactions with their customers.
To aid parties in conducting the analysis, the Department provides the
following discussion of the application of the general rule in certain
common circumstances and requests comment on the discussion. The
Department also seeks comment on whether any adjustment should be made
to the regulatory text to address issues discussed herein.
Sophisticated Retirement Investors
The proposed regulation does not include any special provision for
recommendations to sophisticated advice recipients. Rather, under the
proposal, fiduciary status would turn on the application of proposed
paragraph (c)(1). In the absence of investment discretion (see proposed
paragraph (c)(1)(i)) or a fiduciary acknowledgment (see proposed
paragraph (c)(1)(iii)), the investment advice provider's fiduciary or
non-fiduciary status would depend on the parties' understandings under
the particular facts and circumstances (see proposed paragraph
(c)(1)(ii)).
The Department acknowledges that some commenters in previous
rulemakings have asserted that a specific ``counterparty'' provision is
necessary to avoid limiting plan and IRA investors' choices in
investment transactions.\118\ Commenters have suggested that the
Department should adopt certain metrics, such as wealth or income, as
conclusively establishing that the retirement investor has sufficient
expertise and sophistication to foreclose fiduciary status of an advice
provider. The Department is unaware, however, of compelling evidence
that wealth and income are strong proxies for financial sophistication
or inconsistent with a relationship of trust and confidence.\119\
Moreover, and independently, nothing in the statute's text suggests
that Congress intended to categorically deny fiduciary protection to
``sophisticated investors.'' Instead of a specific ``counterparty''
provision or a provision for sophisticated plan- and IRA-level
fiduciaries, proposed paragraph (c)(1)(ii) generally states an
appropriate test for fiduciary status to apply to a covered
recommendation, even if made to a plan or IRA fiduciary. To the extent
counterparties wish to avoid fiduciary status, they can avoid
structuring their relationships to fall within the circumstances
described in that subparagraph.
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\118\ The 2016 Final Rule provided that, subject to specified
conditions, certain transactions with independent fiduciaries with
financial expertise would not constitute fiduciary investment
advice. 81 FR 20946, 20980 (Apr. 8, 2016).
\119\ High net worth investors and sophisticated investors are
not carved out of protections under the SEC's Regulation Best
Interest or the Advisers Act fiduciary duty.
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In the context of ``wholesaling'' activity, which involves
communications by product manufacturers or other financial service
providers to financial intermediaries who then directly advise plans,
participants, beneficiaries, and IRA owners and beneficiaries, the
Department believes that communications to financial intermediaries
would typically fall outside the scope of proposed paragraph (c)(1)(ii)
because they would not involve recommendations based on the particular
needs or individual circumstances of the plan or IRA serviced by the
intermediary. There may also be other circumstances in which
application of proposed paragraph (c)(1)(ii) would not result in a
covered recommendation being treated as fiduciary investment advice. In
general, however, the Department envisions that proposed paragraph
(c)(1)(ii) would apply broadly to recommendations to plan and IRA
fiduciaries acting on behalf of plans and IRAs.
More fundamentally, the Department rejects the purported dichotomy
between a mere ``sales'' recommendation to a counterparty, on the one
hand, and advice, on the other, in the context of the retail market for
investment products. As reflected in recent regulatory developments
from both the SEC and NAIC, financial service industry marketing
materials, and the industry's comment letters reciting the guidance
they provide to investors, sales and advice typically go hand in hand
in the retail market.
In the Department's view, the updated conduct standards adopted by
the SEC and the NAIC also reflect an acknowledgment of the fact that
broker-dealers and insurance agents commonly provide paid investment
and annuity recommendations to their customers. The SEC stated in the
Regulation Best Interest release that ``there is broad acknowledgment
of the benefits of, and support for, the continuing existence of the
broker-dealer business model, including a commission or other
transaction-based compensation structure, as an option for retail
customers seeking investment recommendations.'' \120\ The NAIC Model
Regulation, section 6.5.M defines a recommendation as ``advice provided
by a producer to an individual consumer that was intended to result or
does result in a purchase, an exchange or a replacement of an annuity
in accordance with that advice.'' Further, ``cash compensation'' is
defined as ``any discount, concession, fee, service fee, commission,
sales charge, loan, override, or cash benefit received by a producer in
connection with the recommendation or sale of an annuity from an
insurer, intermediary, or directly from the consumer.'' \121\ When
retirement investors talk to investment advice providers about the
investments they should make, they commonly pay for, and receive,
advice within the meaning of the statutory definition.
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\120\ 84 FR 33318, 33319 (July 12, 2019).
\121\ NAIC Model Rule section 5.B. (emphasis added).
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Platform Providers and Pooled Employer Plans
Platform providers are entities that offer a platform or selection
of investment alternatives to participant-directed individual account
plans and their fiduciaries who choose the specific investment
alternatives that will be made available to participants for investing
their individual accounts. In connection with such offerings, platform
providers may provide investment advice, or they may simply provide
general financial information such as information on the historic
performance of asset classes and of the investment alternatives
available through the provider.
