Retirement Security Rule: Definition of an Investment Advice Fiduciary

Federal RegisterNov 3, 2023

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2510

RIN 1210-AC02

Retirement Security Rule: Definition of an Investment Advice Fiduciary

AGENCY:

Employee Benefits Security Administration, Department of Labor.

ACTION:

Proposed rule.

SUMMARY:

This document contains a proposed amendment to the regulation defining when a person renders “investment advice for a fee or other compensation, direct or indirect” with respect to any moneys or other property of an employee benefit plan, for purposes of the definition of a “fiduciary” in the Employee Retirement Income Security Act of 1974 (Title I of ERISA or the Act). The proposal also would amend the parallel regulation defining for purposes of Title II of ERISA, a “fiduciary” of a plan defined in Internal Revenue Code (Code) section 4975, including an individual retirement account. The Department also is publishing elsewhere in today's

Federal Register

proposed amendments to Prohibited Transaction Exemption 2020-02 (Improving Investment Advice for Workers & Retirees) and to several other existing administrative exemptions from the prohibited transaction rules applicable to fiduciaries under Title I and Title II of ERISA.

DATES:

Public Comments.

Comments are due on or before January 2, 2024.

Public Hearing.

The Department anticipates holding a public hearing approximately 45 days following the date of publication in the

Federal Register

. Specific information regarding the date, location, and submission of requests to testify will be published in the

Federal Register

ADDRESSES:

You may submit written comments, identified by RIN 1210-AC02, by any of the following methods:

•

Federal eRulemaking Portal: http://www.regulations.gov.

Follow the instructions for sending comments.

•

Mail:

Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Ave. NW, Washington, DC 20210, Attention: Definition of Fiduciary—RIN 1210-AC02.

Instructions:

All submissions must include the agency name and Regulatory Identifier Number (RIN) for this rulemaking. If you submit comments electronically, do not submit paper copies.

Warning:

Do not include any personally identifiable information or confidential business information that you do not want publicly disclosed. Comments are public records posted on the internet as received and can be retrieved by most internet search engines.

Docket:

For access to the docket to read background documents, including the plain-language summary of the proposed rule of not more than 100 words in length required by the Providing Accountability Through Transparency Act of 2023, or comments, go to the Federal eRulemaking Portal at

https://www.regulations.gov.

Comments will be available to the public, without charge, online at

http://www.regulations.gov

and

http://www.dol.gov/agencies/ebsa

and at the Public Disclosure Room, Employee Benefits Security Administration, Room N-1513, 200 Constitution Ave, NW, Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT:

•

For questions regarding the proposed rule:

contact Luisa Grillo-Chope, Office of Regulations and Interpretations, Employee Benefits Security Administration (EBSA), 202-693-8510. (Not a toll-free number).

•

For questions regarding the prohibited transaction exemptions:

contact Susan Wilker, Office of Exemption Determinations, EBSA, 202-693-8540. (Not a toll-free number).

•

For questions regarding the Regulatory Impact Analysis:

contact James Butikofer, Office of Research and Analysis, EBSA, 202-693-8434. (Not a toll-free number).

Customer Service Information:

Individuals interested in obtaining information from the Department of Labor concerning Title I of ERISA and employee benefit plans may call the Employee Benefits Security Administration (EBSA) Toll-Free Hotline, at 1-866-444-EBSA (3272) or visit the Department of Labor's website (

http://www.dol.gov/agencies/ebsa

SUPPLEMENTARY INFORMATION:

A. Executive Summary

The Department of Labor is proposing a new regulatory definition of an investment advice fiduciary for purposes of Title 1 and Title II of the Employee Retirement Income Security Act (ERISA). As compared to the existing regulatory definition, which dates to 1975, the proposal better reflects the text and the purposes of the statute and better protects the interests of retirement investors, consistent with the mission of the Department's Employee Benefits Security Administration to ensure the security of the retirement, health, and other workplace-related benefits of America's workers and their families.

The Department proposes that a person would be an investment advice fiduciary under Title I and Title II of ERISA if they provide investment advice or make an investment recommendation to a retirement investor (

i.e.,

a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary); the advice or recommendation is provided “for a fee or other compensation, direct or indirect,” as defined in the proposed rule; and the person makes the recommendation in one of the following contexts:

• The person either directly or indirectly (

e.g.,

through or together with any affiliate) has discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities or other investment property for the retirement investor;

• 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 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 making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.

The proposal is designed to ensure that ERISA's fiduciary standards uniformly apply to all advice that retirement investors receive concerning investment of their retirement assets in a way that ensures that retirement investors' reasonable expectations are honored when receiving advice from financial professionals who hold themselves out as trusted advice providers. The Department's proposal fills an important gap in those advice relationships where advice is not currently required to be provided in the retirement investor's best interest, and the investor may not be aware of that fact.

Together with proposed amendments to administrative exemptions from the prohibited transaction rules applicable to fiduciaries under Title I and Title II of ERISA published elsewhere in this issue of the

Federal Register

, the

proposal is intended to protect the interests of retirement investors by requiring investment advice providers to adhere to stringent conduct standards and mitigate their conflicts of interest. The proposals' compliance obligations are generally consistent with the best interest obligations set forth in the Securities and Exchange Commission's (SEC's) Regulation Best Interest and its Commission Interpretation Regarding Standard of Conduct for Investment Advisers (SEC Investment Adviser Interpretation), each released in 2019.

The Department anticipates that the most significant benefits of the proposals will stem from the uniform application of the ERISA fiduciary standard and exemption conditions to investment advice to retirement investors. Under the proposals, advice providers would be subject to a common fiduciary standard that would reduce retirement investor exposure to conflicted advice that erodes investment returns and would be obligated to adhere to protective conflict-mitigation requirements.

Requiring advice providers to compete under a common fiduciary standard will be especially beneficial with respect to those transactions that currently are not uniformly covered by fiduciary protections consistent with ERISA's high standards, including recommendations to roll over assets from a workplace retirement plan to an IRA (

e.g.,

in those cases in which the advice provider is not subject to Federal securities law standards and, as is often the case, does not have an ongoing and preexisting relationship with the customer); investment recommendations with respect to many commonly purchased retirement annuities, such as fixed index annuities; and investment recommendations to plan fiduciaries.

The references in this document to a “fiduciary” are intended to mean an ERISA fiduciary unless otherwise stated.

B. Background

1. Title I and Title II of ERISA and the 1975 Rule

ERISA

is a “comprehensive statute designed to promote the interests of employees and their beneficiaries in employee benefit plans.”

Under the statutory framework, Title I of ERISA imposes duties and restrictions on individuals who are “fiduciaries” with respect to employee benefit plans. In particular, fiduciaries to Title I plans must adhere to duties of prudence and loyalty. ERISA section 404 provides that Title I plan fiduciaries must act with the “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims,” and they also must discharge their duties with respect to a plan “solely in the interest of the participants and beneficiaries.”

29 U.S.C. 1001,

et seq.

Shaw

Delta Air Lines, Inc.,

463 U.S. 85, 90 (1983).

ERISA section 404, 29 U.S.C. 1104.

These fiduciary duties, which are rooted in the common law of trusts, are reinforced by prohibitions against transactions involving conflicts of interest because of the dangers such transactions pose to plans and their participants. The prohibited transaction provisions of ERISA, including Title II of ERISA which is codified in the Internal Revenue Code (Code), “categorically bar[]” plan fiduciaries from engaging in transactions deemed “likely to injure the pension plan.”

These prohibitions broadly forbid a fiduciary from “deal[ing] with the assets of the plan in his own interest or for his own account,” and “receiv[ing] any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.”

Congress also gave the Department authority to grant conditional administrative exemptions from the prohibited transaction provisions, but only if the Department finds that the exemption is (1) administratively feasible for the Department, (2) in the interests of the plan and of its participants and beneficiaries, and (3) protective of the rights of participants and beneficiaries of such plan.

Harris Trust Sav. Bank

Salomon Smith Barney Inc.,

530 U.S. 238, 241-42 (2000) (citation and quotation marks omitted).

ERISA section 406(b)(1), (3), 29 U.S.C. 1106(b)(1), (3).

ERISA section 408(a), 29 U.S.C. 1108(a).

Title II of ERISA, codified in the Code,

governs the conduct of fiduciaries to plans defined in Code section 4975(e)(1), which includes IRAs.

Some plans defined in Code section 4975(e)(1) are also covered by Title I of ERISA, but the definitions of such plans are not identical. Although Title II, as codified in the Code, does not directly impose specific duties of prudence and loyalty on fiduciaries as in ERISA section 404(a), it prohibits fiduciaries from engaging in conflicted transactions on many of the same terms as Title I.

Under the Reorganization Plan No. 4 of 1978, which Congress subsequently ratified in 1984,

the Department was generally granted authority to interpret the fiduciary definition and issue administrative exemptions from the prohibited transaction provisions in Code section 4975.

This proposal includes some references to the Code in the context of discussions of Title II of ERISA involving specific provisions codified in the Code. The Department understands that references to the Code are useful but emphasizes that both Title I and Title II are covered by the same definition of fiduciary and the same general framework of prohibited transactions, and that, under both Title I and Title II, fiduciaries must comply with the conditions of an available prohibited transaction exemption in order to engage in an otherwise prohibited transaction.

For purposes of the proposed rule, the term “IRA” is defined as any account or annuity described in Code section 4975(e)(1)(B)-(F), and includes individual retirement accounts, individual retirement annuities, health savings accounts, and certain other tax-advantaged trusts and plans. However, for purposes of any rollover of assets between a Title I Plan and an IRA described in this preamble, the term “IRA” includes only an account or annuity described in Code section 4975(e)(1)(B) or (C). Additionally, while the Department uses the term “

retirement

investor” throughout this document to describe advice recipients, that is not intended to suggest that the fiduciary definition would apply only with respect to employee pension benefit plans and IRAs that are retirement savings vehicles. As discussed herein, the rule would apply with respect to plans as defined in Title I and Title II of ERISA that make investments. In this regard, see also proposed paragraph (f)(11) that provides that the term “investment property” “does not include health insurance policies, disability insurance policies, term life insurance policies, or other property to the extent the policies or property do not contain an investment component.”

26 U.S.C. 4975(c)(1);

cf. id.

at 4975(f)(5), which defines “correction” with respect to prohibited transactions as placing a plan or an IRA in a financial position not worse than it would have been in if the person had acted “under the highest fiduciary standards.”

Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).

5 U.S.C. App. (2018).

Many of the protections, duties, and liabilities in both Title I and Title II of ERISA hinge on fiduciary status; therefore, the determination of who is a “fiduciary” is of central importance. ERISA includes a statutory definition of a fiduciary at section 3(21)(A), which provides that a person is a fiduciary with respect to a plan to the extent the person (i) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or discretionary responsibility in the administration of such plan.

The same

definition of a fiduciary is in Code section 4975(e)(3).

ERISA section 3(21)(A), 29 U.S.C. 1002(21)(A).

