<img height="1" width="1" style="display:none;" alt="" src="https://dc.ads.linkedin.com/collect/?pid=319290&amp;fmt=gif">


On April 23, the Department of Labor (DOL) finalized its new fiduciary rule and its accompanying amendments to prohibited transaction exemptions (PTEs) 2020-02 and 84-24. The new rules would take effect September 23, but they have already triggered the first of what are likely to be multiple court challenges to them. Those court decisions could impact the effective date. And Congress is likely to vote on a Congressional Review Act (CRA) motion to block the rules, although even if a CRA motion passes both the House and Senate, President Biden will surely veto it.

Generally, the rule and its accompanying PTEs make almost every advisor a fiduciary, although there are changes to the proposed rule that ease that impact.

The new fiduciary rule consists of three components: the rule itself, which subjects any advice for compensation on transactions involving tax-advantaged retirement funds (including rollovers from 401(k) and similar plans to IRAs, even if it is one-time advice) to a fiduciary standard of care; amendments to PTE 2020-02, which permit compensation via commissions and apply to advisors working with a broker-dealer; and amendments to PTE 84-24, which also allow commission compensation, but apply to independent producers or to advisors who are selling a product not offered by their own company. Experts say that it will be the insurer or broker-dealer that decides which PTE to apply to their advisors.

In general, the rule (and its accompanying PTEs) would make professional investment recommendations made “on a regular basis as part of the advisor’s business” subject to the fiduciary standard. And, the rule specifies that the advisor will be a fiduciary if “the investment recommendation is made under circumstances that would indicate…that the recommendation is based on review of the Retirement Investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment to the Retirement Investor’s particular needs or individual circumstances, and may be relied upon by the Retirement Investor as intended to advance the Retirement Investor’s best interest.”

The new fiduciary rule requires financial services firms (including broker-dealers and insurers) to exercise substantial oversight over the activities of the advisors offering their products. As a result, advisors must closely follow the practices and rules imposed by their financial institutions when advising retirement investors.

DOL says its rule is an overdue update of the standard of care imposed on those who advise individuals with respect to their retirement funds. It is based, the agency says, on the existence of a relationship of loyalty and trust between the advisor and the client. DOL says the rule “plugs holes” that exist because of the new environment of current times (i.e., much more 401(k) investment decision-making by individuals). Two of its major impacts are its capture of rollovers from employer-sponsored retirement plans into IRAs, and inclusion of annuities (especially fixed annuities) in the scope of the rule. The rule also imposes fiduciary duty on advisors to retirement plans.

DOL also says it worked closely with the Securities and Exchange Commission (SEC) in developing the new regulation, and that the new DOL fiduciary rule works in parallel with the SEC’s regulation best interest, which applies to advice outside of the retirement funds space, and state regulations. The rule, through its PTEs, imposes the SEC’s impartial conduct standards on retirement advisors. It states that advisors can receive only “reasonable compensation” (but that “reasonable compensation” can include commissions), and that advisors may not make misleading statements to a retirement investor—and that the term “misleading statements” includes omissions.

The PTE requirements also include disclosure requirements (many, if not all of which will be supplied by the broker-dealer or insurer), including material fees and costs. But the final amendments to PTE 2020-02 rule drop the proposed rule’s requirement that advisor compensation be disclosed. PTE 84-24 requires advisors to provide compensation information if the retirement investor requests it. On rollovers, the rules require the advisor to provide a written statement explaining the basis for a recommendation, and listing alternatives to a rollover, including leaving the money in the retirement plan.

On May 2, NAIFA hosted a webinar on what the new fiduciary rules do and mean. All NAIFA members can watch (or re-watch) the webinar and access its slide deck. The webinar lays out the rules and the PTE amendments and their requirements in detail, but in a clear and concise way. Click here to watch the seminar and/or view the slide deck.

 Prospects: Between now and the new fiduciary rule’s September 23 effective date, expect multiple lawsuits that not only challenge the rules, but also seek to suspend its applicability pending completion of the judicial review process. Broker-dealers and insurers will be issuing their own practices and procedures with which advisors will have to comply, so NAIFA members impacted by this new rule should watch for guidance from their companies.

There will almost certainly be a CRA motion to block the rule, but while the House is highly likely to approve a CRA motion, its prospects in the Senate are murkier. And even if the Senate does pass a CRA motion, it is virtually certain that President Biden would veto it. There do not appear to be sufficient votes to override a presidential veto.

NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.