In the case of a platform provider, application of the proposed
regulation may often focus on whether the communications fall within
the threshold definition of a ``recommendation.'' As discussed in
section 4, whether a recommendation exists under the proposal will turn
on the degree to which a communication is
[[Page 75908]]
``individually tailored'' to the retirement investor or investors, and
providing a selective list of securities to a particular retirement
investor as appropriate for the investor would be a recommendation as
to the advisability of acquiring securities even if no recommendation
is made with respect to any one security. Therefore, the inquiry may
turn on whether the provider presents the investments on the platform
as having been selected for and appropriate for the investor (i.e., the
plan and its participants and beneficiaries). In this regard, platform
providers who merely identify investment alternatives using objective
third-party criteria (e.g., expense ratios, fund size, or asset type
specified by the plan fiduciary) to assist in selecting and monitoring
investment alternatives, without additional screening or
recommendations based on the interests of plan or IRA investors, would
not be considered under the proposal to be making a recommendation.
In the Department's view, this same analysis is likely to apply in
the context of pooled employer plans (PEPs), which are individual
account plans established or maintained for the purpose of providing
benefits to the employees of two or more employers, authorized in the
Setting Every Community Up for Retirement Enhancement (SECURE)
Act.\122\ PEPs are required to designate a pooled plan provider (PPP)
who is a named fiduciary of the PEP.\123\ PPPs are in a unique
statutory position in that they are granted full discretion and
authority to establish the plan and all of its features, administer the
plan, act as a fiduciary, hire service providers, and select
investments and investment managers. When a PPP or another service
provider interacts with an employer about investment options under the
plan, whether they have made a recommendation under the proposal will
turn, in part, on whether they present the investments as selected for,
and appropriate for, the plan, its participants, or beneficiaries.
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\122\ ERISA section 3(43), 29 U.S.C. 1002(43).
\123\ ERISA Section 3(43)(B), 29 U.S.C. 1002(43)(B).
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Swaps and Security-Based Swaps
Swaps and security-based swaps are a broad class of financial
transactions defined and regulated under amendments to the Commodity
Exchange Act and the Securities Exchange Act of 1934 (Securities
Exchange Act) by the Dodd-Frank Act. Section 4s(h) of the Commodity
Exchange Act \124\ and section 15F of the Securities Exchange Act \125\
establish similar business conduct standards for dealers and major
participants in swaps or security-based swaps. Special rules apply for
swap and security-based swap transactions involving ``special
entities,'' a term that includes employee benefit plans covered under
ERISA. Under the business conduct standards in the Commodity Exchange
Act as added by the Dodd-Frank Act, swap dealers or major swap
participants that act as counterparties to ERISA plans must, among
other conditions, have a reasonable basis to believe that the plans
have independent representatives who are fiduciaries under ERISA.\126\
Similar requirements apply for security-based swap transactions.\127\
The CFTC and the SEC have issued final rules to implement these
requirements.\128\
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\124\ 7 U.S.C. 6s(h).
\125\ 15 U.S.C. 78o-10(h).
\126\ 7 U.S.C. 6s(h)(5); 17 CFR 23.450.
\127\ 15 U.S.C. 78o-10(h)(4), (5).
\128\ See 17 CFR 23.400-451; Business Conduct Standards for Swap
Dealers and Major Swap Participants With Counterparties, 77 FR 9734
(Feb. 17, 2012); 17 CFR 240.15Fh-3-h-6; Business Conduct Standards
for Security-Based Swap Dealers and Major Security-Based Swap
Participants, 81 FR 29960 (May 13, 2016).
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In the Department's view, when Congress enacted the swap and
security-based swap provisions in the Dodd-Frank Act, including those
expressly applicable to ERISA-covered plans, it did not intend to
broadly impose ERISA fiduciary status on the plan's counterparty as it
engaged in regulated conduct as part of the swap or security-based swap
transaction with the employee benefit plan. The Department conferred
with both the CFTC and the SEC at the time of those agencies'
rulemakings, and assured harmonization of any change in the ERISA
fiduciary advice regulation so as to avoid unintended consequences.
The Department makes the same assurance with respect to this
proposed regulation. The disclosures required of plans' counterparties
under the business conduct standards would not generally constitute a
``recommendation'' as defined in the proposal, or otherwise compel the
dealers or major participants to act as fiduciaries in swap and
security-based swap transactions conducted pursuant to section 4s of
the Commodity Exchange Act and section 15F of the Securities Exchange
Act. This includes disclosures regarding material risks,
characteristics, incentives and conflicts of interest; disclosures
regarding the daily mark of a swap or security-based swap and a
counterparty's clearing rights; disclosures necessary to ensure fair
and balanced communications; and disclosures regarding the capacity in
which a swap or security-based swap dealer or major swap participant is
acting when a counterparty to a special entity, as required by the
business conduct standards.