26 U.S.C. 4975(e)(3).

These statutory definitions broadly assign fiduciary status for purposes of Title I and Title II of ERISA. Thus, “any authority or control” over plan assets is sufficient to confer fiduciary status, and any person who renders “investment advice for a fee or other compensation, direct or indirect” is an investment advice fiduciary, regardless of whether they have direct control over the plan's assets, and regardless of their status under another statutory or regulatory regime. In the absence of fiduciary status, persons who provide investment advice would neither be subject to Title I of ERISA's fundamental fiduciary standards, nor responsible under Title I and Title II of ERISA for avoiding prohibited transactions. The broad statutory definition, prohibitions on conflicts of interest, and core fiduciary obligations of prudence and loyalty (as applicable) all reflect Congress' recognition in 1974, when it passed ERISA, of the fundamental importance of investment advice to protect the interests of retirement savers.

In 1975, shortly after ERISA was enacted, the Department issued a regulation at 29 CFR 2510.3-21(c)(1) that defined the circumstances under which a person renders “investment advice” to an employee benefit plan within the meaning of section 3(21)(A)(ii) of ERISA, such that said person would be a fiduciary under ERISA.

The regulation narrowed the plain and expansive language of section 3(21)(A)(ii), creating a five-part test that must be satisfied in order for a person to be treated as a fiduciary by reason of rendering investment advice. Under the five-part test, a person is a fiduciary only if they: (1) render advice as to the value of securities or other property, or make 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. The Department of the Treasury issued a virtually identical regulation under Code section 4975(e)(3), at 26 CFR 54.4975-9(c)(1), which applies to plans defined in Code section 4975.

40 FR 50842 (Oct. 31, 1975).

40 FR 50840 (Oct. 31, 1975). The issuance of this regulation pre-dated The Reorganization Plan No. 4 of 1978, and thus authority to issue this regulatory definition under Title II of ERISA was still with the Department of the Treasury.

Since 1975, the retirement plan landscape has changed significantly, with a shift from defined benefit plans (in which decisions regarding investment of plan assets are primarily made by professional asset managers) to defined contribution/individual account plans such as 401(k) plans (in which decisions regarding investment of plan assets are often made by plan participants themselves). In 1975, IRAs had only recently been created (by ERISA itself), and 401(k) plans did not yet exist. Retirement assets were principally held in pension funds controlled by large employers and professional money managers. Now, IRAs and participant-directed plans, such as 401(k) plans, have become more common retirement vehicles as opposed to traditional pension plans, and rollovers of employee benefit plan assets to IRAs are commonplace. Individuals, regardless of their financial literacy, have thus become increasingly responsible for their own retirement savings.

The shift toward individual control over retirement investing (and the associated shift of risk to individuals) has been accompanied by a dramatic increase in the variety and complexity of financial products and services, which has widened the information gap between investment advice providers and their clients. Plan participants and other retirement investors may be unable to assess the quality of the advice they receive or be aware of and guard against the investment advice provider's conflicts of interest. However, as a result of the five-part test in the 1975 rule, many investment professionals, consultants, and financial advisers have no obligation to adhere to the fiduciary standards in Title I of ERISA or to the prohibited transaction rules, despite the critical role they play in guiding plan and IRA investments. In many situations, this disconnect serves to undermine the reasonable expectations of retirement investors in today's marketplace; a retirement investor may reasonably expect that the advice they are receiving is fiduciary advice even when it is not. If these investment advice providers are not fiduciaries under Title I or Title II of ERISA, they do not have obligations under Federal pension law to either avoid prohibited transactions or comply with the protective conditions in a prohibited transaction exemption (PTE).

Recently, other regulators have recognized the need for change in the regulation of investment recommendations and have imposed enhanced conduct standards on financial professionals that make investment recommendations, including broker-dealers and insurance agents. As a result, the regulatory landscape today is very different than it was even five years ago. In 2019, the SEC adopted Regulation Best Interest, which established an enhanced best interest standard of conduct applicable to broker-dealers when making a recommendation of any securities transaction or investment strategy involving securities to retail customers.

The SEC also issued its SEC Investment Adviser Interpretation, which addressed the conduct standards applicable to investment advisers under the Investment Advisers Act of 1940 (Advisers Act).

As the SEC has repeatedly stated, “key elements of the standard of conduct that applies to broker-dealers under Regulation Best Interest will be substantially similar to key elements of the standard of conduct that applies to investment advisers pursuant to their fiduciary duty under the Advisers Act.”

In this connection, the SEC has also stressed that Regulation Best Interest “aligns the standard of conduct with retail customers' reasonable expectations[.]”

Regulation Best Interest: The Broker-Dealer Standard of Conduct, 84 FR 33318 (July 12, 2019).

Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 84 FR 33669 (July 12, 2019).

Regulation Best Interest release, 84 FR 33318, 33330 (July 12, 2019).

Id.

at 33318.

In 2020, the National Association of Insurance Commissioners (NAIC) also revised its Suitability In Annuity Transactions Model Regulation to provide that insurance agents must act in the consumer's best interest, as defined by the Model Regulation, when making a recommendation of an annuity. Under the Model Regulation, insurers would also be expected to establish and maintain a system to supervise recommendations so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed.

The goal of the NAIC working group was “to seek clear, enhanced standards for annuity sales so consumers understand the products they purchase, are made aware of any material conflicts of interest, and are assured those selling the products do not place their financial

interests above consumers' interests.”

According to the NAIC, as of August 23, 2023, 43 jurisdictions have implemented the revisions to the model regulation.

Available at

www.naic.org/store/free/MDL-275.pdf.

See https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard.

NAIC Annuity Suitability & Best Interest Standard web page,

https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard.

These regulatory efforts reflect the understanding that broker-dealers and insurance agents commonly make recommendations to their customers for which they are compensated as a regular part of their business; that investors rely upon these recommendations; and that regulatory protections are important to ensure that the advice is in the best interest of the retail customer, in the case of broker-dealers, or consumers, in the case of insurance agents.

After careful review of the existing regulatory landscape, the Department too has concluded that existing regulations should be revised to reflect current realities in light of the text and purposes of Title I of ERISA and the Code.

The SEC stated in the Regulation Best Interest release that “there is broad acknowledgment of the benefits of, and support for, the continuing existence of the broker-dealer business model, including a commission or other transaction-based compensation structure, as an option for retail customers seeking investment recommendations.” 84 FR 33318, 33319 (July 12, 2019). The NAIC Model Regulation, section 6.5.M defines a recommendation as “advice provided by a producer to an individual consumer that was intended to result or does result in a purchase, an exchange or a replacement of an annuity in accordance with that advice.” Section 5.B., defines “cash compensation” as “any discount, concession, fee, service fee, commission, sales charge, loan, override, or cash benefit received by a producer

in connection with the recommendation

or sale of an annuity from an insurer, intermediary, or directly from the consumer.” (Emphasis added).

In the current landscape, the existing 1975 regulation no longer serves ERISA's purpose to protect the interests of retirement investors, especially given the growth of participant-directed investment arrangements and IRAs, the conflicts of interest associated with investment recommendations, and the pressing need for plan participants, IRA owners, and their beneficiaries to receive sound advice from sophisticated financial advisers when making critical investment decisions in an increasingly complex financial marketplace. As the SEC and NAIC recognized, many different types of financial professionals, including insurance agents, broker-dealers, advisers subject to the Advisers Act, and others, make recommendations to investors for which they are compensated, and investors rightly rely upon these recommendations with an expectation that they are receiving advice that is in their interest. Like these other regulators, the Department has concluded that it is appropriate to revisit the existing regulatory structure to ensure that it properly and uniformly protects the financial interests of retirement investors as Congress intended. As reflected in this regulatory package, after evaluation of the types of investment advisory relationships that should give rise to ERISA fiduciary status, the Department has concluded that it is appropriate to revise the regulatory definition of an investment advice fiduciary under Title I and Title II of ERISA in the manner set forth herein.

2. Prior Rulemakings

The Department began the process of reexamining the regulatory definition of an investment advice fiduciary under Title I and Title II of ERISA in 2010. After issuing two notices of proposed rules, conducting multiple days of public hearings, and over six years of deliberations, on April 8, 2016, the Department replaced the 1975 regulation with a new regulatory definition (the “2016 Final Rule”), which applied under Title I and Title II of ERISA.

In the preamble to the 2016 Final Rule, the Department noted that the 1975 five-part test had been created in a very different context and investment advice marketplace. The Department expressed concern that specific elements of the five-part test—which are not found in the text of Title I or Title II of ERISA—worked to defeat retirement investors' legitimate expectations when they received investment advice from trusted advice providers in the modern marketplace for financial advice.

Definition of the Term “Fiduciary”; Conflict of Interest Rule—Retirement Investment Advice,

81 FR 20946 (Apr. 8, 2016). The Department issued its first proposal to amend the regulatory definition of an investment advice fiduciary in 2010. 75 FR 65263 (Oct. 22, 2010). The first proposed rulemaking provided for a 90-day comment period, from October 22, 2010, through January 20, 2011. The comment period was extended for 14 days. The Department held a public hearing in Washington, DC, on March 1-2, 2011, after which the Department welcomed public comment for 15 days in order for commenters to supplement hearing testimony or otherwise provide additional comments. That proposal was withdrawn, and the Department issued a second proposal in 2015 along with related proposed prohibited transaction exemptions and proposed amendments to existing exemptions. 80 FR 21928 (Apr. 20, 2015). The 2015 proposal and proposed related exemptions initially provided for 75-day comment periods, ending on July 6, 2015, but the Department extended the comment periods to July 21, 2015. Before finalizing the 2015 proposals, the Department held a public hearing in Washington, DC on August 10-13, 2015, at which over 75 speakers testified. The transcript of the hearing was made available on September 8, 2015, and the Department provided additional opportunity for interested persons to submit comments on the proposal and proposed related exemptions or on the transcript until September 24, 2015. A total of over 3,000 comment letters were received on the 2015 proposals. There were also over 300,000 submissions made as part of 30 separate petitions submitted on the proposals. These comments and petitions, which came from consumer groups, plan sponsors, financial services companies, academics, elected government officials, trade and industry associations, and others, were both in support of and in opposition to the 2015 proposals.

The Department identified the “regular basis” element

in the five-part test as a particularly important example of the 1975 regulation's shortcomings. The Department stated that the requirement that advice be provided on a “regular basis” had failed to draw a sensible line between fiduciary and non-fiduciary conduct and had undermined the Act's protective purpose. The Department pointed to examples of transactions in which a discrete instance of advice can be of critical importance to the plan, such as a one-time purchase of a group annuity to cover all of the benefits promised to substantially all of a plan's participants for the rest of their lives when a defined benefit plan terminates, or a plan's expenditure of hundreds of millions of dollars on a single real estate transaction based on the recommendation of a financial adviser hired for purposes of that one transaction.

This refers to the requirement in the 1975 regulation that, in order for fiduciary status to attach, investment advice must be provided by the person “on a regular basis.” 29 CFR 2510.3-21(c)(1)(ii)(B).

The Department likewise expressed concern that the requirements in the 1975 regulation of a “mutual agreement, arrangement, or understanding” that advice would serve as “a primary basis for investment decisions” had encouraged investment advice providers in the current marketplace to use fine print disclaimers as potential means of avoiding ERISA fiduciary status, even as they marketed themselves as providing tailored or individualized advice based on the retirement investor's best interest. Additionally, the Department noted that the “primary basis” element of the five-part test appeared in tension with the statutory text and purposes of Title I and Title II of ERISA. If, for example, a prudent plan fiduciary hires multiple specialized advisers for an especially complex transaction, it should be able to rely upon any or all of the consultants that it hired to render advice regardless of arguments about whether one could characterize the advice, in some sense, as primary, secondary, or tertiary.

