Final DOL Fiduciary Rule to Have Significant Impact on Rollovers

Labor Department headquarters in Washington. (Photo: Mike Scarcella/ALM)

The Labor Department released Tuesday afternoon its fiduciary prohibited transaction exemption to align with the Securities and Exchange Commission's Regulation Best Interest — a rule that industry officials say will have a significant impact on rollover recommendations and advice to IRAs.

Industry officials, however, anticipate that the Biden administration will pull back the rule and toughen it.

Labor "retained its proposed interpretation of fiduciary status for recommending rollovers," explained Fred Reish, partner at Faegre Drinker in Los Angeles, in a Tuesday email to ThinkAdvisor.

"That is, if an advisor has a preexisting relationship of providing financial advice to the participant, even if it was for personal, and not plan assets, the advisor satisfies the 'regular' part of the give-part fiduciary definition" under the Employee Retirement Income Security Act, Reish said.

"If the advisor who recommends a rollover intends to give ongoing advice about how to invest the rollover IRA, that would satisfy the 'regular' part of the definition," he added.

Considering the requirements of Reg BI and the Investment Adviser Interpretation, "that will in most cases mean that all five parts of the definition are satisfied and the advisor (and the supervisory entity, eg., broker-dealer or RIA) will be fiduciaries for purposes of evaluating and recommending the rollover," the attorney said.

The recommendation, Reish stated, "has to be in the best interest of the participant, which is to say that it must be prudently made and loyal to the participant."

Slott's Views

After a quick review of the 295-page rule, IRA and tax specialist Ed Slott of Ed Slott and Co. added that the PTE is "generally following" Reg BI regarding rollover advice.

"The same standard would apply, meaning that advisors will have to show they have gone through a process when advising on rollover options and be able to document that analysis," Slott explained Tuesday in an email to ThinkAdvisor.

"They can get paid for that advice but they must show they reviewed the benefits and drawbacks of each potential option and came up with recommendations that were in the client's best interest," he said.

Advisors, Slott continued, "need to be better educated on all facets of rollover options. It can't just be 'roll it over to an IRA with us' without going through all the available options to see which is best. But they can get paid for this valuable service when they put in the time."

Such a process is critical now, he added, as "we have seen massive layoffs and early retirements due to the fallout from the pandemic. Advisors have opportunities here to earn fees by helping clients with the big rollover decisions. Document everything! That's clear in these rules."

More Opinions

Ken Bentsen, president and CEO of the Securities Industry and Financial Markets Association, said in a statement that the exemption "is a step forward as it will encourage a variety of investment advice approaches and it will provide retirement investors with the services they seek."

SIFMA, Bentsen explained, "supports permitting financial professionals to provide investment advice in a flexible fashion," adding that Labor "has sought to align" the PTE with Reg BI, "which the industry is working diligently to implement."

Barbara Roper, director of investor protection for the Consumer Federation of America, said Labor's final rule "closely tracks the proposal, which we strongly opposed as too weak to protect retirement savers from conflicted investment advice. The same is true here."

"Fixing this rule — and Reg BI — will be early priorities in the Biden administration," Roper explained.

Dale Brown, president and CEO of the Financial Services Institute, added that with Reg BI now in effect, "it is imperative that other regulations align with the standard set forth by the SEC. We are thoroughly reviewing the final exemption. However, based on the approach of the initial proposal, we are hopeful that the new PTE will harmonize with Reg BI's requirements."

Labor explained that its new prohibited transaction class exemption is for investment advice fiduciaries and is based on an existing temporary policy adopted after the 5th Circuit Court of Appeals vacated Labor's 2016 fiduciary rule.

"The exemption allows investment advice fiduciaries to offer a wide array of investment advice services in compliance with Impartial Conduct Standards. Impartial Conduct Standards are a best interest standard, a reasonable compensation standard and a requirement to make no materially misleading statements," it said.

The standards in Labor's exemption "align with standards of other regulators, including the SEC," the department stated.

Lawmakers Weigh In

Sen. Patty Murray, D-Washington, ranking member of the Senate Health, Education, Labor, and Pensions (HELP) Committee, and Rep. Bobby Scott, D-Virginia, chairman of the House Education and Labor Committee, said in a joint statement that Labor's "weak rule will hurt workers, retirees, and families across the country by letting unscrupulous financial advisors put their own interests ahead of their clients'."

The lawmakers added: "People are looking for reliable help as they try to navigate the painful economic fallout of this pandemic—but this rule will make that unbiased help even harder to find."

Murray and Scott also explained that they're "going to do everything we can to work with the incoming Biden administration to reverse the damage of President Trump's backwards policies and to strengthen the retirement security of people across the country as they work to weather this crisis."

Rule's Timing

Labor plans to send to the PTE, dubbed Improving Investment Advice for Workers & Retirees, to the Federal Register in the near future.

Reish said that the exemption won't be effective until 60 days after its publication in the Federal Register, which should happen in the next few days. "That is consistent with its designation on the OMB website as 'Economically Significant,'" he stated.

"As a result, it won't be effective before the inauguration of the Biden administration," Reish continued. "Since, as a matter of course, a new administration effectively stops all non-final regulations immediately after the inauguration, this exemption will almost certainly not become effective at the scheduled time."

The incoming Biden administration will "pull back and study the new rule to determine if it is consistent with the administration's positions," said the attorney, adding that the Labor Department under Biden "will revise the rule to make it more demanding."

See: Deciphering Best Interest in Reg BI