This is not to say that a dealer or major participant would
necessarily fall outside the scope of the proposed regulation if, in
addition to providing the disclosures mandated above, it also chose to
make specific investment recommendations to plan clients. In that
circumstance, a swap dealer could become a fiduciary by virtue of their
voluntary decision to make individualized investment recommendations to
an ERISA-covered plan if the subparagraph's conditions were met.\129\
To the extent dealers wish to avoid fiduciary status under the
proposal, however, they can structure their relationships to avoid
making such investment recommendations to plans. Additionally, clearing
firms would not be investment advice fiduciaries under the proposed
rule merely as a result of providing such services as valuations,
pricing, and liquidity information. As discussed in greater detail in
the next section, the proposed rule does not include valuation and
similar services as a category of covered recommendations.
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\129\ The business conduct standards do not preclude a swap
dealer from giving advice if it chooses to do so. See, e.g., 17 CFR
23.434 (imposing requirements on swap dealers that recommend a swap
or trading strategy involving a swap to a counterparty); see also 17
CFR 240.15Fh-3(f) (similar provision applicable to security-based
swap dealers).
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Valuation of Securities and Other Investment Property
This proposed rule does not include valuation services, appraisal
services, or fairness opinions as categories of covered
recommendations. In this regard, the Department notes that the
definition of ``recommendation of any securities transaction or other
investment transaction or any investment strategy involving securities
or other investment property'' in proposed paragraph (f)(10) does not
include reference to any of these functions. Accordingly, the provision
of valuation services, appraisal services, or fairness opinions would
not, in and of themselves, lead to fiduciary status under the proposed
rule. The Department continues to believe issues related to valuation
are best addressed through a separate rulemaking.
[[Page 75909]]
6. For a Fee or Other Compensation, Direct or Indirect
Paragraph (e) of the proposal includes a definition of ``for a fee
or other compensation, direct or indirect,'' for purposes of section
3(21)(A)(ii) of ERISA and section 4975(e)(3)(B) of the Code. The
proposal provides:
[A] person provides investment advice ``for a fee or other
compensation, direct or indirect,'' if the person (or any affiliate)
receives any explicit fee or compensation, from any source, for the
advice or the person (or any affiliate) receives any other fee or
other compensation, from any source, in connection with or as a
result of the recommended purchase, sale, or holding of a security
or other investment property or the provision of investment advice,
including, though not limited to, commissions, loads, finder's fees,
revenue sharing payments, shareholder servicing fees, marketing or
distribution fees, mark ups or mark downs, underwriting
compensation, payments to brokerage firms in return for shelf space,
recruitment compensation paid in connection with transfers of
accounts to a registered representative's new broker-dealer firm,
expense reimbursements, gifts and gratuities, or other non-cash
compensation. A fee or compensation is paid ``in connection with or
as a result of'' such transaction or service if the fee or
compensation would not have been paid but for the recommended
transaction or provision of advice, including if eligibility for or
the amount of the fee or compensation is based in whole or in part
on the recommended transaction or the provision of advice.
This proposed definition is consistent with the preamble of the
1975 regulation, which states that ``a fee or other compensation,
direct or indirect'' includes all fees or other compensation ``incident
to the transaction in which the investment advice to the plan has been
rendered or will be rendered,'' including, for example, brokerage
commissions, mutual fund sales commissions, and insurance sales
commissions.\130\
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\130\ 40 FR 50842 (Oct. 31, 1975); 41 FR 56760, 56762 (Dec. 29,
1976).
---------------------------------------------------------------------------
As the Department explained in the preamble when it proposed the
exemption now at PTE 77-9: \131\
---------------------------------------------------------------------------
\131\ 41 FR 56760, 56762 (Dec. 29, 1976).
[T]he Department and the [IRS] stated in the preamble sections
of the notices announcing the adoption of the [1975 fiduciary
definition] regulations that, until a more definitive statement is
issued, the phrase ``fee or other compensation, direct or indirect''
for the rendering of investment advice for purposes of section
3(21)(A)(ii) of the Act and section 4975(e)(3)(B) of the Code should
be deemed to include all fees or other compensation incidental to
the transaction in which the investment advice to the plan has been
rendered or will be rendered, and may therefore include insurance
and mutual fund sales commissions. The Department and the [IRS] have
not modified or revised this position, notwithstanding the contrary
---------------------------------------------------------------------------
views expressed in several of the applications for class exemption.
This proposed definition is also consistent with, for example,
guidance the Department provided just eight years after the 1975
regulation was finalized. Specifically, an association that represented
broker-dealers asked the Department to ``clarify the status of broker-
dealers under ERISA.'' \132\ The association posited that fiduciary
status under ERISA section 3(21)(A)(ii) (the ``fee or other
compensation, direct or indirect'' provision) would not attach to
broker-dealers ``unless the broker-dealer provides investment advice
for distinct, non-transactional compensation.'' \133\ The Department
rejected this interpretation of ERISA section 3(21)(A)(ii). The
Department stated that, based on the facts and circumstances presented
by each case,
---------------------------------------------------------------------------
\132\ U.S. Department of Labor, Adv. Op. 83-60A (Nov. 21, 1983),
available at <a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1983-60a">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1983-60a</a>.