In adopting the 2016 Final Rule, the Department presented an economic

analysis demonstrating that investment advice providers are compensated in ways that create conflicts of interest, which can bias investment advice and erode plan and IRA investment results.

The Department noted that many of the consultants and advisers who provide investment-related advice and recommendations received compensation from the financial institutions whose investment products they recommend, and that this can give the consultants and advisers a strong bias, conscious or unconscious, to favor investments that provide them greater compensation rather than those that may be most appropriate for the retirement investors. The Department also found that consolidation of the financial services industry and developments in compensation arrangements multiplied the opportunities for self-dealing and reduced the transparency of fees. Most significantly, the Department explained in its analysis that, in the absence of the 2016 Final Rule, the underperformance associated with conflicts of interest in the mutual funds segment alone could have cost IRA investors between $95 billion and $189 billion over the following 10 years and between $202 billion and $404 billion over the following 20 years. While these projected losses were substantial, they represented only a portion of what IRA investors stood to lose as a result of conflicted investment advice.

U.S. Department of Labor, Fiduciary Investment Advice Regulatory Impact Analysis (2016), available at

https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.

The Department expected that compliance with the 2016 Final Rule would deliver large gains for retirement investors by reducing these losses. The Department cited evidence that holding broker-dealer representatives to fiduciary standards at the State level does not impair access to their services. Additionally, the Department noted that financial services firms already were moving toward more fee-based advice models, considering flatter compensation models, and integrating technology. The Department anticipated that the rule would accelerate these types of innovations for the benefit of plan and IRA investors.

The 2016 Final Rule defined an investment advice fiduciary for purposes of Title I or Title II of ERISA in a way that would apply fiduciary status in a wider array of advice relationships than the five-part test in the 1975 regulation. The 2016 Final Rule generally covered: (1) recommendations by a person who represents or acknowledges that they are acting as a fiduciary within the meaning of ERISA; (2) advice rendered pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the retirement investor; and, most expansively, (3) recommendations directed to a specific retirement investor or investors regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

One main issue highlighted in the 2016 Final Rule involved the protection of retirement investors in the context of recommendations to roll over assets from workplace retirement plans to IRAs.

As the Department noted, decisions to take a benefit distribution or engage in rollover transactions are among the most, if not the most, important financial decisions that plan participants and beneficiaries and IRA owners and beneficiaries are called upon to make. The Department explained that when an individual is a participant in a workplace retirement plan, their employer or other plan sponsor has both the incentive and the fiduciary duty to facilitate sound investment choices, while in an IRA, both good and bad investment choices are more numerous, and investment advice providers often operate under conflicts of interest. The Department illustrated the consequence of these rollovers to both individuals and investment advice providers, by pointing out that rollovers from employee benefit plans to IRAs were expected to approach $2.4 trillion cumulatively from 2016 through 2020.

Investment advice providers have a strong economic incentive to recommend that investors roll over assets into one of their institutions' IRAs, whether from a plan or from an IRA account at another financial institution, or even between different account types. The 2016 Final Rule also specifically superseded a 2005 Advisory Opinion, 2005-23A (commonly known as the Deseret Letter) which had opined that it is not fiduciary investment advice under Title I of ERISA to make a recommendation as to distribution options from an employee benefit plan, even if accompanied by a recommendation as to where the distribution would be invested.

See

81 FR 20946, 20964 (Apr. 8, 2016).

Id.

at 20949 fn. 7 (citing Cerulli Associates, “U.S. Retirement Markets 2015”).

Id.

On the same date it published the 2016 Final Rule, the Department also published two new administrative class exemptions from the prohibited transaction provisions of Title I and Title II of ERISA: the Best Interest Contract Exemption (BIC Exemption)

and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Principal Transactions Exemption).

The Department granted the new exemptions with the objective of promoting the provision of investment advice that is in the best interest of retail investors such as plan participants and beneficiaries, IRA owners and beneficiaries, and certain plan fiduciaries, including small plan sponsors.

81 FR 21002 (Apr. 8, 2016).

81 FR 21089 (Apr. 8, 2016).

The new exemptions included conditions designed to protect the interests of the retirement investors receiving advice. The exemptions required investment advice fiduciaries to adhere to the following “Impartial Conduct Standards”: providing advice in retirement investors' best interest; charging no more than reasonable compensation; and making no misleading statements about investment transactions and other important matters. In the case of IRAs and non-Title I plans, the exemption required these standards to be set forth in an enforceable contract with the retirement investor, which also was required to include certain warranties and disclosures. The exemption further provided that parties could not rely on the exemption if they included provisions in their contracts disclaiming liability for compensatory remedies or waiving or qualifying retirement investors' right to pursue a class action or other representative action in court. In conjunction with the new exemptions, the Department also made amendments to pre-existing exemptions, namely PTEs 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128, to require compliance with the Impartial Conduct Standards and to make certain other changes.

81 FR 21139 (Apr. 8, 2016); 81 FR 21147 (Apr. 8, 2016); 81 FR 21181 (Apr. 8, 2016); 81 FR 21208 (Apr. 8, 2016).

3. Litigation Over the 2016 Rulemaking

The 2016 Final Rule and related new and amended exemptions (collectively, the 2016 Rulemaking) was challenged in multiple lawsuits. In

National Association for Fixed Annuities

Perez,

a district court in the District of

Columbia upheld the 2016 Rulemaking in the context of a broad challenge on multiple grounds.

Among other things, the court found that the 2016 Final Rule comports with both the text and the purpose of ERISA, and it noted “if anything, it is the five-part test—and not the current rule—that is difficult to reconcile with the statutory text. Nothing in the phrase `renders investment advice' suggests that the statute applies only to advice provided `on a regular basis.' ”

Relatedly, in

Market Synergy

United States Department of Labor,

the U.S. Court of Appeals for the Tenth Circuit affirmed a district court's decision similarly upholding the 2016 Rulemaking as it applied to fixed indexed annuities.

Nat'l Assoc. for Fixed Annuities

Perez,

217 F.Supp.3d 1 (D.D.C. 2016) [hereinafter

NAFA

]. On December 15, 2016, the U.S. Court of Appeals for the District of Columbia denied an emergency request to stay application of the definition or the exemptions pending an appeal of the district court's ruling.

Nat'l Assoc. for Fixed Annuities

Perez,

No. 16-5345, 2016 BL 452075 (D.C. Cir. 2016).

NAFA,

217 F. Supp. 3d at 23, 27-28.

885 F.3d 676 (10th Cir. 2018);

see Thrivent Financial for Lutherans

Acosta,

No. 16-CV-03289, 2017 WL 5135552 (D. Minn. Nov. 3, 2017) (granting the Department's motion for a stay and the plaintiff's motion for a preliminary injunction, with respect to Thrivent's suit challenging the BIC Exemption's bar on class action waivers as exceeding the Department's authority and as unenforceable under the Federal Arbitration Act).

On March 15, 2018, however, the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) overturned a district court's decision upholding the validity of the 2016 Final Rule

and vacated the 2016 Rulemaking

in toto,

Chamber of Commerce

United States Department of Labor

(

Chamber

The Fifth Circuit held that the 2016 Final Rule conflicted with ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B). Specifically, the Fifth Circuit found that the 2016 Final Rule swept too broadly and extended to relationships that lacked “trust and confidence,” which the court stated were hallmarks of the common law fiduciary relationship that Congress intended to incorporate into the statutory definitions. The court concluded that “all relevant sources indicate that Congress codified the touchstone of common law fiduciary status—the parties' underlying relationship of trust and confidence—and nothing in the statute `requires' departing from the touchstone.”

Chamber of Commerce

Hugler,

231 F. Supp. 3d 152 (N.D. Tex. Feb. 8, 2017) (finding, among other things, that in the 2016 Final Rule, the Department reasonably removed the “regular basis” requirement; and noting, “if anything, however, the five-part test is the more difficult interpretation to reconcile with who is a fiduciary under ERISA.”).

See Chamber,

885 F.3d 360 (5th Cir. 2018).

But see id.

at 391 (“Noting in the phrase `renders investment advice for a fee or other compensation' suggests that the statute applies only in the limited context accepted by the panel majority.”) (Stewart, C.J., dissenting).

Id.

at 369 (citing

Nationwide Mut. Ins. Co.

Darden,

503 U.S. 318, 322 (1992));

see id.

at 376 (“In short, whether one looks at DOL's original regulation, the SEC, Federal and state legislation governing investment adviser fiduciary status vis-à-vis broker-dealers, or case law tying investment advice for a fee to ongoing relationships between adviser and client, the answer is the same: `investment advice for a fee' was widely interpreted hand in hand with the relationship of trust and confidence that characterizes fiduciary status.”).

But see id.

at 392 (“One area in which Congress has departed from the common law of trusts is with the statutory definition of `fiduciary.' ERISA does not define `fiduciary' `in terms of formal trusteeship, but in

functional

terms of

control and authority over the plan,

. . . thus expanding the universe of persons subject to fiduciary duties . . .”) (Stewart, C.J., dissenting) (quoting

Mertens

Hewitt Assocs.,

508 U.S. 248, 262 (1993)). As discussed herein, in the period since the Fifth Circuit decision, the SEC and the National Association of Insurance Commissioners (NAIC) have moved forward with strengthened standards for recommendations provided by broker-dealers and insurance agents, respectively.

In addition to holding that the 2016 Final Rule conflicted with the statutory definitions in Title I and Title II of ERISA, the Fifth Circuit in

Chamber

also determined that the 2016 Rulemaking failed to honor the difference in the Department's authority over employee benefit plans under Title I of ERISA and IRAs under Title II, by imposing “novel and extensive duties and liabilities on parties otherwise subject only to the prohibited transactions penalties.”

These included the conditions of the BIC Exemption and Principal Transactions Exemption that required financial institutions and individual fiduciary advisers to enter into contracts with their customers with specific duties, warranties, and disclosures, and forbade damages limitations and class action waivers.

Under the Code, IRA investors do not have a private right of action.

Instead, the primary remedy for a violation of the prohibited transaction provisions under the Code is the assessment of an excise tax.

In the Fifth Circuit's view, the Department had effectively exceeded its authority by giving IRA investors the ability to bring a private cause of action that Congress had not authorized.

Id.

at 384.

Id.

See id.

Code section 4975(a), (b).

Chamber,

885 F.3d 360, 384-85 (5th Cir. 2018);

see

Code section 4975.

4. Field Assistance Bulletin No. 2018-02

In response to the Fifth Circuit's vacatur of the 2016 Rulemaking, on May 7, 2018, the Department issued Field Assistance Bulletin 2018-02, Temporary Enforcement Policy on Prohibited Transactions Rules Applicable to Investment Advice Fiduciaries (FAB 2018-02).

