The Street (October 31, 2023)
The Department of Labor’s Employee Benefits Security Administration is proposing a new rule that would protect workers’ retirement savings by updating the regulation defining a fiduciary under the Employee Retirement Income Security Act (ERISA).
The “Retirement Security Rule: Definition of an Investment Advice Fiduciary” would affect how investors get advice on their job-based retirement accounts and other retirement savings plans and how investment advice providers must act if they have a conflict of interest.
The proposals include:
Proposed Retirement Security Rule
This rule would update the definition of an “investment advice fiduciary” under ERISA. It would require financial advisers to adhere to fiduciary standards and put their clients’ interests ahead of their own when providing retirement investment advice. This aims to address conflicts of interest that can lead to higher fees and reduced returns for retirement investors.
Read Proposed Retirement Security Rule.
Proposed Amendment to PTE 2020-02
The Department of Labor (DOL) has proposed amendments to PTE 2020-02, an exemption that allows financial advisers to receive compensation for retirement investment advice that would otherwise be prohibited. The exemption was designed to ensure retirement investors receive advice in their best interest.
The current exemption requires advisers to:
- Acknowledge fiduciary status in writing
- Disclose services and material conflicts of interest
- Adhere to Impartial Conduct Standards:
- Make prudent recommendations
– Act with loyalty to investors
– Charge reasonable fees
– Avoid misleading statements
– Adopt policies to ensure compliance and mitigate conflicts of interest
- Document reasons for rollover recommendations
- Conduct annual retrospective reviews
The proposed amendments aim to provide more certainty for investors and advisers by:
- Requiring additional disclosures on costs and conflicts of interest
- Providing more guidance on complying with standards and implementing policies
- Maintaining core investor protections of current exemption
- Not requiring contracts for IRA advice
- Adding failure to correct prohibited transactions as reason for losing exemption
The DOL believes the changes will enhance protections for retirement investors while providing clarity for financial institutions. The amendments build on the current exemption’s safeguards to ensure investors receive advice in their best interest.
Read Proposed Amendment to PTE 2020-02
Proposed Amendments to PTE 84-24
The Department of Labor has proposed amendments to PTE 2020-02, an exemption that allows financial advisers to receive compensation for retirement investment advice that would otherwise be prohibited under ERISA. The current exemption requires advisers to acknowledge fiduciary status, disclose conflicts of interest, adhere to impartial conduct standards, adopt compliance policies, document rollover recommendations, and conduct annual reviews.The proposed amendments aim to provide more certainty for investors and advisers while maintaining core protections. Key changes include:
- Requiring additional disclosures on costs, conflicts of interest, and reasons for recommendations
- Providing more guidance on complying with standards and implementing policies
- Not requiring contracts for IRA advice
- Adding failure to correct prohibited transactions as reason for losing exemption
Independent insurance agents selling annuities would rely on a separate section of PTE 84-24 under the proposal. They would have to sell annuities from multiple insurers and meet conditions similar to PTE 2020-02.
Read Proposed Amendment to PTE 84-24
Proposed Amendments to PTEs 75-1, 77-4, 80-83, 83-1, and 86-128
The Department of Labor is proposing amendments to several existing prohibited transaction exemptions (PTEs) that currently provide relief for certain fiduciary investment advice transactions. The goal is to create a uniform standard of care for investment advice fiduciaries by requiring them to comply with the conditions in the amended PTE 2020-02.To do this, the DOL proposes adding the following statement to PTEs 75-1 Parts III & IV, 77-4, 80-83, 83-1, and 86-128:”Exception. No relief from the restrictions of ERISA section 406(b) and the taxes imposed by Code section 4975(a) and (b) by reason of Code sections 4975(c)(1)(E) and (F) is available for fiduciaries providing investment advice within the meaning of ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B) and regulations thereunder.”This would prevent investment advice fiduciaries from relying on these exemptions and instead require them to comply with the amended PTE 2020-02.In addition, the DOL proposes:
- Revoking certain duplicative or outdated sections of PTE 75-1
- Revising recordkeeping requirements in PTEs 75-1 and 86-128
- Clarifying that all trustees can use the “recapture of profits” provision in PTE 86-128
The goal of these amendments is to create a consistent regulatory framework for investment advice fiduciaries and strengthen protections for retirement investors. Investment advice fiduciaries would be required to provide advice under the same impartial conduct standards regardless of the type of product or compensation.