\133\ Id.
if . . . the services provided by the broker-dealer include the
provision of ``investment advice'', as defined in regulation 2510.3-
21(c), it may be reasonably expected that, even in the absence of a
distinct and identifiable fee for such advice, a portion of the
commissions paid to the broker-dealer would represent compensation
for the provision of such investment advice.\134\
---------------------------------------------------------------------------
\134\ Id.; see Letter from the Department of Labor to the
Securities Industry Association (Mar. 1, 1984) (declining to modify
this position); see also IB 96-1, 61 FR 29586, 29589 at fn. 3 (June
11, 1996) (``The Department has expressed the view that, for
purposes of section 3(21)(A)(ii), such fees or other compensation
need not come from the plan and should be deemed to include all fees
or other compensation incident to the transaction in which the
investment advise [sic] has been or will be rendered.'' (citations
omitted)).
As the proposed regulation makes clear, however, there must be a
link between the transaction-based compensation and the investment
professional's recommendation. Under the terms of the proposal, the
compensation is treated as paid ``in connection with or as a result
of'' the provision of advice only if it would not have been paid but
for the recommended transaction or the provision of advice, or if the
investment advice provider's eligibility for the compensation (or its
amount) is based in whole or part on the recommended transaction or the
provision of advice.
Under the proposed definition, any fee that is paid explicitly for
the provision of investment advice would fall within the proposed
definition of ``for a fee or other compensation, direct or indirect.''
This would include, for example, a fee paid to an investment adviser
under the Advisers Act based on the retirement investor's assets under
management.
A fee or other compensation received in connection with an
investment transaction also would fall within the proposed definition
of ``for a fee or other compensation, direct or indirect.'' This
treatment of investment compensation is in accord with the actions of
other State and Federal regulators, and with the modern marketplace for
investment advice in which brokers and insurance agents can do far more
than merely execute transactions or close sales. Investment
professionals are commonly compensated for their advice through the
payment of transaction-based fees, such as commissions, which are
contingent on the investor's decision to engage in the recommended
transaction.
The SEC acknowledged this in the Regulation Best Interest release,
noting that ``there is broad acknowledgment of the benefits of, and
support for, the continuing existence of the broker-dealer business
model, including a commission or other transaction-based compensation
structure, as an option for retail customers seeking investment
recommendations. ''\135\ The SEC discussion further contemplated that
commissions compensate broker-dealers for their recommendations, and
may be the preferred method of investment advice compensation with
respect to certain transactions. As an example, the SEC stated that
retail customers seeking a long-term investment may determine that
``paying a one-time commission to a broker-dealer recommending such an
investment is more cost effective than paying an ongoing advisory fee
to an investment adviser merely to hold the same investment.'' \136\
The Department agrees that there are benefits to ensuring a wide range
of compensation structures remain available to retirement investors.
---------------------------------------------------------------------------
\135\ Regulation Best Interest release, 84 FR 33318, 33319 (July
12, 2019).
\136\ Id.
---------------------------------------------------------------------------
Likewise, the NAIC Model Regulation acknowledged that insurance
agents make recommendations and might be compensated for their
recommendations through commissions. The NAIC Model Regulation defines
a recommendation as ``advice provided by a producer to an individual
consumer that was intended to result or does result in a purchase, an
exchange or a replacement of an annuity in accordance with that
advice.'' \137\ The definition of ``cash compensation'' in the model
regulation is: ``any discount, concession, fee, service fee,
[[Page 75910]]
commission, sales charge, loan, override, or cash benefit received by a
producer in connection with the recommendation or sale of an annuity
from an insurer, intermediary, or directly from the consumer.'' \138\
---------------------------------------------------------------------------
\137\ NAIC Model Regulation, at Section 6, 5. M.
\138\ Id. at Section 5. B.
---------------------------------------------------------------------------
When an investment professional meets the five-part test set out in
the 1975 rule, or the fiduciary definition set forth in this proposal,
the services rendered by the professional include individualized
advice, and the compensation, including commission payments, is not
merely for execution of a sale, but for the professional advice
provided to the investor, as uniformly recognized by the Department's
previous guidance and by other State and Federal regulators.\139\
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\139\ E.g., U.S. Department of Labor, Adv. Op. 83-60A (Nov. 21,
1983), available at <a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1983-60a">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1983-60a</a>.
