This past October the U.S. Department of Labor (DOL) released a proposed amendment to the definition of investment advice fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (Code). Investment advice fiduciaries must generally avoid engaging in certain prohibited transactions absent an exemption. In connection with this proposed amendment, the DOL also released proposed amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries, including PTE 2020-02 and PTE 84-24.
Whether an individual is providing fiduciary investment advice under ERISA and the Code is currently determined by the DOL’s five-part test set forth in its 1975 regulation. Generally, a person will be deemed to be rendering fiduciary investment advice if: 1) the person renders advice to a plan or IRA (including plan participants or beneficiaries) as to the value of, or advisability of investing in, securities or other property; 2) on a regular basis; 3) pursuant to a mutual agreement with the plan or IRA; 4) that the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and 5) that the advice will be individualized based on the particular needs of the plan or IRA.[1] Section 3(21)(A)(ii) of ERISA and section 4975(e)(3)(B) of the Code further provide that this investment advice must be “for a fee or other compensation, direct or indirect.”
The DOL is proposing that a person would be an investment advice fiduciary under ERISA and the Code if the person makes a “recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property,” as this phrase is defined in the proposed rule, to a Retirement Investor (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary), and the person meets one of the following:
- The person directly or indirectly has discretionary authority or control over investment decisions for the Retirement Investor;
- The person directly or indirectly makes investment recommendations to investors on a regular basis as part of their business, and 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; or
- the person represents or acknowledges that they are acting as a fiduciary when making investment recommendations.[2]
The DOL reasoned that these three situations are situations in which an investor would reasonably expect to receive investment recommendations that are in their best interest, and therefore it is appropriate for the advisor to be held to a fiduciary standard.
The proposed amended definition effectively removes the requirements that advice be provided to the Retirement Investor on a “regular basis,” and that there is “a mutual agreement, arrangement, or understanding” that the advice will serve as “a primary basis for investment decisions.” Instead of providing advice to the Retirement Investor on a regular basis, the advisor must only be in the business of providing investment recommendations to investors in general. Instead of a mutual agreement or understanding, the recommendation must only be provided under circumstances indicating that it may be relied on by the Retirement Investor. Instead of serving as a primary basis for investment decisions, the recommendation must only be a basis for investment decisions of the Retirement Investor.
These are significant expansions which will have far reaching implications for investment professionals who have not traditionally been held to a fiduciary duty under ERISA and the Code, and who, even under the DOL’s prior guidance issued in connection with PTE 2020-02, do not meet the five-part test for fiduciary investment advice due to one or more of these elements. The DOL’s stated goal is to ensure the ERISA fiduciary standards apply uniformly across all financial professionals advising Retirement Investors.
In addition, the proposed amended definition expands fiduciary obligations to persons who make recommendations to Retirement Investors and represent or acknowledge that they are acting as a fiduciary when making such recommendations. The proposal notes that written statements attempting to disclaim fiduciary status under ERISA or the Code will not be controlling if the person has represented that they are acting as a fiduciary in their oral communications, marketing materials, or other interactions with the Retirement Investor.
The DOL’s proposed definition for “recommendation of any securities transaction or other investment transaction involving securities or other investment property” largely reuses language from the 2016 overturned revisions to the definition of “fiduciary investment advice.” There are a few minor differences. Most notably, this time rollover recommendations from a plan or IRA are listed as its own separate category, thus emphasizing the fact that rollover recommendations are considered fiduciary investment advice.
The DOL further proposed including an example elsewhere in the rule clearly stating that a person who satisfies the definition of “fiduciary investment advice” in connection with a recommendation to rollover assets currently held in a plan to an IRA is a fiduciary under ERISA. This appears aimed at addressing the U.S. District Court opinion for the Middle District of Florida which took issue with the DOL attempting to extend the ERISA fiduciary duty to IRA rollovers through issued guidance.
The DOL is also proposing a definition of “for a fee or other compensation, direct or indirect” as that phrase is used to describe an investment advice fiduciary under Section 3(21)(A)(ii) of ERISA and section 4975(e)(3)(B) of the Code. The proposed amendment provides that this definition is met if the person or any affiliate receives “explicit fee or compensation, from any source” or “any other fee or other compensation, from any source” in connection with or resulting from the recommendation. The proposed amendment further provides a list of various fees or compensation which would be included, such as commissions, expense reimbursements, gifts, and non-cash compensation.
The DOL is currently in the process of reviewing comments on its proposed rule, which were due on January 2, 2024.
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[1] 29 CFR 2510.3-21(c)(1), 40 FR 50842 (October 31, 1975).
[2] Retirement Security Rule: Definition of an Investment Advice Fiduciary, 88 FR 75890 (Nov. 3, 2023).