Read Proposed Amendment to PTEs 75-1, 77-4, 80-83, 83-1, and 86-128
The proposed rules follow growing concerns over conflicts of interest in retirement advice costing investors billions per year. If finalized, the rules would significantly expand protections for retirement savers receiving investment advice. However, critics argue the rules could create regulatory burdens for financial firms. Read https://www.thinkadvisor.com/2023/08/22/where-a-new-fiduciary-rule-stands-now/ and https://www.federalregister.gov/documents/2015/04/20/2015-08837/proposed-amendment-to-and-proposed-partial-revocation-of-prohibited-transaction-exemption-pte-84-24
The public has 60 days to submit comments on the proposed rules before they can be finalized. Stakeholders on both sides of the issue are expected to engage in debate as the proposals move forward. Read https://www.reuters.com/world/us/new-biden-target-junk-fee-crackdown-retirement-advisers-2023-10-31/, https://www.asppa-net.org/news/browse-topics/new-retirement-security-rule-roll-out-oct-31 and https://www.cnbc.com/2023/10/31/biden-administration-to-crack-down-on-junk-fees-in-retirement-plans.html.
Reaction From Experts
For his part, Knut Rostad, the founder of the Institute for the Fiduciary Standard, provided via email this insight:
The Retirement Security Rule is essential to fill the gap in federal regulation — ‘The Grand Canyon’ gap – in investor protection left by the SEC’s Regulation BI, he said.
Four points stand out:
1. Reg BI was designed to accommodate broker-dealers’ conflict-infested businesses. Fiduciary advocacy groups warned of Reg BI’s weaknesses.
Consumer Federation of America and PIABA warned investors the day before Reg BI was released that SEC falsely claims “Reg BI Better for Investors” and explained “Why Reg BI will do more harm than good (and) is being misrepresented by the SEC.” The Institute for the Fiduciary Standard argued that Reg BI failed to define “best interest”, so that BDs can “interpret the rule to fit their needs.”
2. The first Reg BI enforcement case in June 2022 was wrongly championed as Reg BI enforcing a best interest standard. This case could have been brought under the prior suitability standard, according to Ropes & Gray and other securities attorneys. Read SEC Files First Enforcement Action Alleging Violations of Best Interest Rule’s Care and Compliance Standards | Insights | Ropes & Gray LLP (ropesgray.com)
3. The North American Securities Administrators Association, NASAA, has monitored Reg BI in the states. Here NASAA identified the frequency that BDs recommended products that were “Costly, complex and risky” (CCR).
Read North American Securities Administrators Association (NASAA) research from November 2021 NASAA NASAA Report Finds that Many Broker-Dealer Firms Still Place Their Financial Interests Ahead of Their Customers Despite Implementation of Regulation Best Interest -and September 2023 Reg-BI-Phase-II-B-Report-Formatted-8.29.23.pdf (nasaa.org) on BD compliance with Reg BI is revealing.
In November 2021, NASAA reported that 76% of BDs (FINRA Retail 2021) and only 14% of RIAs (IA only 2018) recommended at least one CCR product. Also, NASAA reports 66% of BDs and 5% of RIAs recommended VAs. (Appendix B)
In September 2023, NASAA reported, “Firms are still relying heavily on suitability policies …. Efforts to address the standard of care concepts established by Reg BI remain perfunctory.” (Page 3)
4. The highest court in Massachusetts affirmed last month that Reg BI is no substitute for the fiduciary standard.
The court ruled for the state fiduciary rule and against Robinhood in part because Reg BI “Constitutes a regulatory floor that does not foreclose state regulation to more clearly protect investors”. (page 46) 2023-sjc-13381.pdf (justia.com)
In summary, Rostad noted the following:
- Fiduciary advocates foresaw in June 2019 when it was released the holes in investor protection in the SEC’s Reg BI.