FAB 2018-02 announced that, pending further guidance, the Department would not pursue prohibited transaction claims against fiduciaries who were working diligently and in good faith to comply with the Impartial Conduct Standards for transactions that would have been exempted in the BIC Exemption and Principal Transactions Exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules. In adopting the temporary enforcement policy, the Department cited uncertainty about fiduciary obligations and the scope of exemptive relief following the court's opinion that could disrupt existing investment advice arrangements to the detriment of retirement plans, retirement investors, and financial institutions, as well as the significant resources some financial institutions had devoted towards compliance with the BIC Exemption and the Principal Transactions Exemption.

Available at

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-02.

5. Subsequent Actions by the Department

On July 7, 2020, the Department proposed a new prohibited transaction class exemption under Title I and Title II of ERISA for investment advice fiduciaries with respect to employee benefit plans and IRAs, called “Improving Investment Advice for Workers & Retirees.”

The proposal stated it was in response to informal industry feedback seeking a permanent administrative class exemption based on FAB 2018-02.

On the same day, the Department issued a technical amendment to the Code of Federal Regulations (CFR) reinserting the 1975 regulation, reflecting the Fifth Circuit's vacatur of the 2016 Final Rule.

The technical amendment also reinserted into the CFR Interpretive Bulletin 96-1 (IB 96-1) relating to participant investment education, which had been removed and largely incorporated into the text of the 2016 Final Rule. Additionally, the Department updated its website to reflect the fact that the pre-existing prohibited transaction exemptions that had been amended in the 2016 Rulemaking had been restored to their pre-amendment form, and also to reflect that the Department had withdrawn the Deseret Letter.

85 FR 40834 (July 7, 2020).

Id.

at 40835.

85 FR 40589 (July 7, 2020).

On December 18, 2020, the Department adopted the Improving

Investment Advice for Workers & Retirees exemption as PTE 2020-02.

The exemption provides relief that is similar in scope to the BIC Exemption and the Principal Transactions Exemption, but it does not include contract or warranty provisions. The exemption expressly covers prohibited transactions resulting from both rollover advice and advice on how to invest assets within a plan or IRA, and imposes new conditions on investment advice fiduciaries providing such advice. In particular, PTE 2020-02 mirrors the core of the BIC and Principal Transaction exemptions' requirements of best interest standards of conduct and policies and procedures to ensure the advice is provided consistent with those standards.

85 FR 82798 (Dec. 18, 2020).

The preamble to PTE 2020-02 also included the Department's interpretation of when advice to roll over assets from an employee benefit plan to an IRA would constitute fiduciary investment advice under the 1975 regulation's five-part test. As in the 2016 Rulemaking, the Department again made clear in 2020 that rollover recommendations were a central concern in the regulation of fiduciary investment advice. Accordingly, the Department emphasized the importance to a retirement investor of the rollover decision, as well as the fact that investment advice providers may have a strong economic incentive to recommend that investors roll over assets into one of their institutions' IRAs.

The preamble interpretation confirmed the Department's continued view that the Deseret Letter was incorrect, and that a recommendation to roll assets out of a Title I Plan is advice with respect to moneys or other property of the plan and, if provided by a person who satisfies all of the requirements of the regulatory test, constitutes fiduciary investment advice. The preamble interpretation also discussed when a recommendation to roll over assets from an employee benefit plan to an IRA would satisfy the “regular basis” requirement. Additionally, the preamble set forth the Department's interpretation of the 1975 regulation's requirement of “a mutual agreement, arrangement, or understanding” that the investment advice will serve as “a primary basis for investment decisions.” In April 2021, the Department issued Frequently Asked Questions (FAQs) that, among other things, summarized aspects of the preamble interpretation.

New Fiduciary Advice Exemption: PTE 2020-02 Improving Investment Advice for Workers & Retirees Frequently Asked Questions,

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.

The Department's preamble interpretation and certain FAQs were challenged in two lawsuits filed after the issuance of PTE 2020-02.

On February 13, 2023, the U.S. District Court for the Middle District of Florida issued an opinion vacating the policy referenced in FAQ 7 (entitled “When is advice to roll over assets from an employee benefit plan to an IRA considered to be on a `regular basis'?”) and remanded it to the Department for future proceedings.

On June 30, 2023, a magistrate judge in the Northern District of Texas filed a report with the judge's findings, conclusions, and recommendations, including that the court should vacate portions of PTE 2020-02 that permit consideration of actual or expected Title II investment advice relationships when determining Title I fiduciary status.

Compl.,

Am. Sec. Ass'n.

U.S. Dep't of Labor,

No. 8:22-CV-330VMC-CPT, 2023 WL 1967573 (M.D. Fla. Feb. 13, 2023); Compl.,

Fed'n of Ams. for Consumer Choice

U.S. Dep't of Labor,

No. 3:22-CV-00243-K-BT (N.D. Tex. Feb. 2, 2022).

Am. Sec. Ass'n.

U.S. Dep't of Labor,

2023 WL 1967573, at * 22-23.

See

Findings, Conclusions, and Recommendations of the United States Magistrate Judge,

Fed'n of Ams. for Consumer Choice

U.S. Dep't of Labor,

No. 3:22-CV-00243-K-BT, 2023 WL 5682411, at *27-29 (N.D. Tex. June 30, 2023) [hereinafter

FACC

]. As of the date of this proposal, the district court judge has not yet taken action regarding the magistrate judge's report and recommendations.

6. Other Regulatory Developments

U.S. Securities and Exchange Commission

Since the vacatur of the Department's 2016 Rulemaking, other regulators have considered and adopted enhanced standards of conduct for investment professionals as a method of addressing, among other things, conflicts of interest. At the Federal level, on June 5, 2019, the SEC finalized a regulatory package relating to conduct standards for broker-dealers and investment advisers. The package included Regulation Best Interest, which established a best interest standard applicable to broker-dealers when making a recommendation of any securities transaction or investment strategy involving securities to retail customers.

The SEC also issued its SEC Investment Adviser Interpretation regarding the conduct standards applicable to investment advisers under the Advisers Act.

As part of the package, the SEC adopted new Form CRS, which requires registered investment advisers under the Advisers Act and registered broker-dealers to provide retail investors with a short relationship summary with specified information (SEC Form CRS).

84 FR 33318 (July 12, 2019).

84 FR 33669 (July 12, 2019).

Form CRS Relationship Summary; Amendments to Form ADV, 84 FR 33492 (July 12, 2019).

According to the SEC, these actions were designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisers, help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.

Regulation Best Interest release, 84 FR 33318, 33321 (July 12, 2019).

The SEC's Regulation Best Interest enhanced the broker-dealer standard of conduct “beyond existing suitability obligations.”

According to the SEC, this

Id.

at 33318.

[A]lign[ed] the standard of conduct with retail customers' reasonable expectations by requiring broker-dealers, among other things, to: Act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer; and address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest, and in instances where [the SEC has] determined that disclosure is insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the conflict.

Id.

Regulation Best Interest's “best interest obligation” includes a Disclosure Obligation, a Care Obligation, a Conflict of Interest Obligation, and a Compliance Obligation. The Care Obligation requires broker-dealers, in making recommendations, to exercise reasonable diligence, care, and skill to:

• Understand the potential risks, rewards, and costs associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers;

• Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that

retail customer's investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the financial or other interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; and

• Have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest when taken together in light of the retail customer's investment profile and does not place the financial or other interest of the broker, dealer, or such natural person making the series of recommendations ahead of the interest of the retail customer.

Id.

at 33372.

The Conflict of Interest Obligation requires the broker-dealer to establish, maintain and enforce written policies and procedures reasonably designed to:

• Identify and at a minimum disclose, or eliminate, all conflicts of interest associated with such recommendations;

• Identify and mitigate any conflicts of interest associated with such recommendations that create an incentive for a natural person who is an associated person of a broker or dealer to place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer;

• Identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended to a retail customer and any conflicts of interest associated with such limitations, and prevent such limitations and associated conflicts of interest from causing the broker, dealer, or a natural person who is an associated person of the broker or dealer to make recommendations that place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; and

• Identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.

Id.

at 33476.

A conflict of interest is defined as “an interest that might incline a broker, dealer, or a natural person who is an associated person of a broker or dealer—consciously or unconsciously—to make a recommendation that is not disinterested.”

17 CFR 240.15l-1.

The SEC stated that “[t]he Commission has crafted Regulation Best Interest to draw on key principles underlying fiduciary obligations, including those that apply to investment advisers under the Advisers Act, while providing specific requirements to address certain aspects of the relationships between broker-dealers and their retail customers.”

The SEC emphasized that, “[i]mportantly, regardless of whether a retail investor chooses a broker-dealer or an investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor.”

The SEC also noted that the standard of conduct cannot be satisfied through disclosure alone.

Regulation Best Interest release, 84 FR 33318, 33320 (July 12, 2019).

Id.

at 33321.

Id.

at 33390.

The best interest standard in the SEC's Regulation Best Interest applies to broker-dealers and their associated persons when they make a recommendation to a retail customer of any “securities transaction or an investment strategy involving securities (including account recommendations).” According to the SEC, this language encompasses recommendations to roll over or transfer assets in a workplace retirement plan account to an IRA, and recommendations to take a plan distribution.

However, the SEC also stated that while Regulation Best Interest applies to advice regarding a person's own retirement account such as a 401(k) account or IRA, it does not cover advice to workplace retirement plans themselves or to their legal representatives when they are receiving advice on the plan's behalf.

Id.

at 33337.

Id.

at 33343-44.

The SEC Investment Adviser Interpretation, published simultaneously with Regulation Best Interest, reaffirmed and in some cases clarified aspects of the fiduciary duty of an investment adviser under the Investment Advisers Act.

The SEC stated that “an investment adviser's fiduciary duty under the Investment Advisers Act comprises both a duty of care and a duty of loyalty.”

According to the SEC, “[t]his fiduciary duty is based on equitable common law principles and is fundamental to advisers' relationships with their clients under the Advisers Act.”

The fiduciary duty under the Federal securities laws requires an adviser “to adopt the principal's goals, objectives, or ends.”

The SEC stated:

84 FR 33669 (July 12, 2019).

Id.

at 33671 (footnote omitted).

Id.

at 33670.

Id.

at 33671.

This means the adviser must, at all times, serve the best interest of its client and not subordinate its client's interest to its own. In other words, the investment adviser cannot place its own interests ahead of the interests of its client. This combination of care and loyalty obligations has been characterized as requiring the investment adviser to act in the “best interest” of its client at all times.

Id.

(footnote omitted).

The SEC further stated, “[t]he investment adviser's fiduciary duty is broad and applies to the entire adviser-client relationship.”

at 33670. See also

id.

n 17 citing authorities where the Commission previously recognized the broad scope of section 206 of the Advisers Act in a variety of contexts.

The SEC also adopted a new required disclosure of a “Form CRS Relationship Summary,” under which registered investment advisers under the Advisers Act and broker-dealers must provide retail investors with certain information about the nature of their relationship with their financial professional. One of the purposes of the Form CRS is to help retail investors better understand and compare the services and relationships that investment advisers and broker-dealers offer in a way that is distinct from other required disclosures under the Federal securities laws.

Form CRS also includes a link to a dedicated page on the SEC's investor education website,

Investor.gov

, which offers educational information about broker-dealers and investment advisers, and other materials.

