On June 29, 2020, the day before Reg BI became effective, the Department of Labor ("DOL") announced 1 its new approach to the standards for financial institutions and investment professionals who provide investment advice on a nondiscretionary basis to 401(k) plans, pension plans, or other plans covered by ERISA or to IRAs (collectively, "Retirement Plans") after its prior 2016 regulations (the "2016 Fiduciary Rule") were struck down by the Fifth Circuit in June 2018.
The DOL released final regulations that reinstate its definition of who is a fiduciary by reason of providing investment advice to Retirement Plans, which reflect the "5-Part Test" that was in effect from 1975 until its modification by the 2016 Fiduciary Rule, along with adding several new interpretations and clarifications to the longstanding 5-Part Test. 2 The DOL also proposed a new prohibited transaction exemption ("PTE") that, if finalized as proposed, will provide rules for financial institutions and investment professionals seeking to (a) receive compensation from a recommended transaction involving a Retirement Plan, including commissions or additional advisory fees received as the result of advice to an individual to roll funds from a Retirement Plan covered by ERISA to an IRA, and/or (b) conduct principal trades with Retirement Plans to which they provide investment advice. 3
Chairman Clayton commended the DOL on their efforts to "align the standards of conduct" of investment professionals providing advice to main street investors, 4 which has been an area of focus by the SEC in recent years.
Additional information regarding the DOL's final regulation or proposed PTE can be found in our recently published Legal Alert. 5 If you have any questions about the DOL's final regulation regarding the definition of a Retirement Plan fiduciary, the proposed PTE for Investment Advice Fiduciaries, other PTEs available to broker-dealers, registered investment advisers, or insurance agents who work with Retirement Plans, including IRAs, Reg BI, or state fiduciary rules, please feel to contact us.
1 Department of Labor, U.S. Department of Labor Proposes to Improve Investment Advice and Enhance Financial Choices for Workers and Retirees, available at https://www.dol.gov/newsroom/releases/ebsa/ebsa20200629. For additional DOL guidance on the new approach see the DOL's Fact Sheet, Improving Investment Advice for Workers & Retirees, available at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/improving-investment-advice-for-workers-and-retirees.
2 Department of Labor, Final Rule: Conflict of Interest Rule – Retirement Investment Advice: Notice of Court Vacatur, 85 Fed. Reg. 40589, available at https://www.federalregister.gov/documents/2020/07/07/2020-14260/conflict-of-interest-rule-retirement-investment-advice-notice-of-court-vacatur.
3 Department of Labor, Proposed Rule: Improving Investment Advice for Workers & Retirees, 85 Fed. Reg. 40834, available at https://www.federalregister.gov/documents/2020/07/07/2020-14261/improving-investment-advice-for-workers-and-retirees.
4 SEC, Chairman Jay Clayton, Statement on the Department of Labor's Investment Advice Proposal (June 29, 2020), available at https://www.sec.gov/news/public-statement/clayton-dol-investment-advice-proposal-2020-6-29.
5 Kilpatrick Townsend & Stockton, Fiduciary Rule 2.0: What You Need to Know About the DOL's New Fiduciary Rule (August 6, 2020), https://www.kilpatricktownsend.com/Insights/Alert/2020/8/Fiduciary-Rule-2-0-What-You-Need-to-Know-About-the-DOLs-New-Fiduciary-Rule.
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