Revisiting the Fiduciary Rule

The fiduciary rule issued by the Department of Labor (DOL) during the Obama administration was struck down in the courts, creating uncertainty that still exists. A recent ASPPA webcast discussed federal efforts to regulate fiduciary activity, as well as the demise of the fiduciary rule and what that means.

 

In the April 8 ASPPA webcast “The Fiduciary Rule, Again?” ERISA attorney Kevin Walsh, a Principal at Groom Law Group, Chartered, looked at DOL proposals and amendments to its rules, its traditional “five-part test” for fiduciary status and what may be coming next.

 

Following are highlights of the webcast.

 

Walsh noted that under the 1975 fiduciary rule, a person will be a fiduciary by reason of giving investment advice if the person receives compensation:

 

All five prongs had to be satisfied to trigger fiduciary status.

 

Some regard the 1975 rule as a “swiss cheese” test, Walsh said. In its Advisory Opinion 83-60A, the DOL said that if a broker provides “investment advice,” receipt of a commission may trigger fiduciary status. The DOL muddied the waters, he said, by making a distinction between a sales pitch and giving advice.  “The easiest thing the DOL could do is withdraw this advisory opinion,” Walsh said.

 

 

The 2015 fiduciary rule proposal focused on making sure that individuals making suggestions are held to a fiduciary standard, said Walsh. The rule that the DOL issued in 2016, he said, was “taking the swiss cheese rule and applying a ‘vacuum rule’ that seems to be sweeping up any communication that deals with investments.”

 

Under the 2016 fiduciary rule, Walsh observed, the types of activities that constitute investment advice, if they are done for a fee or other compensation are recommendations pertaining to:

 

In addition, the person who makes the recommendation must:

 

For the purposes of the rule, a recommendation means a communication that—based on its context, content and presentation—would be reasonably viewed as a suggestion to engage or refrain from a specific action. The more individually tailored a communication is, the more likely it is to be viewed as a recommendation, Walsh said.

 

The rule, Walsh said, was “a massive deal. Massive change.”

 

But jurisprudence ensued, and the Fifth Circuit eventually stopped the fiduciary rule. Walsh said that the reasons for that include:

 

The DOL, Walsh said, has acknowledged the impact of the ruling by stating that it “will not be enforcing the 2016 fiduciary rule.” And in its Field Assistance Bulletin 2018-2, Walsh notes that the DOL said that it “will not pursue prohibited transaction claims against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted in the [SEC’s] BIC Exemption and Principal Transactions Exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules.”

 

The decision throwing out the rule, said Walsh, throws how ERISA has been interpreted into uncertainty. “This decision really throws a lot into the air,” he said, adding, it’s “incredibly not helpful” and “doesn’t answer the question of who a fiduciary is.” Further, he said, “in times of economic crisis, like today, you see employers reduce their contribution. It’s an easier path than termination, it’s but tougher for an individual to do that. It’s much tougher for an individual to know what to do.”

 

 

Walsh also addressed the Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg. BI) standard. He noted that the SEC adopted its Reg. BI standard on June 5, 2019; it has five key components:

 

Reg. BI requires that a service provider 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 associated person making the recommendation ahead of the retail customer’s interest.

 

Under the standard, “it is important that one disclose conflicts in a way the client can understand,” said Walsh. One cannot rely solely on the Form CRS to satisfy the disclosure obligation. Under this standard before or at the time a recommendation is made, the retail customer must be furnished full and fair disclosure of:

 

There is some flexibility, however:

 

Walsh commented that the SEC “is more saying ‘you’ve got to think about these things when you put your system in place,’ adding “it seems like ‘fiduciary lite.’”

 

 

Walsh observed that the SEC originally set a deadline for compliance with the standard of June 30, 2020—but unlike the IRS and the Pension Benefit Guaranty Corporation (PBGC), it has not adjusted the deadline in response to the COVID-19 pandemic.

 

Unless the Fifth Circuit’s decision is overturned, which appears unlikely, Walsh said, the fiduciary rule is effectively dead. There is, however, discussion of harmonizing a new DOL fiduciary rule with the SEC’s Reg. BI standard; however, Walsh said that the “DOL is running out of time to harmonize.” If it does run out of time, he said, the DOL is likely to put the five-part test back in place. And if the DOL is going to revert to the five-part test, it should consider updating the 1992 guidance it had issued that affected that test, he suggested.