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The statutory exemption for investment advice to participants and
beneficiaries of individual account plans set forth in ERISA section
408(b)(14) similarly recognizes that compensation for advice often
comes in the form of commissions and transaction-based
compensation.\140\ Accordingly, the exemption applies to transactions
``in connection with the provision of investment advice described in
section 3(21)(A)(ii)'' including ``the direct or indirect receipt of
fees or other compensation by the fiduciary adviser or an affiliate
thereof . . . . in connection with the provision of the advice or in
connection with an acquisition, holding, or sale of a security or other
property available as an investment under the plan pursuant to the
investment advice.'' \141\
---------------------------------------------------------------------------
\140\ 29 U.S.C. 1108(b)(14). See Code section 4975(d)(17)
(parallel statutory exemption).
\141\ 29 U.S.C. 1108(b)(14) (emphasis added).
---------------------------------------------------------------------------
As has been true since the Department first proposed regulations
under this section in 1975 and as discussed above, the Department
understands the phrase ``for a fee or other compensation, direct or
indirect'' to encompass a broad array of compensation incident to the
transaction.\142\ The Department requests comments on this portion of
the proposal, including whether additional examples would be helpful.
---------------------------------------------------------------------------
\142\ See Findings, Conclusions, and Recommendations of the
United States Magistrate Judge, Federation of Americans for Consumer
Choice v. U.S. Dep't of Labor, No. 3:22-CV-00243-K-BT, 2023 WL
5682411, at *21 (N.D. Tex. June 30, 2023) (``The expansive choice of
investment advice `for other compensation' indicates an intent to
cover any transaction where the financial professional may receive
conflicted income if they are acting as a trusted adviser.'')
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7. Other Definitions in the Proposed Rule
In addition to the definitions discussed above, proposed paragraph
(f) would define a variety of other pertinent terms for purposes of the
proposed rule. The definitions generally track other definitions within
Title I and Title II of ERISA and the Federal securities laws. The
definitions in proposed paragraph (f), not otherwise discussed above,
are: ``affiliate'' (similar to that of paragraph (e)(1) of the 1975
rule); and ``control'' (similar to that of paragraph (e)(2) of the 1975
rule). ``Plan'' refers to any plan described under section 3(3) of
ERISA and any plan described in section 4975(e)(1)(A) of the Code. For
purposes of the proposal ``IRA'' refers to any account or annuity
described in Code section 4975(e)(1)(B) through (F), including, for
example, an individual retirement account described in section 408(a)
of the Code and a health savings account described in section 223(d) of
the Code.\143\ ``Plan fiduciary'' would use the same definition as
described in section (3)(21)(A) of the Act and section 4975(e)(3) of
the Code; for these purposes, a participant or beneficiary of the plan
who is receiving advice is not a ``plan fiduciary'' with respect to the
plan. Under the proposed rule ``relative'' refers to a person described
in section 3(15) of the Act and section 4975(e)(6) of the Code and also
includes a sibling, or a spouse of a sibling. ``Plan participant'' or
``participant'' (for a plan described in section 3(3) of ERISA), would
be a person described in section 3(7) ERISA.
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\143\ The definition of an IRA would also include an individual
retirement annuity described in Code section 408(b), an Archer MSA
described in Code section 220(d), and a Coverdell education savings
account described in Code section 530. However, for purposes of any
rollover of assets between a Title I Plan and an IRA described in
this preamble, the term ``IRA'' includes only an account or annuity
described in Code section 4975(e)(1)(B) or (C).
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8. Scope of Investment Advice Fiduciary Duty
Paragraph (c)(2) of the proposal confirms that a person who is a
fiduciary with respect to a plan or IRA by reason of rendering
investment advice is not deemed to be a fiduciary regarding any assets
of the plan or IRA with respect to which that person does not have or
exercise any discretionary authority, control, or responsibility or
with respect to which the person does not render or have authority to
render investment advice defined by the proposed rule. On the other
hand, nothing in paragraph (c)(2) exempts such a person from the
provisions of section 405(a) of the Act concerning liability for
violations of fiduciary responsibility by other fiduciaries or excludes
such person from the definition of party in interest under section
3(14)(B) of the Act or section 4975(e)(2) of the Code. This provision
is unchanged from the current 1975 regulation.
The Department further notes that, if a person's recommendations
relate to the advisability of acquiring or exchanging securities or
other investment property in a particular transaction, the proposed
rule does not impose on the person an automatic fiduciary obligation to
continue to monitor the investment or the retirement investor's
activities to ensure the recommendations remain prudent and appropriate
for the plan or IRA. Instead, the obligation to monitor the investment
on an ongoing basis would be a function of the reasonable expectations,
understandings, arrangements, or agreements of the parties.
Also, as has been made clear by the Department, there are a number
of ways to provide fiduciary investment advice without engaging in
transactions prohibited by Title I or Title II of ERISA because of the
conflicts of interest they pose. For example, an investment advice
provider can structure the fee arrangement to avoid a prohibited
transaction (and the related conflicts of interest) by offsetting third
party payments against direct fees agreed to by the retirement
investor, as explained in advisory opinions issued by the
Department.\144\ If there is not a prohibited transaction, then there
is no need to comply with the terms of an exemption, though an
investment advice fiduciary with respect to a Title I plan would still
be required to comply with the statutory duties including prudence and
loyalty.
