The 2 Biggest Fights Brewing Over DOL's New Fiduciary Rule

What You Need to Know

A rollover recommendation qualifying as fiduciary advice will likely spark lawsuits, industry experts agree.
The beefed-up PTE 84-24 breaks insurance agents into two categories.
PTE 2020-02, one of the exemtptions modified by the new rule, still faces a challenge in court.

Industry officials have been poring over the Labor Department’s new fiduciary rule since it was released on Oct. 31, and while there are many noteworthy aspects to the plan, its treatment of rollover advice and insurance agent status is catching the most attention.

One of the most glaring parts is that Labor’s new fiduciary proposal, the Retirement Security Rule: Definition of an Investment Advice Fiduciary, “makes a single recommendation a fiduciary recommendation,” ERISA attorney Fred Reish of Faegre Drinker told me in a recent interview. “That is particularly important regarding rollover recommendations.”

This aspect of the new rule will be challenged in court, Reish and others, including Ed Slott of Ed Slott & Co., predict.

As Slott told me, “Yes, it’s a single rollover, but it also may be the single largest financial transaction a client has ever made — it’s their life savings on that advisor doing what’s in their best interest. And it often doesn’t happen again.”

Slott agreed that the single recommendation requirement will likely spark a lawsuit and that “it’s overregulation and it hurts the advisors that are doing the right thing already.” That being said, “financial advisors should be doing this anyway with such a large financial move the client is making,” Slott continued. “Often this rollover amount is larger than the purchase of their home.”

Labor, Slott has said, “is putting rollover advice right up there with investment advice.”

Yet the DOL has anticipated potential lawsuits, Reish relayed, and has drafted the rule’s preamble accordingly.

For instance, Labor points out “how their new proposals are aligned with the SEC’s Regulation Best Interest,” Reish said. Reg BI “says a rollover recommendation is subject to the best-interest standard of care.”

Tim Hauser, associate solicitor at Labor’s Employee Benefits Security Administration, stated at a recent event that Labor’s goal was to “significantly” align Labor’s new fiduciary rule with Reg BI.

Labor “felt like to the extent advisors in this marketplace were making a strong, good-faith effort to comply with what Reg BI requires, they ought to be in good shape” in complying with Labor’s new fiduciary rule, Hauser said at the American Law Institute’s life insurance products conference in Washington.

DOL also points out that its new fiduciary definition “is based on a fiduciary having a relationship of trust and confidence with the investor,” Reish continued, and “that is exactly out of the [U.S. Court of Appeals] Fifth Circuit decision” that torpedoed Labor’s 2016 rule.

The Fifth Circuit decision, Reish explained, said that “it takes a relationship of trust and confidence to have a fiduciary” arrangement. “Short of that, you’re not in a fiduciary relationship, you’re in a sales relationship.”

‘Regular Basis’ and One-Time Advice

Attorneys at K&L Gates agreed in a recent alert that Labor’s plan will face challenges from the industry and in the courts.

The proposed rule would replace an almost 50-year-old regulation — known as the “five-part test” — defining when a person is deemed to provide fiduciary investment advice under the Employee Retirement Income Security Act, the K&L Gates attorneys explain.

Under the five-part test, the attorneys explain, a person is a fiduciary only if they:

Render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
On a regular basis;
Pursuant to a mutual agreement, arrangement, or understanding with the plan or a plan fiduciary that
The advice will serve as a primary basis for investment decisions with respect to plan assets; and
That the advice will be individualized based on the particular needs of the plan.

Notably, the K&L Gates attorneys point out, Labor’s new “change from the five-part test’s ‘regular basis’ prong to persons providing investment recommendations ‘on a regular basis as part of their business’ (as opposed to regular advice to any particular client) would accomplish DOL’s goal of making one-time advice, such as rollover advice, covered by the fiduciary standard.”

Insurance Agents and the ‘Single Biggest Fight’

Another significant change in Labor’s fiduciary package is the changes to Prohibited Transaction Exemption 84-24. “Historically, if an insurance agent became a fiduciary by virtue of recommendations, they could use [PTE] 84-24 to be able to get their commission,” Reish explained.

The new proposed amendments to 84-24, however, “break insurance agents into two categories,” Reish said.