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DOL Takes Fire from All Sides on Fiduciary Advice Proposal

Regulatory Compliance

The Department of Labor heard from an array of witnesses on its proposed fiduciary advice rulemaking package—ranging from calls to withdraw the proposal altogether, to making significant changes before proceeding. 

The DOL’s Sept. 3 hearing focused on its proposed advice package, “Improving Investment Advice for Workers & Retirees,” released June 29. In general, the package restored the 1975 five-part test on the conditions for advice to constitute “investment advice” and proposes a new prohibited transaction exemption allowing investment advice fiduciaries under ERISA to receive compensation, including as a result of advice to roll over assets from a plan to an IRA. 

In the nearly six-hour long virtual hearing—which experienced a few technical difficulties—the DOL heard from six panels comprised of 21 witnesses[i] where the arguments could generally be broken into four groups: 

  • those who opposed the rulemaking package and urged DOL to withdraw it;
  • those who opposed the guidance as it’s currently drafted, but offered suggestions to improve it;
  • those who welcomed the guidance, but urged improvements in various areas; and
  • those who praised the guidance and urged its immediate finalization.

For those who want to dig into the finer details, DOL officials indicated that the hearing was recorded and that a transcript will be available to the public in about a week. The DOL officials also cautioned that no inference should be taken by the witness testimony or the line of questioning by the officials as to how the DOL might respond.  

Changes Needed

One of the witnesses who welcomed the guidance, but urged improvements was Jon Breyfogle with the Groom Law Group. Breyfogle, who noted that he was testifying on behalf of many financial services firms and plan recordkeepers, primarily focused on the proposed exemption. He explained that, immediately after the 5th U.S. Circuit Court of Appeals’ ruling vacating the 2016 fiduciary rule, clients needed a broad-based exemption and wanted a clear path on how to offer investment advice and products benefitting plans, participants and IRA holders. But while he welcomed the DOL’s work, he disagreed with some of the positions taken by the DOL in the rejuvenated five-part test. 

One key point Breyfogle suggested was removal or replacement of the proposed exemption’s requirement to acknowledge fiduciary status, noting that would allow financial institutions to rely on the exemption on a wider array of occasions. He explained, for example, that with an investor at one time in the past, it is unclear whether any additional recommendation or even a casual conversation would cause the regular basis prong to be met. As such, if a financial institution prefers not to act as a fiduciary, it would need to avoid providing a recommendation to the investor. If this condition were to be removed, he explained, then the financial institution could provide the recommendation and comply with the proposed exemption even if its second recommendation did cause it to meet the regular basis prong. 

What’s the Rush?

Among witnesses who opposed the rule, a common thread was to wait until the SEC’s Regulation Best Interest (Reg BI) has had more time to mature so that the DOL will have a better understanding of how that regulation is working before rushing its investment advice package through. 

“Since the Department issued its proposal one day before the SEC’s Reg BI was due to take effect, and the comment period closed when that new rule had been in effect for just over a month, there hasn’t been time for us—or the Department—to comprehensively study whether, or to what extent, Reg BI has caused firms to change the way they do business,” testified Barbara Roper of the Consumer Federation of America. 

Other witnesses suggested that the current DOL proposal would expose investors to conflicted advice and that there are inadequate restrictions on investment advice. Several witnesses expressed opposition to the compressed comment and hearing period, and the apparent rush to finalize guidance, which could have broad affects for investors and the economy.

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Kim O’Brien of the Federation of Americans for Consumer Choice, who testified that the proposal will not work for independent insurance agents, said that she believes the DOL proposal is flawed and that the rush to adoption is concerning. “We cannot begin to address all of the issues in a hearing like this,” further noting that the class exemption may work for the securities industry but it does not work for the insurance industry. O’Brien added that the new requirements are being proposed at the worst possible time considering the country’s current economic conditions. 

Disclosure Confusion

Still others criticized the disclosure requirements under the proposed exemption—generally with respect to the written acknowledgement requirement that they are fiduciaries—arguing that it will lead to confusion among investors and that the requirements should be more explicit.  

AARP’s David Certner noted that, even if one believed that a disclosure regime can be protective, the disclosures suggested in the proposal are inadequate and would not protect participants or beneficiaries. “To suggest that people will read and understand disclosure is not dealing with reality,” Certner stated, noting that it would be better to be clearer within the disclosure that there is compliance with a fiduciary standard. He also contended that the DOL’s interpretation doesn’t go far enough in terms of meeting the regular basis threshold for the five-part test, adding that investors would be moving from a heavily regulated environment under ERISA to a loosely regulated one in the IRA market. 

To this point, Kent Mason, and attorney with Davis & Harman, argued that the disclosure on the acknowledgement of fiduciary status would, in essence, turn the exemption into a binding agreement and provide a pathway for the plaintiffs’ bar to bring breach-of-contract claims, adding that it would increase litigation tremendously. He suggested that, contrary to the proposal’s preamble, the exemption requirement to acknowledge fiduciary status would trigger new liabilities and private rights of action, which were a core reason for the failure of the 2016 rule.

Mason added that he believes there are a lot of excellent elements in proposal, but suggested that the preamble includes a substantial rewrite of the five-part test, making it unworkable. Mason explained that the preamble effectively eliminates three core parts of the test—the mutual understanding, primary basis and regular basis tests—and thus, effectively reinstates the invalidated 2016 fiduciary definition. 

Insurance Industry Concerns

Brad Campbell, a partner with the law firm of Faegre Drinker who testified on behalf of seven insurance industry organizations, supported the proposal but argued that modifications were needed to the proposed class exemption to properly apply to insurance and annuity recommendations. 

“The proposed class exemption is designed to align with securities regulation, but insurance regulation is materially different in key respects,” Campbell stated. “If the Department wishes the exemption to be broad-based and widely used, it must be modified to provide for insurance-specific conditions as an alternative to the securities-specific conditions.” Campbell further contended that the guidance reinterpreting the 1975 fiduciary investment advice five-part test is “fundamentally flawed.” 

He added that the organizations believe a modified form of the class exemption should proceed, but that the DOL needs to rescind and fundamentally reexamine its fiduciary guidance, noting that it “cannot be justified on its face as a reasonable interpretation of the 1975 regulation.” 

Campbell contributed a moment of levity during the virtual proceedings when he cited concerns with the notion of an anticipated ongoing relationship, noting that it was predicated not on actions, but on intentions. He commented that fiduciary status “cannot hinge on whether an intended future event may happen, and something that has only happened once simply cannot be occurring on a regular basis.”  

To make the point, he explained, “If I meet once with an Investment Professional and she recommends a rollover, the Department would have us believe that we are meeting on a regular basis because we plan on meeting again in the future for additional recommendations. If this is what regular basis means, then it turns out I have been going to the gym on a regular basis for months now.” 

[i]A link to the hearing agenda with the individual panels and witnesses can be found here. Additional information about the hearing and the proposal can be found here