84 FR 33492, 33493 (July 12, 2019).

Id.

SEC staff has since issued guidance on Regulation Best Interest, Form CRS, and related interpretations, including staff bulletins on care obligations, conflicts of interest, and account recommendations for retail investors, which are available at

https://www.sec.gov/regulation-best-interest.

State Legislative and Regulatory Developments

Also, since the vacatur of the Department's 2016 Rulemaking, there have been legislative and regulatory developments at the State level involving conduct standards. The Massachusetts Securities Division amended its regulations to apply a fiduciary conduct standard under which broker-dealers and their agents must “[m]ake recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer.”

950 Mass. Code Regs. 12.204 & 12.207 as amended effective March 6, 2020;

see

Consent Order,

In the Matter of Scottrade, Inc.,

No. E-2017-0045 (June 30, 2020);

see also Enf't Section of Massachusetts Sec. Div. of Office of Sec'y of Commonwealth

Scottrade, Inc.,

327 F. Supp. 3d 345, 352 (D. Mass. 2018) (discussing enforcement actions under Massachusetts securities and other consumer protection laws). A challenge to the regulation was rejected by the Massachusetts Supreme Judicial Court.

See Robinhood Fin. LLC

Sec'y of Commonwealth of Mass,

No. SJC-13381, 2023 WL 5490571 (Mass. Aug. 25, 2023).

The NAIC Model Regulation, updated in 2020, provides that insurance agents must act in the consumer's “best interest,” as defined by the Model Regulation, when making a recommendation of an annuity, and insurers must establish and maintain a system to supervise recommendations so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed.

According to the NAIC, as of August 23, 2023, 43 jurisdictions have implemented the revisions to the model regulation.

Available at

www.naic.org/store/free/MDL-275.pdf.

NAIC Annuity Suitability & Best Interest Standard web page,

https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard.

The NAIC Model Regulation includes a best interest obligation comprised of a care obligation, a disclosure obligation, a conflict of interest obligation, and a documentation obligation, applicable to an insurance producer.

If these specific obligations are met, the producer is treated as satisfying the overarching best interest standard as expressed in the NAIC Model Regulation. The care obligation states that the producer, in making a recommendation, must exercise reasonable diligence, care and skill to:

A producer is defined in section 5.L. of the Model Regulation as “a person or entity required to be licensed under the laws of this state to sell, solicit or negotiate insurance, including annuities.” Section 5.L. further provides that the term producer includes an insurer where no producer is involved.

• Know the consumer's financial situation, insurance needs and financial objectives;

• Understand the available recommendation options after making a reasonable inquiry into options available to the producer;

• Have a reasonable basis to believe the recommended option effectively addresses the consumer's financial situation, insurance needs and financial objectives over the life of the product, as evaluated in light of the consumer profile information; and

• Communicate the basis or bases of the recommendation.

NAIC Model Regulation, at section 6(A)(1)(a).

The conflict of interest obligation requires the producer to “identify and avoid or reasonably manage and disclose material conflicts of interest, including material conflicts of interest related to an ownership interest.”

“Material conflict of interest” is defined as “a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation,” but the definition expressly carves out “cash compensation or non-cash compensation” from treatment as sources of conflicts of interest.

The NAIC Model Regulation also provides that it does not apply to transactions involving contracts used to fund an employee pension or welfare plan covered by ERISA.

Id.

at section 6(A)(3).

Id.

at section 5(I).

Id.

at section 4(B)(1).

The NAIC expressly disclaimed that its standard creates fiduciary obligations, and the obligations in the Model Regulation differ in significant respects from those applicable to broker-dealers in the SEC's Regulation Best Interest.

For example, in addition to disregarding compensation as a source of conflicts of interest, the specific care, disclosure, conflict of interest, and documentation requirements do not expressly incorporate the obligation not to put the producer's or insurer's interests before the customer's interests, even though compliance with their terms is treated as meeting the “best interest” standard. Similarly, the Model Regulation's care obligation does not repeat the “best interest” requirement but instead includes a requirement to “have a reasonable basis to believe the recommended option effectively addresses the consumer's financial situation, insurance needs and financial objectives . . . .”

Additionally, the obligation to comply with the “best interest” standard is limited to the individual producer, as opposed to the insurer responsible for supervising the producer.

Section 6(d) of the Model Regulation provides, “[t]he requirements under this subsection do not create a fiduciary obligation or relationship and only create a regulatory obligation as established in this regulation.” In recent insurance industry litigation against the Department, plaintiff Federation of Americans for Consumer Choice, Inc., stated that “[t]here is a world of difference” between the NAIC Model Regulation and ERISA's fiduciary regime.

See

Pls.' (1) Br. In Opp'n to Defs.' Cross-Motion to Dismiss for Lack of Jurisdiction or, in the Alternative, for Summ. J., and (2) Reply Br. in Supp. of Pls. Mot. for Summ. J, 40,

Fed'n of Ams. for Consumer Choice

U.S. Dep't of Labor,

No. 3:22-CV-00243-K-BT (Nov. 7, 2022) (comparing ERISA's best interest requirement to NAIC Model Regulation 275, Sections 2.B and 6.A.(1)(d)).

Id.

at section 6(A)(1)(a)(iii).

These regulatory changes cover many, but not all, of the assets held by retirement plans. Further, the SEC's Regulation Best Interest and the NAIC Model Regulation are each limited in important ways in terms of application to advice provided to ERISA plan fiduciaries although this is not the case with the Advisers Act fiduciary obligations. For example, Regulation Best Interest does not cover advice to workplace retirement plans or their representatives (such as an employee of a small business who is a fiduciary of the business's 401(k) plan).

The NAIC Model Regulation does not apply to transactions involving contracts used to fund an employee pension or welfare plan covered by ERISA.

The Department believes that retirement investors and the regulated community are best served by an ERISA fiduciary standard that applies uniformly to all investments that retirement investors may make with respect to their retirement accounts. Amendments to the ERISA regulation are necessary to achieve that result.

Regulation Best Interest release, 84 FR 33318, 33343-44 (July 12, 2019). Regulation Best Interest would apply, however, to retail customers receiving recommendations for their own retirement accounts.

Id.

NAIC Model Regulation, at section 4(B)(1).

7. Coordination With Other Agencies

Under Title I and Title II of ERISA, the Department has primary responsibility for the regulation of fiduciaries' advice to retirement investors. Because of the fundamental importance of retirement investments to workers' financial security and the tax-preferred status of plans and IRAs, Congress defined the scope of fiduciary coverage broadly and imposed stringent obligations on fiduciaries, including prohibitions on conflicted transactions that do not have direct analogues under the securities and insurance laws. The fiduciary standards and prohibited transaction rules set forth in Title I and Title II of ERISA, as applicable, broadly apply to covered fiduciaries, irrespective of the particular investment product they recommend or their status as investment advisers under the Advisers Act, broker-dealers, insurance agents, bankers, or other status. This proposed regulatory approach is designed to ensure that the standards and rules applicable under Title I and Title II of ERISA are broadly uniform as applied to retirement investors across different categories of investment advice providers and advisory relationships.

At the same time, however, many stakeholders have stressed the need to harmonize the Department's efforts with potential rulemaking and rulemaking activities by other regulators, including the SEC's standards of care for providing investment advice and the Commodity Futures Trading Commission's (CFTC) business conduct standards for swap dealers (and comparable SEC standards for security-based swap dealers). In addition, commenters have urged coordination with other agencies regarding IRA products and services.

As the SEC has adopted regulatory standards for broker-dealers that are

based on fiduciary principles of care and loyalty also applicable to investment advisers under the Advisers Act, and the NAIC has adopted a model law that includes a best interest standard, the Department believes that it is possible to honor the unique regulatory structure imposed by the law governing tax-preferred retirement investments, adopt a regulatory approach that provides a broadly uniform standard for all retirement investors, as contemplated by Title I and Title II of ERISA, and avoid the imposition of obligations that conflict with investment professionals' obligations under other applicable laws. In particular, in the Department's view, PTE 2020-02 is consistent with the requirements of the SEC's Regulation Best Interest and the fiduciary obligations of investment advisers under the Advisers Act. Therefore, broker-dealers and investment advisers that have already adopted meaningful compliance mechanisms for Regulation Best Interest and the Advisers Act fiduciary duty, respectively, should be able to adapt easily to comply with the PTE.

Nevertheless, to better understand whether the proposed rule and exemptions would subject investment advice providers to requirements that conflict with or add to their obligations under other Federal laws, the Department has continued consulting and coordinating with the SEC; other securities, banking, and insurance regulators; the Department of the Treasury, including the Federal Insurance Office; and the Financial Industry Regulatory Authority (FINRA), the independent regulatory authority of the broker-dealer industry.

The Department has also continued consulting and coordinating with the Department of the Treasury and the Internal Revenue Service (IRS), particularly on the subject of IRAs, and will continue to do so through the rulemaking process. Although the Department has responsibility for issuing regulations and prohibited transaction exemptions under section 4975 of the Code, which applies to IRAs, the IRS maintains general responsibility for enforcing the excise tax applicable to prohibited transactions. The IRS's responsibilities extend to the imposition of excise taxes on fiduciaries who participate in prohibited transactions. As a result, the Department and the IRS share responsibility for addressing self-dealing by investment advice fiduciaries to tax-qualified plans and IRAs.

C. Purpose of the Proposed Rule and Summary of the Major Provisions

1. Purpose of the Proposed Rule

Since the 1975 rule was adopted, developments in retirement savings vehicles and in the investment advice marketplace have altered the way retirement investors interact with investment advice providers. In 1975, retirement plans were primarily defined benefit plans, which were typically managed by sophisticated investment professionals. IRAs were not major market participants and 401(k) plans were not yet in existence. Today, however, plan participants, IRA owners, and their beneficiaries exercise direct authority over their investments, and depend upon a wide range of investment professionals, including broker-dealers, advisers subject to the Advisers Act, insurance agents, and others on how to make complex decisions about the management of retirement assets.

These individual investors have far greater responsibility for decisions about their retirement savings than was true in 1975, when investment professionals directly managed plan investments. Individual investors routinely depend on the quality of the advice they receive from financial professionals who commonly hold themselves out as trusted advice providers. Because these professionals have inherent conflicts of interest, however, there is an ever-present danger that the investment advice the retirement investor receives will be driven, not by the best interest of the investor, but by the financial interests of the investment professional or firm whom they depend upon for advice that is in their interest.

Certainly, when an investment professional satisfies all five conditions of the 1975 regulation with respect to a given instance of advice, the investment professional is properly treated as a fiduciary in accordance with the parties' reasonable understanding of the nature of their relationship. However, the 1975 test, as applied to the current marketplace is underinclusive because it fails to capture many circumstances in which an investor would reasonably believe they were receiving advice from an investment professional who was rendering services to the investor based upon the investor's best interest. The Department's experience in the current marketplace is that the five-part test—in particular, the “regular basis” requirement and the requirement of “a mutual agreement, arrangement, or understanding” that the investment advice will serve as “a primary basis for investment decisions”—too often work to defeat legitimate retirement investor expectations of impartial advice and allow some advice relationships to occur where there is no best interest standard.

