While the financial services industry expected the Biden administration to withdraw the Trump administration’s eleventh-hour rule regarding a new fiduciary investment advice exemption, the U.S. Department of Labor (DOL) on Feb. 12, 2021, surprised many by announcing that it would allow the regulation to go into effect on Feb. 16, 2021.
In December 2020, the DOL published the final version of Prohibited Transaction Exemption 2020-02 (PTE 2020-02), a new class exemption that allows those giving fiduciary advice to receive otherwise-prohibited compensation if they follow certain policies and procedures. Importantly, PTE 2020-02 also included language from the DOL overturning its previous guidance saying that rollover recommendations are categorically not fiduciary advice.
Going forward, each rollover recommendation will need to be evaluated according to the particular circumstances to determine whether an advisor or producer is acting as a fiduciary. Whether a fiduciary relationship exists between you and a client – and therefore, whether the fiduciary standard of care applies to you – depends on a variety of facts and circumstances specific to individual situations. In other words, if you’re a financial professional who provides advice to retirement investors, it’s important that you understand any new requirements so that you can ensure you’re in compliance.
Financial advisors and insurance agents have some time to comply.
In its Feb. 12th press release, the DOL announced that an existing, temporary non-enforcement policy would remain in place until Dec. 20, 2021. In other words as long as an advisor is following “impartial conduct standards” (acting in the client’s best interest, refraining from making misleading statements, and receiving only reasonable compensation), neither the DOL nor the Internal Revenue Service will pursue action against the advisor.
This temporary non-enforcement policy is intended to allow financial institutions and investment professionals time to develop procedures for implementation of the new exemption. However, since it does not prevent private litigation or actions from other agencies, it does not insulate advisors from all risk. So while it is not necessary to panic, it will be key for advisors to prepare.
You also can expect further clarification from the DOL. In its Feb. 12th press release, the DOL said that “in the coming days, the agency will publish related guidance for retirement investors, employee benefit plans and investment advice providers.” This month, the Biden administration issued its first set of Frequently Asked Questions (FAQs) regarding the new fiduciary advice exemption. The FAQs revealed additional detail regarding the Biden administration’s interpretation of the new rule – but further guidance impacting advisors and agents may still be forthcoming.
Senior Market Sales® (SMS) is monitoring developments and will keep you informed. You also can visit our DOL Fiduciary Rule Resource Library.
If you’re confused as to whether you are acting as a fiduciary when you interact with your clients, it’s no wonder – the definition of “fiduciary” has changed multiple times in the past decade.
President Barack Obama in 2010 directed his DOL to craft a fiduciary rule. The resulting rule expanded the definition of an “investment advice fiduciary” under the Employee Retirement Income Security Act (ERISA) of 1974 to require many more advisors and producers to act as fiduciaries. But that version of the fiduciary rule was vacated by the U.S. Fifth Circuit of Appeals in June 2018 as regulatory overreach, effectively killing it.
The Trump administration’s guidance within PTE 2020-02, while not as far-reaching as the Obama-era fiduciary rule, expanded the fiduciary definition to include certain advisors handling retirement plan rollovers – a move that surprised many.
In the past, advice regarding rollovers has typically been seen by the DOL as a one-time recommendation, and therefore not fiduciary advice. But the DOL abandoned that position within its discussion of PTE 2020-02.
For example, if you recommend a rollover and then intend to meet with that client in the future, the DOL views that as an anticipated ongoing relationship, or the beginning of an investment advice relationship subject to fiduciary standards, explained Brad Campbell, partner at Faegre Drinker in Washington during the law firm’s recent webcast on the topic.
Because the new rule essentially tosses out the old notion that most rollovers are not fiduciary advice, you should, going forward, evaluate each rollover according to the particular circumstances to determine whether you’re acting as a fiduciary.
Despite the industry attention due to its impact on rollover recommendations, the Trump administration’s PTE 2020-02 is primarily an exemption to allow investment advice fiduciaries a new method to receive compensation that would otherwise be prohibited under ERISA and/or the IRS Code. PTE 2020-02 is a class exemption that requires financial institutions (including banks, broker-dealers, registered investment advisers and insurance companies) to adopt certain policies and procedures to receive this exemption. Registered representatives and investment advisor representatives (IARs) should consult with their broker-dealers and RIAs for guidance.
Insurance-only agents may not need to use the new exemption, however, because of other existing exemptions, such as Prohibited Transaction Exemption 84-24, or PTE 84-24. PTE 84-24 provides an exemption for an insurance agent to get paid a commission on the sale of an annuity or life insurance contract to a qualified plan participant and individual retirement account (IRA) holder and requires a disclosure document be signed by the owner. The new exemption is an additional way for fiduciaries to receive commissions compliantly, not a new required way that trumps older ones.
In this way, PTE 2020-02 may have little impact on annuity and certain life insurance sales. You may see carriers providing forms for PTE 2020-02 later this year, and you may choose to use that exemption instead of existing ones.
Here’s a helpful way to boil down your obligations to help you move forward. If your dealings qualify you as a fiduciary under the new investment advice regulation, there are two issues:
For the issue of the fiduciary standard of care, you’ll need to document these recommendations to show how the sale or recommendations were developed.
The new investment advice rule comes at a time when other federal and state regulators and industry organizations are making significant progress on issuing various standards, whether called “fiduciary,” “enhanced suitability” or “best interest” standards.
The Securities and Exchange Commission’s Regulation Best Interest, which took effect June 2020, requires that four factors be considered in making a recommendation: the retail customer’s investment profile, potential risks, potential rewards and costs. While separate, PTE 2020-02 is modeled after the SEC’s Regulation Best Interest – an example of how regulations are increasingly aligning.
In February 2020, the Executive Committee of the National Association of Insurance Commissioners (NAIC), the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from all 50 states, the District of Columbia and five U.S. territories, finalized revisions to its suitability in annuity transactions model law. Several states have adopted the model law, which aims to require producers to act in the best interest of the consumer when making a recommendation of an annuity.