---------------------------------------------------------------------------
\144\ U.S. Department of Labor, Adv. Op. 97-15A (May 22, 1997).
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Proposed paragraph (d) of the regulation is identical to paragraph
(d) of the 1975 regulation, apart from updated references. The
paragraph specifically provides that the mere execution of a securities
transaction at the direction of a plan or IRA owner would not be deemed
to be fiduciary activity. The regulation's scope remains limited to
advice relationships, as delineated in its text, and does not cover
transactions that are executed pursuant to specific direction in which
no advice is provided. The Department seeks comment as to whether any
updates to paragraph (d) are necessary.
[[Page 75911]]
9. Interpretive Bulletin 96-1
The proposed regulation does not include a specific provision
addressing investment education. Investment education is addressed in
the Department's IB 96-1, which was reinstated in 2020.\145\ IB 96-1
provides examples of four categories of information and materials
regarding participant-directed individual account plans--plan
information, general financial and investment information, asset
allocation models, and interactive investment materials--that do not
constitute investment advice. This is the case irrespective of who
provides the information (e.g., plan sponsor, fiduciary, or service
provider), the frequency with which the information is shared, the form
in which the information and materials are provided (e.g., on an
individual or group basis, in writing or orally, or via video or
computer software), or whether an identified category of information
and materials is furnished alone or in combination with other
identified categories of information and materials. The IB states that
there may be many other examples of information, materials, and
educational services, which, if furnished to participants and
beneficiaries, would not constitute ``investment advice.''
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\145\ 85 FR 40589 (July 7, 2020).
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Although the Department issued IB 96-1 when the 1975 rule was in
effect, the Department believes that the IB would continue to provide
accurate guidance under the proposed regulation. If the proposed rule
is finalized, the IB would continue to correctly describe the types of
educational information and materials that should not be treated as
``recommendations'' subject to the fiduciary advice definition.
Although the IB specifically applies in the context of participants and
beneficiaries in participant-directed individual account plans, the
Department believes that the analysis it presents is valid regardless
of whether the retirement investor is a plan participant, beneficiary,
IRA owner, IRA beneficiary, or fiduciary.
One important example of investment education is the provision of
information about the benefits of increasing contributions to an
employee benefit plan. Under IB 96-1, the provision of information on
``the benefits of plan participation'' and the ``benefits of increasing
plan contributions'' are both examples of ``plan information.'' The
Department confirms that, for purposes of the proposal, the provision
of such information would not trigger fiduciary status.
In the 2016 Final Rule, the Department incorporated the provisions
of IB 96-1 into the regulatory text; as a result, certain provisions
were specifically applicable to transactions involving IRAs. In
addition, the Department made a few changes to the provisions. The
Department clarified and expanded the category in IB 96-1 from
``General Financial and Investment Information'' to ``General
financial, investment, and retirement information.'' The revised
category included information on ``[g]eneral methods and strategies for
managing assets in retirement (e.g., systemic withdrawal payments,
annuitization, guaranteed minimum withdrawal benefits).'' This change
was intended to improve retirement security by facilitating the
provision of information and education relating to retirement needs
that extend beyond a participant's or beneficiary's date of retirement.
Such information would be considered non-fiduciary education as long as
the provider did not recommend a specific investment or investment
strategy.\146\
---------------------------------------------------------------------------
\146\ 81 FR 20946, 20977 (Apr. 8, 2016).
---------------------------------------------------------------------------
The Department cautions however, that to the extent a provider goes
beyond providing education and gives investment advice on a specific
investment or investment strategy, it is not appropriate to broadly
exempt those communications from fiduciary liability. The Department
believes that such an approach would be especially inappropriate in
cases in which a service provider offers ``educational'' services that
systematically exceed the boundaries of education. In such cases, when
firms or individuals make specific investment recommendations to plan
participants, they should adhere to basic fiduciary norms of prudence
and loyalty and take appropriate measures to protect plan participants
and beneficiaries from the potential harm caused by conflicts of
interest.
An employer or other plan sponsor would not, however, become an
investment advice fiduciary under the proposal merely because the
employer or plan sponsor engaged a service provider to provide
investment advice or because a service provider engaged to provide
investment education crossed the line and provided investment advice in
a particular case. On the other hand, whether the service provider
renders fiduciary advice or non-fiduciary education, the proposed rule
does not change the well-established fiduciary obligations that arise
in connection with the selection and monitoring of plan service
providers.\147\ Even if the service provider crosses the line and makes
investment recommendations that go beyond mere ``education,'' the
service provider will only be treated as an investment advice fiduciary
to the extent that the full proposed regulatory definition is
satisfied. Depending on the facts and circumstances, whether a service
provider is an investment advice fiduciary under the proposal may
require an inquiry into whether that service provider has held itself
out as a fiduciary, whether that service provider regularly provides
investment advice as part of the provider's business, whether such
advice is individualized, and whether the service provider received a
fee or compensation (directly or indirectly) in connection with the
advice.