These components of the five-part test are not found in the statute's text, and in today's marketplace, undermine legitimate investor understandings of a professional relationship centered around the investor's best interest. In other words, there are currently many situations where the retirement investor reasonably expects that their relationship with the advice provider is one in which the investor can (and should) place trust and confidence in the recommendation, yet which are not covered by the current regulation. This proposal attempts to reconcile the regulatory text with the both the reasonable expectations of the retirement investor along with the statutory text and purpose.

The proposed revised definition of an investment advice fiduciary under ERISA, as discussed in detail below, is consistent with the express text of the statutory definition and better protects the interests of retirement investors. The proposal comports with the broad language and protective purposes of the statute, while at the same time limiting the treatment of recommendations as ERISA

fiduciary

advice to those objective circumstances in which a retirement investor would reasonably believe that they can rely upon the advice as rendered by an investment professional who is acting in the investor's best interest, rather than merely promoting their own competing financial interests at the investor's expense.

An important premise of Title I and Title II of ERISA is that fiduciaries' conflicts of interest should not be left unchecked, but rather should be carefully regulated through rules requiring adherence to basic fiduciary norms and avoidance of prohibited transactions. The specific duties imposed on fiduciaries by Title I and Title II of ERISA stem from Congress' judgment regarding the best way to protect the public interest in tax-advantaged benefit arrangements that are critical to workers' financial and physical health. In contrast to the Federal securities laws and other regulatory regimes which can permit certain conflicts if prescribed disclosure obligations are met, the statutory prohibited transaction provisions in Title I and Title II of ERISA contemplate a more stringent approach for the protection of these tax-advantaged retirement savings. In this context, an

appropriately constructed regulatory definition of an investment advice fiduciary under Title I and Title II of ERISA is essential.

While Congress enacted ERISA to give special protections to retirement investors based on the central importance of retirement assets to individuals' financial security and the broader marketplace, ERISA's regulation of advice has failed to keep up with changes in the marketplace, in marked contrast to other regulatory regimes. As noted above, the Department's proposal follows the acts of other regulators who have similarly recognized the need to change the standards applicable to investment professionals to reflect current realities. It is appropriate that the Department, too, update its regulation to reflect the current marketplace, and to ensure that ERISA and the Code serve their protective purposes. When Congress enacted ERISA, it chose to impose a uniquely protective regime on the management and oversight of plan assets. The law's aim was to protect the interests of plan participants and beneficiaries by imposing especially high standards on those who exercise functional authority over plan investments, including rendering investment advice for a fee. As many Courts have noted, ERISA's obligations are the “highest known to the law.”

The 1975 rule as applied to current market conditions, however, undermines ERISA's protective goals and defeats legitimate investor expectations of professional advice based upon their best interest. As discussed in more detail in the RIA, some retirement investors remain vulnerable to harm from conflicts of interest in the investment advice they receive because of the outdated 1975 regulation. The Department, as opposed to other regulators, remains uniquely positioned to create a regulatory definition of an investment advice fiduciary under ERISA that is uniformly applicable to all the types of investments that retirement investors make.

Donovan

Bierwirth,

680 F.2d 263, 272 n. 8 (2d. Cir. 1982),

cert denied,

459 U.S. 1069 (1982).

For example, the Department's proposal fills an important gap regarding advice to plans and plan fiduciaries. Advice from broker-dealers to plans and plan fiduciaries is not protected by the SEC's Regulation Best Interest. And the NAIC Model Regulation does not apply to transactions involving contracts used to fund retirement plans covered by ERISA. The fiduciary advice definition in Title I and Title II of ERISA, however, extends more broadly to cover advice to plan and IRA fiduciaries as well as plan participants, beneficiaries, and IRA owners and beneficiaries. This provides important protections to the retirement investors saving through these plans. The proposed rule would apply uniformly to advice to retirement investors within the ambit of Title I and Title II of ERISA, as is consistent with the text of the statutory definition which draws no distinctions between these different categories of retirement investors.

The proposal also takes on special importance in creating uniform standards for investment transactions that are not covered by the Federal securities laws. Some types of plan and IRA investments, such as real estate, fixed indexed annuities, certificates of deposit, and other bank products, may not be subject to the SEC's Regulation Best Interest, and there are a number of persons who provide investment advice services that are neither subject to the SEC's Regulation Best Interest nor to the fiduciary obligations in the Advisers Act. An update to the regulatory definition of an investment advice fiduciary, for purposes of Title I and Title II of ERISA, will enhance protections of retirement investors. This approach reflects both the statutory text, which adopts a uniform approach to all assets held in tax-advantaged retirement plans, as well as sound public policy. When investment professionals hold themselves out to retirement investors as making recommendations based on the retirement investors' best interests, their recommendations should be driven by a uniform fiduciary obligation, and not by perceptions that one category of investment product is subject to lower regulatory standards than another.

Since ERISA's enactment, the Department has been expressly given the authority under Title I of ERISA to issue regulations defining terms in Title I and to grant administrative exemptions from the prohibited transactions provisions. Pursuant to the President's Reorganization Plan No. 4 of 1978,

which Congress ratified in 1984,

the Department's authority was expanded to include authority to issue regulations, rulings, and opinions on the definition of a fiduciary with respect to Title II plans under the Code (including IRAs) and to grant administrative prohibited transaction exemptions applicable to them.

Thus, the Department has clear authority to promulgate the regulatory definition of a fiduciary under both Title I and Title II of ERISA, and the Department has taken care in this proposal to honor the text and purposes of Title I and Title II of ERISA.

5 U.S.C. App. 1 (2018).

Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).

Sec. 102, 5 U.S.C. App. 1.

2. Summary of the Major Provisions of the Proposed Rule

The Department proposes that a person would be an investment advice fiduciary if they provide investment advice or make an investment recommendation to a retirement investor (

i.e.,

a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA fiduciary); the advice or recommendation is provided “for a fee or other compensation, direct or indirect,” as defined in the proposed rule; and the person provides the advice or makes the recommendation in one of the following contexts:

• The person either directly or indirectly (

e.g.,

• The person either directly or indirectly (

e.g.,

• The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.

This proposed rule is accompanied by proposals (published elsewhere in the

Federal Register

) related to prohibited transaction exemptive relief. The proposals would amend existing PTEs, including PTE 2020-02, that allow, subject to protective conditions, investment advice fiduciaries to receive compensation and engage in transactions that otherwise would be prohibited. Unlike the PTEs that were a part of the 2016 Rulemaking, these PTEs do not, and the amendments would not, include required contracts or warranties that the Fifth Circuit objected to. These prohibited transaction exemptions also do not exempt a party from

status as a fiduciary,

and therefore, the proposals do not affect the scope of the regulatory definition of an investment advice fiduciary. Rather, the exemption proposals involve an exercise of the statutory authority afforded to the Department by Congress to grant administrative relief from the strict prohibited transaction provisions in Title I and Title II of ERISA for beneficial transactions involving plans and IRAs.

See

section 408(a) of ERISA (requiring the Department to make findings before granting an exemption that the exemption is administratively feasible, in the interests of the plan or IRA and of its participants and beneficiaries, and protective of

the rights of participants and beneficiaries of such plan or IRA); section 4975(c)(2) of the Code (same).

It is important to note that each required component of the new proposed regulatory definition would have to be satisfied with respect to any particular recommendation for the recommendation to constitute fiduciary investment advice. In accordance with the statute, fiduciary status is determined on a transactional basis. Under the statutory text, a person is a fiduciary with respect to advice “to the extent . . . [they] render[] investment advice for a fee or other compensation, direct or indirect.” The proposed rule, like the statute, applies fiduciary status on a transaction-by-transaction basis. One is only a fiduciary “to the extent” the person making the recommendation meets the rule's requirements with respect to the particular advice transaction at issue.

The Department believes the test that it is proposing here better honors the statute and retirement investors' legitimate expectations of impartial investment advice from trusted advice providers than the 1975 rule, while avoiding the danger of sweeping too broadly and covering recommendations that Congress might not have intended to cover.

The Department's proposal is also intended to be responsive to the Fifth Circuit's emphasis on relationships of trust and confidence. The current proposal is much more narrowly tailored than the 2016 Final Rule, which treated as fiduciary advice, any compensated investment recommendation as long as it was directed to a specific retirement investor regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA. In contrast, the proposal provides that fiduciary status would attach only if compensated recommendations are made in certain specified contexts, each of which describes circumstances in which the retirement investor can reasonably place their trust and confidence in the advice provider. The Department believes the approach in this proposal is consistent with the statutory definition that applies fiduciary status on a functional (and therefore, transactional) basis.

Mertens

Hewitt Assocs.,

508 U.S. 248 (1993). In this regard, the Department notes that the SEC's Regulation Best Interest also applies on a transactional basis. As stated by the SEC, “the provision of recommendations in a broker-dealer relationship is generally transactional and episodic, and therefore the final rule requires that broker-dealers act in the best interest of their retail customers at the time a recommendation is made and imposes no duty to monitor a customer's account following a recommendation.” 84 FR 33318, 33331 (July 12, 2019).

The proposed regulatory definition of an investment advice fiduciary includes the following paragraphs, which are discussed in greater detail below. Paragraph (c) of the proposed regulation defines the term “investment advice.” Paragraph (d) retains the provision in the existing regulation regarding “execution of securities transactions.” Paragraph (e) defines the phrase “for fee or other compensation, direct or indirect.” Paragraph (f) sets forth definitions used in the regulation. Paragraph (g) addresses applicability of the regulation. Paragraph (h) confirms the continued applicability of State law regulating insurance, banking, and securities.

3. Covered Advice and Recommendations

Paragraph (c)(1) of the proposed regulation provides that a person renders “investment advice” with respect to moneys or other property of a plan or IRA if the person makes a recommendation of any securities 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, subject to certain specified criteria. Paragraphs (c)(1)(i), (ii), and (iii) set forth three alternative contexts under which covered recommendations would constitute investment advice for purposes of the statutory definitions of an investment advice fiduciary in Title I and Title II of ERISA. As discussed herein, under each of these three contexts, the Department believes that retirement investors could reasonably place their trust and confidence in the advice provider. The proposal also makes clear that fiduciary status under Title I and/or Title II of ERISA may result from recommendations to any of the relevant plan actors, including not only the plan fiduciary, but also plan participants, IRA owners, and their beneficiaries. This is consistent with the Department's longstanding position that advice to a plan participant or beneficiary is advice to the plan.

IB 96-1, 29 CFR 2509.96-1. For purposes of this definition, a participant or beneficiary of the plan is not a “plan fiduciary” with respect to the plan.

Paragraph (c)(1)(i)

In the first context, which is set forth in proposed paragraph (c)(1)(i), a person renders fiduciary “investment advice” within the meaning of ERISA section 3(21) if the person rendering advice either directly or indirectly (

e.g.,

through or together with any affiliate) has discretionary authority or control, whether or not pursuant to an agreement, arrangement or understanding, with respect to purchasing or selling securities or other investment property for the retirement investor.

This proposed provision is similar to a provision in the 1975 rule that provides for investment advice fiduciary status if a covered recommendation is made and the person making the recommendation either directly or indirectly has “discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities or property

for the plan.”

