On Dec. 18, 2020, the (Trump) Department of Labor (DOL) released Prohibited Transaction Exemption (PTE) 2020-02, “Improving Investment Advice for Workers & Retirees.” Among other things, PTE 2020-02 radically “reinterpreted” (and broadened) the five-part test under DOL’s 1975 regulation defining who is an advice fiduciary.
DOL had restored the five-part test as a consequence of the Fifth Circuit’s 2018 decision vacating the (Obama) DOL’s 2016 publication of a new Fiduciary Rule amending that regulation and providing a brand new (and much broader) definition of advice fiduciary.
The Five-Part Test…
For those unfamiliar with it, the five-part test requires, for a person to be an “advice fiduciary,” among other things, that investment advice be made on a regular basis pursuant to a mutual agreement that the advice will be a primary basis for an investment decision.
In the preamble to 2020-02, DOL significantly extended the limits of many of the elements of the five-part test, e.g., stating that a provider’s explicit denial of “mutual agreement” will not be determinative, applying it to plan-to-IRA rollovers, and treating post-IRA-rollover advice as evidence of a “regular basis.”
…Reinterpreted to Mean What it Always Meant
Notwithstanding that DOL’s reinterpretation (in the preamble to the PTE) of the five-part test significantly broadened its application, DOL claimed that its new (and “final”) interpretation simply reflected what the law had always been.
That claim would come as news to members of the Obama DOL, who had claimed that an entirely new regulation was needed. In the preamble to its (2016) new regulation, the Obama DOL said that, because of “the growth of participant-directed investment arrangements and IRAs, and the need for plans and IRA owners to seek out and rely on sophisticated financial advisers to make critical investment decisions in an increasingly complex financial marketplace,” it was necessary to “replace the 1975 regulations with a definition of fiduciary investment advice that better reflects the broad scope of the statutory text and its purposes and better protects plans, participants, beneficiaries, and IRA owners from conflicts of interest, imprudence, and disloyalty.”
But There Are Very Real Prohibited Transaction Issues
The rationalization behind DOL’s reinterpretation of the five-part test was a very real problem that had been created by that failed 2016 attempt to implement a brand-new regulatory version of the definition of advice fiduciary via the so-called Fiduciary Rule. Firms that had taken on fiduciary status pursuant to that “non-regulation” —during the two years between its publication by DOL and revocation by the Fifth Circuit—had a real prohibited transaction problem, due to the fac that the 2016 exemption that DOL had provided for these fiduciaries had also been vacated by the Fifth Circuit.
And (via a preamble in a PTE), DOL was also turning many persons—critically, call center operators—who, previously, no one had thought were fiduciaries, into fiduciaries. Creating for them (and for plan sponsors) a prohibited transaction problem.
Four Years of DOL Failure-to-Act
Notwithstanding that the Trump DOL had four years, since taking office, and two years, since the Fifth Circuit decision, to do all this, it wasn’t until December 2020 that DOL published guidance, with an effective date that wouldn’t occur until after the change in administrations.
And so, inevitably—as they knew at the time that this PTE, with its preamble, was finalized, with a 60-day effective date—this PTE was “frozen” pursuant to blanket Biden Administration action freezing all Trump guidance that had not yet taken effect.
We know that Democrats oppose this entire Trump DOL project, believing that the five-part test (however creatively reinterpreted) should not have been restored and that the Fifth Circuit decision vacating the Obama DOL Fiduciary Rule should have been contested. We also know that the Biden Administration is likely to, at some point, restart the process of implementing some version of the 2016 Fiduciary Rule, more or less in spite of the Fifth Circuit decision.
Leaving regulatory guidance in this area, for some perhaps very long interim period, a complete mess.
Where Are We Now?
To state what (to me at least) seems obvious: completely rewriting a 45-year old regulation in the preamble to a prohibited transaction exemption is just weird. What is the legal status of that preamble? It purports to be a statement of what the law has always been. So that, even if the PTE itself is frozen, this (as the PTE describes it) “final” interpretation of the five-part test arguably still represents some kind of publication of DOL’s understanding of the law.
Will courts defer to DOL’s new interpretation? Some may. Others—given the longstanding counter interpretation of this regulation by nearly everyone (including DOL)—may view this process for what it is. DOL has exited the interpreting-the-law zone and entered the making-policy zone.
So We Zig Zag
And how long will it take to get new guidance? On day-one of his Administration, President Trump instructed DOL to take a hard look at the 2016 Obama DOL Fiduciary Rule, “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” In that regard, the Secretary was to consider whether the rule: (1) “has harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings;” (2) “has resulted in dislocations or disruptions within the retirement services industry;” and (3) “is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay.”
My guess is that the new Biden DOL will act as fast as it is capable of acting to do something more aggressive in this area. But there are several obstacles in their way. They have to get a new Secretary of Labor confirmed. And then a new head of the EBSA (Employee Benefit Security Administration). And then—in all likelihood—go through a regulatory notice-and-comment process, unless they can (or at least think they can) somehow reinstate the Obama Fiduciary Rule regulatory package without such a process.
And What Are We to Do?
In this context, what are providers—and for that matter, sponsors—to do? None of this is good for the industry or, for that matter, for the regulatory process. This is not the way policy should be made. It is, however, a path that seems inevitable when there is an effort to fundamentally rewrite policy without bipartisan support.
We may be going down that road again with the Biden Administration. But what will they do if, yet again, two or four years from now, some other court shoots their effort down?
Compromise Anyone?
Why not try to bring all the stakeholders together and develop some compromise that all sides will accept, however unenthusiastically? One can dream.
If they can’t do that, there’s a decent chance that we will be zig zagging on this issue with every change of political party control of DOL. Which would be a legal nightmare.
Michael P. Barry is a senior consultant at October Three and President of O3 Plan Advisory Services LLC, which provides retirement plan regulatory analysis targeted at plan sponsors and those who provide services to them.
Opinions expressed are those of the author, and do not necessarily reflect the views of ASPPA or its members.
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