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\147\ See IB 96-1, Section (e) ``Selection and Monitoring of
Educators and Advisors.''
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The Department seeks comment on this discussion of investment
education. Do commenters agree that the examples of investment
education information and materials identified in IB 96-1 and in the
provisions of the 2016 Final Rule regarding investment education do not
constitute a ``recommendation'' as described under the proposed rule?
Further, do commenters believe that IB 96-1 provides sufficient and
appropriate guidance in conjunction with the provisions in this
proposal, or do commenters support amending IB 96-1 or incorporating
any of its provisions into the final regulation?
10. Application to Code Section 4975
Certain provisions of Title I of ERISA, such as those relating to
participation, benefit accrual, and prohibited transactions, also
appear in Title II of ERISA, codified in the Code. This parallel
structure ensures that the relevant provisions apply to Title I plans,
whether or not they are ``plans'' defined in section 4975 of the Code,
and to tax-qualified plans and IRAs, regardless of whether they are
subject to Title I of ERISA. With regard to prohibited transactions,
the ERISA Title I provisions generally authorize recovery of losses
from, and imposition of civil penalties on, the responsible plan
fiduciaries, while the Title II provisions impose excise taxes on
persons engaging in the prohibited transactions. The definition of
fiduciary is the same in section 4975(e)(3)(B) of the Code as the
definition in section 3(21)(A)(ii) of ERISA, and, as noted above, the
Department's 1975 regulation defining fiduciary investment advice is
virtually identical to the regulation
[[Page 75912]]
defining the term ``fiduciary'' under the Code.
To rationalize the administration and interpretation of the
parallel provisions in Title I and Title II of ERISA, Reorganization
Plan No. 4 of 1978 divided the interpretive and rulemaking authority
for these provisions between the Secretaries of Labor and of the
Treasury.\148\ Under the Reorganization Plan, which was prepared by the
President and transmitted to Congress pursuant to the provisions of
Chapter 9 of Title 5 of the United States Code, the Department of Labor
has authority to interpret the prohibited transaction provisions and
the definition of a fiduciary in the Code. ERISA's prohibited
transaction rules, sections 406 to 408,\149\ apply to Title I plans,
and the Code's corresponding prohibited transaction rules, 26 U.S.C.
4975(c), apply to tax-qualified pension plans, as well as other tax-
advantaged arrangements, such as IRAs, that are not subject to the
fiduciary responsibility and prohibited transaction rules in Title I of
ERISA.\150\ In accordance with the above discussion, paragraph (g) of
the proposal, entitled ``Applicability'' provides that the regulation
defines a ``fiduciary'' both for purposes of ERISA section 3(21)(A)(ii)
and for the parallel provision in Code section 4975(e)(3)(B).
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\148\ 5 U.S.C. App. (2018).
\149\ 29 U.S.C. 1106-1108.
\150\ Reorganization Plan No. 4 of 1978 also transferred to the
Secretary of Labor the authority to grant administrative exemptions
from the prohibited transaction provisions in section 4975 of the
Code. See section 4975(c)(2) of the Code.
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Proposed paragraph (g) explains the applicability of Title I of
ERISA and the Code in the specific context of rollovers. As that
paragraph explains, ``a person who satisfies paragraphs (c)(1) and (e)
of this section in connection with a recommendation to a retirement
investor that is an employee benefit plan as defined in section 3(3) of
the Act, a fiduciary of such a plan, or a participant or beneficiary of
such a plan, including a recommendation concerning the rollover of
assets currently held in a plan to an IRA, is a fiduciary subject to
the provisions of Title I of the Act.'' With this example, the
Department intends to clarify the application of Title I to
recommendations made regarding rollovers from a Title I plan under the
proposal. As discussed above, the Department had earlier taken a
contrary position in the Deseret Letter, which was withdrawn.
11. State Law
Proposed paragraph (h) is entitled ``Continued applicability of
state law regulating insurance, banking, or securities'' and provides
``[n]othing in this section shall be construed to affect or modify the
provisions of section 514 of Title I of the Act, including the savings
clause in section 514(b)(2)(A) for State laws that regulate insurance,
banking, or securities.'' This paragraph of the proposal acknowledges
that ERISA section 514 expressly saves State regulation of insurance,
banking, and securities from ERISA's express preemption provision, and
confirms that the regulation is not intended to change the scope or
effect of ERISA section 514, including the savings clause in ERISA
section 514(b)(2)(A) for State regulation of insurance, banking, or
securities.
D. Severability
The Department is considering whether this proposal could continue
to work even if certain aspects of the proposal were struck down by a
court. In determining whether any aspects of this proposal could be
severable the Department is focused on the text and purpose of ERISA.