The proposal would broaden this provision by referencing securities or other investment property of the retirement investor, not just an investment through a plan or IRA.

See

29 CFR 2510.3-21(c)(1)(ii)(A) and 26 CFR 54.4975-9(c)(1)(ii)(A) (emphasis added).

See also

paragraph (d) of the proposal, which provides that a person is not a fiduciary merely because they have certain specific discretion in connection with the execution of securities transactions.

Persons that have discretionary authority or control over the investment of a retirement investor's assets necessarily are in a relationship of trust and confidence with respect to the retirement investor.

Further, like the 1975 provision, the proposal would extend to circumstances in which the person making the recommendation “indirectly (

e.g.,

through or together with any affiliate)” has discretionary authority or control over securities or other investment property; in this context, the use of “indirectly” generally refers to an arrangement in which an affiliate has discretionary authority or control.

As discussed below, the proposed rule would not impose on a fiduciary an automatic fiduciary obligation to continue to monitor an investment or a retirement investor's activities to ensure the recommendations remain prudent and appropriate for the plan or IRA. The extent of a monitoring obligation would depend on whether the facts and circumstances indicate that the fiduciary has undertaken that responsibility. A fiduciary that assumes discretion over plan or IRA assets, however, would generally be viewed as assuming a monitoring obligation.

Paragraph (c)(1)(ii)

The second context, in proposed paragraph (c)(1)(ii), sets forth that a person provides fiduciary “investment advice” if the person making the recommendation directly or indirectly (

e.g.,

through or together with an affiliate) makes investment recommendations to investors on a

regular basis as part of their business and the recommendation is provided under circumstances indicating 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.

The proposed provision applies only to advice rendered by a person who makes investment recommendations to investors “on a regular basis as part of their business.” As compared to the “regular basis” prong of the 1975 regulation, which the Department believes can work to undermine the current reasonable expectations of retirement investors, this proposed provision is properly focused on whether the advice provider is in the business of providing investment recommendations. The proposal's updated regular basis requirement avoids concerns that the rule could sweep so broadly as to cover, for example, the car dealer who suggests that a consumer finance a purchase by tapping into retirement funds. Retirement investors would not typically view such persons as making investment recommendations based on the retirement investors' individual financial interests, and the rule would not treat them as fiduciaries. Similarly, the human resources employees of a plan sponsor would not be considered investment advice fiduciaries under the proposed regulatory definition, because they do not regularly make investment recommendations to investors as part of their business.

The Department also would not consider salaries of human resources employees of the plan sponsor to be a fee or other compensation in connection with or as a result of the educational services and materials that they provide to plan participants and beneficiaries. Further, the proposed rule does not alter the principles articulated in ERISA Interpretive Bulletin 75-8, D-2 (29 CFR 2509.75-8) (IB 75-8). IB 75-8 provides that persons who perform purely administrative functions for an employee benefit plan, within a framework of policies, interpretations, rules, practices and procedures made by other persons, but who have no power to make decisions as to plan policy, interpretations, practices or procedures, are not fiduciaries with respect to the plan by virtue of those purely ministerial functions.

However, the proposal's regular basis requirement would not defeat legitimate investor expectations by automatically excluding one-time advice from treatment as fiduciary investment advice.

For example, the proposed rule would treat an insurance agent's recommendation to invest a retiree's retirement savings in an annuity as fiduciary advice if the agent regularly makes investment recommendations to investors, and the circumstances indicate that the recommendation is based on the retiree's particular needs and circumstances and may be relied upon for making an investment decision that is in the investor's best interest. Similarly, if the agent told the retiree that they were rendering fiduciary advice, the proposal would treat the recommendation as fiduciary advice even if was one-time advice. Over time, the Department has become concerned that 1975 regulation's regular basis test served to defeat objective understandings of the nature of the professional relationship and the reliability of the advice as based on the investor's best interest.

As noted by the magistrate judge in

Federation of Americans for Consumer Choice

United States Dept. of Labor,

the Fifth Circuit's opinion “did not foreclose that Title I duties may reach those fiduciaries who, as aligned with Title I's text, render advice, even for the first time, `

for

a fee or other compensation.'” Findings, Conclusions, and Recommendations of the United States Magistrate Judge,

FACC,

No. 3:22-CV-00243-K-BT, 2023 WL 5682411, at *22 (N.D. Tex. June 30, 2023) (quoting ERISA section 3(21)(A)(ii), 29 U.S.C. 1002(21)(A)(ii)) (emphasis in original).

By limiting the scope of those who may be an investment advice fiduciary to those who make investment recommendations as a regular part of their business, the Department believes that the proposed definition is appropriately tailored to those advice providers in whom retirement investors may reasonably place their trust and confidence. Whether someone gives investment recommendations on a regular basis as part of their business is an objective test based on the totality of facts and circumstances.

The Department invites comment on this approach, including the extent to which the Department should consider the investor's understandings as to whether the adviser regularly makes investment recommendations as part of their business. The Department seeks comment regarding examples of financial professionals who may be reasonably viewed by investors as giving investment advice but would not in fact meet the requirements laid out in this provision.

The reference to “investment recommendations” here and elsewhere in the proposal does not indicate that the proposal is limited to broker-dealers, or parties who regularly provide advice or make recommendations in the securities or banking industries. The scope of the regulation would extend to recommendations involving securities

or other investment property.

Therefore, for example, insurance agents who regularly make recommendations to customers with respect to the purchase of annuity contracts would be considered to make investment recommendations to investors on a regular basis as part of their business. Proposed paragraph (f)(11) provides that the term “investment property” does not include health insurance policies, disability insurance policies, term life insurance policies, or other property to the extent the policies or property do not contain an investment component.

Proposed paragraph (c)(1)(ii) further provides that, to count as fiduciary advice, the recommendation must be 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.”

This provision of the proposal is similar to, but improves upon, the parts of the 1975 regulation that require a “mutual agreement, arrangement or understanding” that the advice will serve as “a primary basis” for the retirement investor's investment decisions. Instead of the “mutual agreement, arrangement, or understanding” requirement—which over time has encouraged investment professionals to hold themselves out as trusted advisers while disclaiming fiduciary status in the fine print—the proposal would focus on the objective “circumstances” surrounding the recommendation, including how the investment professional held themselves out to the retirement investor and described the services offered. The Department believes that the proposed language will better avoid loopholes and fine print disclaimers, while properly focusing on a reasonable understanding of the nature of their relationship.

Further, the proposal does not include the 1975 regulation's “primary basis” requirement, which has proved difficult to interpret and untethered from the extent to which the recommendation was presented as advice upon which the investor could rely in making a decision.

100

Instead, the proposal has a requirement that the 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.” Recommendations that meet this test can be outcome-determinative for the investor and are appropriately treated as fiduciary advice when the elements of the proposed rule are satisfied.

100

See

Preamble to Prohibited Transaction Exemption 2020-02, Improving Investment Advice for Workers & Retirees, 85 FR 82798, 82808 (Dec. 18, 2020) (discussing comments on whether the test focuses on “a” primary basis or “the” primary basis).

In determining whether proposed paragraph (c)(1)(ii) is satisfied, the Department intends to examine the

ways investment advice providers market themselves and describe their services. For example, some stakeholders have previously expressed concern that investment advice providers that adopt titles such as financial consultant, financial planner, and wealth manager, are holding themselves out as acting in positions of trust and confidence while simultaneously disclaiming status as an ERISA fiduciary.

101

In the Department's view, an investment advice provider's use of such titles routinely involves holding themselves out as making investment recommendations that will be based on the particular needs or individual circumstances of the retirement investor and may be relied upon as a basis for investment decisions that are in the retirement investor's best interest.

101

See id.

at 82803.

Of course, whether a recommendation is provided under circumstances indicating that it is based on the particular needs or individual circumstances of the retirement investor and that it may be relied upon as a basis for investment decisions that are in the retirement investor's best interest is only part of the consideration. Even if a recommendation satisfies a portion of the definition, it is not fiduciary investment advice unless each aspect is satisfied (

e.g.,

to satisfy paragraph (c)(1)(ii), the person must also (directly or indirectly) make investment recommendations on a regular basis as part of their business).

The Department invites comments on the extent to which particular titles are commonly perceived to convey that the investment professional is providing individualized recommendations that may be relied upon as a basis for investment decisions in a retirement investor's best interest (and if not, why such titles are used). The Department also requests comment on whether other types of conduct, communication, representation, and terms of engagement of investment advice providers should merit similar treatment.

Paragraph (c)(1)(iii)

The third context identified in the proposal, in proposed paragraph (c)(1)(iii), is if the person making recommendations represents or acknowledges that they are acting as a fiduciary when making investment recommendations. An investment advice provider that acknowledges fiduciary status has expressly agreed that the customer may place trust and confidence in them. Furthermore, as discussed in the Fifth Circuit's opinion, honesty is a general premise of a common law fiduciary relationship.

102

This provision of the proposal would ensure that parties making a fiduciary representation or acknowledgment cannot subsequently deny their fiduciary status if a dispute arises, but rather must honor their words.

102

Chamber,

885 F.3d 360, 370 (5th Cir. 2018) (citing George M. Turner, Revocable Trusts § 3:2 (Sept. 2016 Update)).

For purposes of the proposal, paragraph (c)(1)(iii) is not limited to the circumstances in which the person specifically represents that they are a fiduciary for purposes of Title I or Title II of ERISA, or specifically cites any particular statutory provisions. It is enough that the investment advice provider told the retirement investor that the investment advice or investment recommendations were or will be made in a fiduciary capacity. As with the other contexts identified in proposed paragraph (c)(1), this is intended to align fiduciary status with the retirement investor's reasonable expectations. A retirement investor who is told by a person that the person will be acting as a fiduciary reasonably and appropriately places their trust and confidence in such a person.

In the retirement context, the Department has stressed the importance of clarity regarding the nature of an advice relationship and has encouraged retirement investors to ask advice providers about their status as an ERISA fiduciary with respect to retirement accounts and seek a written statement of the advice provider's fiduciary status. The Department's FAQs entitled

Choosing the Right Person to Give You Investment Advice: Information for Investors in Retirement Plans and Individual Retirement Accounts

state “A written statement helps ensure that the fiduciary nature of the relationship is clear to both you and the investment advice provider at the time of the transaction, and limits the possibility of miscommunication.”

103

Available at

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/choosing-the-right-person-to-give-you-investment-advice.

Many retirement investors may receive a written fiduciary acknowledgment due to compliance obligations of an investment advice provider. For example, retirement investors that are plan fiduciaries entering into an investment advice services arrangement on behalf of the plan are likely to receive an acknowledgment of fiduciary status from the provider as part of the disclosure obligations under ERISA section 408(b)(2) and the regulations thereunder.

104

Further, an upfront written acknowledgment of fiduciary status is a requirement of several prohibited transaction exemptions available to investment advice fiduciaries, including the statutory exemption added by Congress at ERISA section 408(b)(14)

105

and the Department's broad administrative exemption, PTE 2020-02.

