Posted on August 6, 2020

Agency Should Withdraw Reinterpretation of Fiduciary Status Test

WASHINGTON, D.C. – The U.S. Department of Labor (DOL) should make constructive changes to its latest fiduciary investment advice proposal to ensure that Americans can continue to access the financial products and services they need to achieve their retirement goals, according to the Insured Retirement Institute (IRI).

The proposal would establish a new class exemption from the prohibited transaction rules imposed by the Employee Retirement Income Security Act of 1974 (ERISA). Financial professionals and financial institutions would have to satisfy a number of conditions to rely on the exemption. These conditions are intended to ensure that firms and advisors working with retirement assets are promoting the interests of investors and that investment advice is not compromised by competing interests.

The DOL designed the proposal with an eye towards alignment with the U.S. Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI) and a model best interest standard approved earlier this year by the National Association of Insurance Commissioners (NAIC).

IRI believes policymakers should align their standards of conduct with these new SEC and NAIC rules to ensure all Americans are protected by a clear, consistent, and workable best interest standard that will provide meaningful and effective consumer protections without depriving them of access to valuable financial products and services.

In comments filed today, IRI said that, while the proposal represents an advancement towards regulatory alignment, it also includes provisions that diverge from Reg BI, the NAIC’s model regulation, and other established securities and insurance rules.

“We believe the Department’s intent is appropriate, and if enacted with certain constructive changes, will offer retirement savers continued access to retirement advice,” said Jason Berkowitz, IRI Chief Legal and Regulatory Affairs Officer.

The proposal was accompanied by a technical amendment that officially reinstated a 1975 rule that employs a five-part test to determine whether a firm or advisor will be treated as an investment advice fiduciary under ERISA. The five-part test was replaced by a 2016 DOL regulation that was subsequently vacated by the Fifth Circuit Court of Appeals in 2018.

In addition to recommending improvements to the proposed exemption, IRI expressed significant concerns with language in the proposal’s preamble that would substantially reinterpret the five-part test in a manner that is inconsistent with Fifth Circuit Court’s decision and appears to have little or no support in past regulatory or sub-regulatory guidance issued by the DOL.

“The Department should withdraw the Preamble,” Berkowitz said. “In the 45 years since Congress enacted ERISA, it has had opportunities to legislatively adjust the five-part test, but it has not.”

IRI noted that, with certain important modifications, the proposed exemption will appropriately protect retirement investors while preserving access to investment advice and alternative business models. IRI-recommended changes to the proposed exemption include:

  • The required written acknowledgment of fiduciary status would impair the ability of financial professionals and their clients to dictate the terms of their relationship and should therefore be removed.
  • The annual certification requirement is unnecessary to ensure compliance with the conditions of the proposed exemption and should also be removed.
  • Financial professionals should be permitted to rely on the accuracy and completeness of information provided by retirement investors about existing retirement accounts when recommending rollovers.
  • Delivery of the disclosures required under Reg BI or the NAIC model should satisfy the disclosure requirements of the proposed exemption.
  • The DOL should allow fiduciaries to determine whether ongoing monitoring is required rather than mandating when monitoring must be provided based on DOL’s own perception of the complexity or risk of particular products.

IRI also raised significant concerns about the expansive new interpretation of the five-part test when considering how it would apply to the segment of the insurance industry that offers annuities and other guaranteed lifetime income products.

“We believe the facts and circumstances surrounding insurance recommendations will not typically trigger fiduciary status because such recommendations typically occur on a one-time basis,” IRI wrote. “The Department should confirm that servicing of insurance and annuity contracts does not constitute investment advice.”

IRI also encouraged the DOL to provide a clear path to exemptive relief for independent insurance agents through the use of supervisory mechanisms developed by the NAIC. The proposed exemption is designed to fit the brokerage industry’s business model but does not align well with the structure of the independent distribution channel.

IRI concluded, “We value the opportunity to engage with the Department on this important topic, and we look forward to working with the Department to bring the current rulemaking initiative across the finish line in the form of a final exemption and related guidance that will provide appropriate protections for retirement investors while also preserving retirement investors’ access to investment advice and alternative business models in a manner consistent with Reg BI.”

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Contact: Dan Zielinski