For Many, DOL’s Fiduciary Proposal May Be ‘Less Daunting’ Than at First Blush

Allison Wielobob

On Nov. 3, the Department of Labor published its proposal to (1) redefine an “investment advice fiduciary” under ERISA and (2) also modify the prohibited transaction exemptions available to such fiduciaries. That is, the proposal would (1) change who is an ERISA fiduciary and (2) the conditions under which those fiduciaries may conduct business with retirement investors (including fiduciaries acting for plans and IRA owners).  

Highly anticipated, a release of this size and significance should be evaluated carefully by the industry. Broker-dealers may take heart, however. Considering experience with the existing PTE 2020-02 and related guidance from the Department, a great deal about what is expected for complying with the proposed PTE’s requirements will be familiar. This may be said even though it has some enhanced disclosure requirements.

On the other hand, if the proposed requirements are finalized in their current form, banks, insurance agents and insurance companies will need to make significant changes. The impact will primarily be felt in sales of annuities to fund rollovers from plans to IRAs. 

Outside of the banking and insurance contexts, an overview of the proposed changes to PTE 2020-02 shows that the changes are somewhat less daunting than they may seem at first blush and are not drastic for many parts of the industry as some headlines have suggested.

The changes include the following:

Acknowledgment of Fiduciary Status. The proposal requires written acknowledgment of fiduciary status by the financial institution and its investment professionals. The Department characterizes this as a clarification of the current requirement, which has been misinterpreted as not required in all cases.
Statement of Best Interest Standard of Care. Financial institutions would have to give retirement investors a statement of the best interest standard of care. The proposal includes model language that meets this requirement: 

When we make investment recommendations to you regarding your retirement plan account or individual retirement account, we are fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act and/or the Internal Revenue Code, as applicable, which are laws governing retirement accounts. The way we make money creates some conflicts with your interests, so we operate under a special rule that requires us to act in your best interest and not put our interest ahead of yours. Under this special rule’s provisions, we must:

• Meet a professional standard of care when making investment recommendations (give prudent advice);
• Never put our financial interests ahead of yours when making recommendations (give loyal advice);
• Avoid misleading statements about conflicts of interest, fees and investments;
• Follow policies and procedures designed to ensure that we give advice that is in your best interest;
• Charge no more than is reasonable for our services; and
• Give you basic information about conflicts of interest.

You can ask us for more information explaining costs, fees, and compensation, so that you may make an informed judgment about the costs of the transaction and about the significance and severity of the Conflicts of Interest. We will provide you with this information at no cost to you.

Disclosure of Third-Party Payments; Description of Services to Be Provided and Material Conflicts of Interests. Financial institutions would have to disclose whether (a) the retirement investor will pay for services directly or indirectly, including through “Third-Party Payments”; and (b) the retirement investor will pay through commissions or transaction-based payments. In addition, the material conflicts of interest disclosure cannot be misleading in “any” respect. The Department also considers this a clarification.

Rollover Disclosure. The proposal would formalize the current requirement that for rollover recommendations, the investment adviser disclose the “specific reasons” why the rollover recommendation is in the best interest of the retirement investor. Financial institutions would be permitted to charge a separate fee for this analysis.

Policies and Procedures. Certain forms of compensation would be prohibited—quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, or other similar actions or incentives—that are intended, or that a reasonable person would conclude are likely, to result in recommendations that are not in retirement investors’ best interest.

Statement of Right to Obtain Additional Information Upon Request. Financial institutions must let retirement investors know that they may request, free of charge, specific information regarding costs, fees, and compensation that is described in dollar amounts, percentages, formulas, or other means reasonably designed to present materially accurate disclosure of their scope, magnitude, and nature. The statement would have to describe how the retirement investor may obtain such information. This is a new requirement.

Annual Retrospective Review. The current annual retrospective review of impartial conduct standards and policies and procedures would be expanded to require the financial institution to test compliance with all of PTE 2020-02’s conditions.

Self-Correction. Financial institutions could self-correct good faith errors or omissions in providing the required disclosures.

Additionally, changes in the scope of relief under PTE 2020-02 include that it would (1) cover robo-advice arrangements that do not involve the participation of a live investment professional and (2) allow pooled plan providers to use it in connection with providing advice to pooled plans.

The takeaway message is that broker-dealers and others should review their PTE 2020-02 compliance policies and practices to ensure that they satisfy the current PTE’s requirements. If they do, they are a long way toward meeting many of the changes proposed for PTE 2020-02.

Also keep in mind that this rulemaking is at the proposed—not final—stage. The last time the industry went through this—in 2015—the Department seemed to hear and heed some the industry’s response.