- The first SEC Reg BI enforcement case enforced the suitability standard.
- NASAA affirms BDs still “rely heavily of suitability policies.”
- The Massachusetts highest court affirmed Reg BI is only a regulatory floor.
“There’s no question additional protections in the DOL Retirement Security Rule are needed to fill ‘The Grand Canyon’ gap in federal regulation, he said. “So when the industry screams in vehement opposition to any DOL rulemaking, their voice will be muted.”
Others have also weighed in:
The following steering group members of the Save Our Retirement coalition – AARP, AFL-CIO, AFSCME, Americans for Financial Reform, Better Markets, Center for American Progress, Consumer Federation of America, Economic Policy Institute, and Pension Rights Center – commended the public release of the Department of Labor’s (DOL) proposed rule to protect Americans from conflicts of interest when financial professionals give retirement investment advice:
“The release of this rule is a major milestone in the long fight to bring millions of Americans one step closer to a secure, dignified retirement. We look forward to reviewing this proposal in detail, submitting our comments, and working to help craft the strongest possible rule to ensure that retirement savers receive investment advice that is in their best interest, not the self-interest of the financial professionals they turn to for advice about their retirement investments. If the proposal is as strong as we have urged, this will prove to be a banner day for retirement savers.”
And the Public Investors Advocate Bar Association (PIABA) issued the following statement:
Joseph Peiffer, incoming president of PIABA and founding partner or the law firm Peiffer Wolf Carr Kane Conway & Wise, said: “Retirees deserve good advice enabling them to live a long and happy retirement, not advice that serves their broker’s interest in making large commissions. The DOL rule, which imposes a fiduciary duty on advisors, ensures that advisors will have to put retirees ahead of commissions.”
The DOL’s conflict of interest rule was originally issued in 2016. In 2018, the 5th U.S. Circuit Court of appeals vacated the rule. The Securities and Exchange Commission (SEC) issued its own similar rule package in 2020, known as the Regulation Best Interest standard (Reg BI). The DOL has said it is coordinating with the Treasury Department, IRS and SEC to ensure that the new rule appropriately reflects the changes that the financial services industry has made to comply with the SEC’s Reg BI.
In addition, Investment Company Institute (ICI) President and CEO Eric Pan released the following statement regarding the Department of Labor’s (DOL) proposed rule updating the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA):
“ICI supports ensuring retirement security for all American workers and urges the Department of Labor to balance crucial investor protections with the preservation of investor choice and access to affordable investment advice,” he said in a release. “As recently as 2020, the Department gave a class exemption that successfully struck this balance,” he said in a release. “The 2020 exemption conditions, together with the Securities and Exchange Commission’s Regulation Best Interest and Advisers Act fiduciary standards, provide robust protections to investors whether they are saving in an employer-sponsored retirement plan, rolling assets over to an IRA, or saving in other investment accounts. Given this existing class exemption, ICI will be analyzing the Department’s proposal to understand the justification and evidence for why further regulatory changes are now necessary.”
American Council of Life Insurers (ACLI) Executive Vice President & General Counsel Jillian Froment made the following statement today regarding the Department of Labor’s proposed fiduciary regulation:
“Conflating legitimate retirement costs with junk fees is a scare tactic to push regulations that will hurt Americans in need of greater financial certainty.
“The proposal is out of touch with the anxieties of regular people who are worried about savings lasting through retirement, the effect of volatile markets on 401ks, and the high cost of living.
“Traditional pensions are no longer the norm, and guaranteed lifetime income through annuities lets people create their own pensions. That’s why annuity ownership is up.
“Cutting off retirement options ignores the realities of the savings gap and builds a barrier to financial inclusion.”