November 07, 2023
More than five years after the Fifth Circuit Court of Appeals decision to vacate the Department of Labor’s (DOL) 2016 fiduciary rule, the DOL has proposed a new rule that, once again, attempts to re-define when financial organizations are so-called “investment advice fiduciaries” subject to ERISA. The proposed rule will be of particular interest to broker-dealers, banks, investment advisers and insurance firms and their agents that interact with retail retirement clients. The new rule continues the DOL’s laser focus on financial organizations that give advice to individual retirement account (IRA) owners, as well as businesses that make rollover recommendations to Section 401(k) and other retirement plan participants.
The proposed rule replaces the five-part test that has been at the core of the DOL’s guidance since 1975 on defining who is an investment advice fiduciary subject to ERISA. As will be no surprise to many in the industry, the proposed rule does not include the five-part test’s requirement that persons become investment advice fiduciaries only when they provide advice to the investor on a regular basis that serves as a primary basis for investment decisions. Rather, the proposed rule would make an entity an investment advice fiduciary when a person working for such entity provides investment advice on a regular basis “as part of [the entities’] business” and “circumstances” indicate that the recommendation “may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.”
In crafting the proposed rule (as well as amendments to Class Exemption PTE 2020-02 (“PTE 2020-02”), which allows investment advice fiduciaries to receive fees), the DOL attempted to address the concerns of the Court of Appeals for the Fifth Circuit that resulted in the court vacating the prior rule. The proposed rule and PTE 2020-02 do not condition prohibited transaction relief on a requirement that service providers enter into a contractual relationship with IRA owners, nor does it require service providers to agree to new remedies and private rights of action as a means of enforcement. The proposed rule is also more limited in scope than the 2016 rule, carving out securities valuation services from the definition of “investment advice.” The proposed rule leaves in place the DOL’s existing guidance distinguishing between advice and investment education, and, in the preamble to the proposed rule, the DOL reiterates that one does not become a fiduciary solely through marketing activity.
The proposed rule also attempts to integrate with similar initiatives by the SEC and state insurance regulators that were not in place in 2016, including the SEC’s 2019 Regulation Best Interest.
Despite these efforts by the DOL, the proposed rule is likely to prove controversial and result in significant public comment. The proposed rule does not include an exception for advice provided to sophisticated investors. Further, it directly challenges the use of written statements as a means of disclaiming fiduciary status. The DOL has also stated in the preamble to the proposed rule that in determining whether the “circumstances indicat[e] that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest,” it will focus on the marketing materials of the advice provider, including their use of titles such as financial consultant, financial planner and wealth manager.
As noted above, coupled with the new rule are modifications to PTE 2020-02, which allows investment advice fiduciaries to receive compensation that varies based on their advice or that is paid from a third party if the conditions of PTE 2020-02 are satisfied. The DOL also amended various prohibited transaction exemptions to remove investment advice fiduciaries from the relief provided by these exemptions so that these fiduciaries will need to rely on PTE 2020-02.
Comments on the proposed rule are due to the DOL by January 2, 2024. To the extent any of our clients have thoughts on the proposed rule, we encourage you to reach out to your regular contacts at the firm or any of the individuals listed below.
 The current five-part test provides that a person will be treated as a fiduciary by reason of rendering investment advice if the person directly or indirectly (e.g., through or together with any affiliate): (1) renders advice as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing or selling securities or other property; (2) on a regular basis; (3) pursuant to a mutual agreement, arrangement or understanding with the plan or a plan fiduciary; that (4) the advice will serve as a primary basis for investment decisions with respect to plan assets and that (5) the advice will be individualized based on the particular needs of the plan. 29 CFR 2510.3–21(c)(1).
 The proposed rule provides that a person will be treated as a fiduciary by reason of rendering investment advice if the person directly or indirectly (e.g., through or together with any affiliate): (1) makes a recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property to the plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary; (2) the person either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of its business and (3) the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.
 PTEs 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128. With respect to PTE 84-24, the DOL has provided a limited exception that allows independent insurance agents to continue to rely on that exemption subject to certain conditions being met.