The Department requests comments regarding whether this proposal would
be workable and appropriate if certain aspects were severed, or why it
would not be workable or appropriate. Specifically, the Department is
interested in hearing which aspects of the rule the public believes
could or could not be severed, and the rationale behind those views.
The Department expects to consider severability as it reviews comments
and drafts a final rule.
The Department generally intends discrete aspects of this
regulatory package to be severable. For example, in the event that this
regulatory package is finalized with both an updated regulatory
definition of a fiduciary and amendments to the PTEs, the Department
intends that the updated regulatory definition of a fiduciary would
survive even if a court vacated any of the amendments to the PTEs
leaving in place the previously granted versions of those PTEs.
E. Effective Date
The Department proposes to make the rule effective 60 days after
publication of a final rule in the Federal Register. The Department
requests comment on this proposed timeframe and whether parties believe
that additional time is needed before the rule becomes applicable.
F. Regulatory Impact Analysis
This section analyzes the economic impact of the proposed rule and
proposed amendments to the following class administrative exemptions
(PTEs) providing relief from the prohibited transaction rules that are
applicable to fiduciaries under Title I of ERISA and the Code: PTEs
2020-02, 84-24, 75-1, 77-4, 80-83, 83-1, and 86-128. The Department is
publishing the proposed amendments to the PTEs elsewhere in this issue
of today's Federal Register. Collectively, the proposed rule and
amendments to the PTEs are referred to as ``the proposal'' for this
section.
Employment-based retirement plans and IRAs are critical to the
retirement security of millions of America's workers and their
families. Because retirement investors often lack financial expertise,
professional investment advice providers often play an important role
in guiding their investment decisions. Prudent professional advice
helps consumers set and achieve appropriate retirement savings and
decumulation goals more effectively than consumers would on their own.
For many years, the benefits of professional investment advice,
however, have been persistently undermined by conflicts of interest
that occur when financial services firms compensate individual
investment advice providers in a manner that incentivizes them to steer
consumers toward investments and transactions that yield higher profits
for the firms. These practices can bias the investment advice that
providers render to consumers and detrimentally impact their retirement
savings by eroding plan and IRA investment results.
Title I of ERISA imposes duties and restrictions on fiduciaries
with respect to employee benefit plans. ERISA section 404 requires
Title I plan fiduciaries to act with the ``care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent person
acting in a like capacity and familiar with such matters would use in
the conduct of an enterprise of a like character and with like aims.''
Further, fiduciaries must carry out their duties ``solely in the
interest of the participants and beneficiaries'' of the plan. Title I
of ERISA also includes prohibited transaction provisions that forbid
fiduciaries from, among other things, self-dealing.\151\ The aim of the
prohibited transaction provisions is to protect plans, their
participants, and beneficiaries from dangerous conflicts of interest
that threaten the safety and security of plan benefits.\152\
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\151\ ERISA section 406, 29 U.S.C. 1106.
\152\ Lockheed Corp. v. Spink, 517 U.S. 882 (1996); Comm'r v.
Keystone Consol. Indus, Inc., 508 U.S. 152 (1993).
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Title II of ERISA, codified in the Internal Revenue Code, governs
the conduct of fiduciaries to tax-qualified
[[Page 75913]]
plans and IRAs. Although Title II does not directly impose specific
duties of prudence and loyalty on fiduciaries as ERISA section 404(a)
does, it prohibits fiduciaries from engaging in conflicted transactions
on many of the same terms as Title I.\153\
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\153\ Cf. 26 U.S.C. 4975(c)(1), Code section 4975(f)(5) defining
``correction'' with respect to prohibited transactions as placing a
plan or an IRA in a financial position not worse than it would have
been in if the person had acted ``under the highest fiduciary
standards.''
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The proposal focuses on the provision of fiduciary investment
advice to ERISA retirement plans, participants, and IRA owners and
seeks to reduce or eliminate the impacts of conflicts of interest on
advice they receive. The proposal amends the definition of a fiduciary
such that an investment advice provider is a fiduciary if the person
provides advice or makes a recommendation on any securities transaction
or other investment transaction or any investment strategy involving
securities or other investment property to the plan, plan fiduciary,
plan participant or beneficiary, IRA, IRA owner or IRA fiduciary
(retirement investor), the advice or recommendation is provided ``for a
fee or other compensation, direct or indirect,'' as defined by the
proposed rule, and (i), (ii) or (iii) is satisfied:
(i) The person either directly or indirectly (e.g., through or
together with any affiliate) has discretionary authority or control,
whether or not pursuant to an agreement, arrangement or understanding,
with respect to purchasing or selling securities or other investment
property for the retirement investor;
(ii) The person either directly or indirectly (e.g., through or
together with any affiliate) makes investment recommendations to
investors on a regular basis as part of its business and the
recommendation is provided
[…truncated; see source link]Indexed from Federal Register on November 3, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.