106

104

29 CFR 2550.408b-2(c)(1)(iv)(B).

105

See

ERISA section 408(g)(6)(A)(vii), 29 U.S.C. 1108(g)(6)(A)(vii) (“[T]he fiduciary adviser [must] provide[] to a participant or a beneficiary before the initial provision of the investment advice with regard to any security or other property offered as an investment option, a written notification (which may consist of notification by means of electronic communication) . . . that the adviser is acting as a fiduciary of the plan in connection with the provision of the advice . . . .”).

106

Section II(b)(1).

As discussed in the preamble to PTE 2020-02, the Department believes that parties seeking to provide investment advice to retirement investors and relying on the exemption should, at a minimum, make a conscious up-front determination of whether they are acting as fiduciaries; tell their retirement investor customers that they are rendering advice as fiduciaries; and, based on their conscious decision to act as fiduciaries, implement and follow the exemption's conditions.

107

85 FR 82798, 82827 (Dec. 18, 2020).

Disclaimers

Paragraph (c)(1)(v) of the proposal addresses the impact of disclaimers on parties' status as investment advice fiduciaries. The proposed paragraph provides that written statements by a person disclaiming status as a fiduciary under the Act, the Code, or this regulation, or disclaiming any of the conditions set forth in paragraph (c)(1)(ii), will not control to the extent they are inconsistent with the person's oral communications, marketing materials, applicable State or Federal law, or other interactions with the retirement investor. The Department's intent in including this paragraph in the proposal is to permit parties to define the nature of their relationship, but also to ensure that any disclaimer be consistent with oral communications or actions, marketing material, State and Federal law, and other interactions based on all relevant facts and circumstances. When the disclaimer is at odds with the investment advice provider's oral communications, marketing material, State or Federal law, or other interactions, the disclaimer is insufficient to defeat the retirement investor's legitimate expectations.

108

This discussion of disclaimers applies to the regulation proposed herein, defining an investment

advice fiduciary, and would not extend to a circumstance in which a financial professional has investment discretion over a retirement investor's assets.

4. Recommendations Regarding Securities Transactions or Other Investment Transactions or Investment Strategies

The definition of “investment advice” in proposed paragraph (c)(1) requires that there be “a recommendation regarding securities transactions or other investment transactions or investment strategies.”

Recommendation

Whether a person has made a “recommendation” is a threshold element in establishing the existence of fiduciary investment advice. For purposes of the proposed rule, the Department views a recommendation as a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the retirement investor engage in or refrain from taking a particular course of action. The analysis would apply equally to a communication that is made orally or in writing and would include electronic communications. The determination of whether a recommendation has been made would be an objective rather than a subjective inquiry.

In this regard, the more individually tailored the communication is to a specific retirement investor or investors about, for example, a security, investment property, or investment strategy, the more likely the communication will be viewed as a recommendation; however, the Department cautions that the fact that a communication is made to a group rather than an individual would not be dispositive of whether a recommendation exists. Additionally, providing a selective list of securities to a particular retirement investor as appropriate for the investor would be a recommendation as to the advisability of acquiring securities even if no recommendation is made with respect to any one security. Furthermore, a series of actions, taken directly or indirectly (

e.g.,

through or together with any affiliate), that may not constitute a recommendation when each action is viewed individually may amount to a recommendation when considered in the aggregate. Even if an action rises to the level of a recommendation, the advice is only fiduciary investment advice if the rest of the regulatory test is met.

In evaluating whether a recommendation has been made under the proposal, the Department intends to take an approach similar to that taken by the SEC and FINRA in the broker-dealer context. In the SEC's Regulation Best Interest, the SEC stated that it would apply the term as currently interpreted with respect to broker-dealer regulation for purposes of the suitability obligations, to achieve efficiencies for broker-dealers.

109

The Department likewise believes that efficiencies will apply if it adopts a similar approach.

109

Regulation Best Interest release, 84 FR 33318, 33335 (July 12, 2019);

see id.

at fn. 161 (providing citations to relevant FINRA guidance, including on the definition and contours of the term “recommendation”).

In the Regulation Best Interest release, the SEC stated,

[T]he determination of whether a broker-dealer has made a recommendation that triggers application of Regulation Best Interest should turn on the facts and circumstances of the particular situation and therefore, whether a recommendation has taken place is not susceptible to a bright line definition. Factors considered in determining whether a recommendation has taken place include whether the communication “reasonably could be viewed as a `call to action' ” and “reasonably would influence an investor to trade a particular security or group of securities.” The more individually tailored the communication to a specific customer or a targeted group of customers about a security or group of securities, the greater the likelihood that the communication may be viewed as a “recommendation.”

110

Id.

The SEC did not include a formal definition of a recommendation in Regulation Best Interest, based on its view that the concept of a recommendation is fact-specific and not conducive to an express definition.

111

In drafting this proposal, the Department has worked to ensure alignment with the regulatory regimes of the SEC and other regulatory agencies, and is proposing a similar approach.

111

Id.

In the Department's view, the framework established by the SEC for broker-dealers is consistent with ordinary understandings of “advice” and familiar to the broker-dealers that are regulated by the SEC. Accordingly, the Department would consider a recommendation for purposes of the SEC's Regulation Best Interest as a recommendation for purposes of this proposed regulation. The Department seeks comment on whether the approach taken in the proposal is sufficiently clear, or whether an express definition would be preferable.

Definition of the phrase “recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property.”

Proposed paragraph (f)(10) defines the phrase “recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property.” This phrase largely parallels the language in the SEC's Regulation Best Interest, which applies to broker-dealers' “recommendation of any securities transaction or investment strategy involving securities (including account recommendations).”

112

The phrase's broader reference to “other investment property” reflects the differences in jurisdiction between the SEC and the Department.

112

17 CFR 240.15l-1(a)(1).

Under proposed paragraph (f)(10), the phrase “recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property” is defined as recommendations:

• As to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, as to investment strategy, or as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA;

• As to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (

e.g.,

account types such as brokerage versus advisory) or voting of proxies appurtenant to securities; and

• As to rolling over, transferring, or distributing assets from an employee benefit plan or IRA, including recommendations as to whether to engage in the transaction, and the amount, the form, and the destination of such a rollover, transfer, or distribution.

Components of these proposed covered recommendations are discussed below.

Recommendations Involving Securities, Other Investment Property, and Investment Strategy

Paragraph (f)(10)(i) of the proposal describes, as covered recommendations, recommendations as to “the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, as to investment strategy, or as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or

distributed from the plan or IRA.” Similar to the SEC and FINRA, the Department intends to interpret “investment strategy” broadly, to include “among others, recommendations generally to use a bond ladder, day trading . . . or margin strategy involving securities, irrespective of whether the recommendations mention particular securities.”

113

Regulation Best Interest release, 84 FR 33318, 33339 (July 12, 2019) (citing FINRA Rule 2111.03 and FINRA Regulatory Notice 12-25, available at

https://www.finra.org/rules-guidance/notices/12-2

The reference to “other investment property” is intended to capture other investments made by plans and IRAs that are not securities. This includes, but would not be limited to, non-securities annuities, banking products, and digital assets (regardless of status as a security). The Department does not see any basis for differentiating advice regarding investments in CDs, including investment strategies involving CDs (

e.g.,

laddered CD portfolios), from other investment products, and therefore would interpret paragraph (f)(10) to cover such recommendations.

The Department proposes that the term investment property, however, not include health insurance policies, disability insurance policies, term life insurance policies, and other property to the extent the policies or property do not contain an investment component. This is confirmed in a proposed definition of “investment property” in paragraph (f)(11). Although there can be situations in which a person recommending group health or disability insurance, for example, effectively exercises such control over the decision that the person is functionally exercising discretionary control over the management or administration of the plan as described in ERISA section 3(21)(A)(i) or section 3(21)(A)(iii), the Department does not believe that the definition of investment advice in ERISA's statutory text is properly interpreted or understood to cover a recommendation to purchase group health, disability, term life insurance, or similar insurance policies that do not have an investment component.

Recommendations as to How Securities or Other Investment Property Should Be Invested After Rollover, Transfer, or Distribution

Proposed paragraph (f)(10)(i) also references recommendations “as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA.” This proposed provision addresses an important concern of the Department that investment advice providers should not be able to avoid fiduciary responsibility for a rollover recommendation by focusing solely on the investment of assets

after

they are rolled over from the plan. In many or most cases, a recommendation to a plan participant or beneficiary regarding the investment of securities or other investment property after a rollover, transfer, or distribution involves an implicit recommendation to the participant or beneficiary to engage in the rollover, transfer, or distribution. Certainly, a prudent and loyal fiduciary generally could not make a recommendation on how to invest assets currently held in a plan after a rollover, without even considering the logical alternative of leaving the assets in the plan or evaluating how that option compares with the retirement investor's likely investment experience post-rollover. A fiduciary would violate ERISA's 404 obligations if it recommended that a retirement investor roll the money out of the plan without proper consideration of how the money might be invested after the rollover.

Moreover, even in those relatively rare circumstances in which there is no implicit rollover recommendation, advice to a plan participant on how to invest assets currently held in an ERISA-covered plan is “advice with respect to moneys or other property of such plan” within the meaning of section 3(21)(A)(ii) of ERISA, inasmuch as the assets at issue are still held by the plan. The Department requests comments on the proposed language, and on whether this approach will appropriately protect the interests of plan participants and beneficiaries, or whether another approach would be more protective.

Recommendations on Strategies, Management of Securities or Other Investment Property, and Account Types

Paragraph (f)(10)(ii) of the proposed rule describes, as covered recommendations, recommendations as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (

e.g.,

account types such as brokerage versus advisory), or the voting of proxies appurtenant to securities. The statutory text broadly refers to “investment advice . . . with respect to any moneys or other property of such plan.” Recommendations as to investment management or strategy fall within the most straightforward reading of the statutory text. Accordingly, the proposed regulation makes clear that covered investment advice is not artificially limited solely to recommendations to buy, sell, or hold particular securities or investment property to the exclusion of all the other important categories of investment advice that investment professionals routinely provide.

This provision of the proposed regulation also makes clear that recommendations as to the selection of investment account arrangements would be covered. Accordingly, a recommendation to move from a commission-based account to an advisory fee-based account (or vice versa) would be a covered recommendation. The provision is consistent with the SEC's Regulation Best Interest and the Advisers Act's fiduciary obligations.

114

17 CFR 240.15l-1(a)(1) (“A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (

including account recommendations

) to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.”) (emphasis added); SEC Investment Adviser Interpretation, 84 FR at 33674 (“An adviser's fiduciary duty applies to all investment advice the investment adviser provides to clients, including advice about investment strategy, engaging a sub-adviser, and account type.”).

Recommendation on the Selection of Other Persons To Provide Investment Advice or Investment Management

Proposed paragraph (f)(10)(ii) extends to recommendations as to “selection of other persons to provide investment advice or investment management services.” Consistent with the Department's longstanding position, the proposed regulation would cover the recommendation of another person to be entrusted with investment advice or investment management authority over retirement assets. Such recommendations are often critical to the proper management and investment of those assets and are fiduciary in nature if the other conditions of the proposed definition are satisfied. Recommendations of investment advisers or managers are no different than recommendations of investments that the plan or IRA may acquire and are often, by virtue of the track record or

information surrounding the capabilities and strategies that are employed by the recommended fiduciary, inseparable from recommendations as to the types of investments that the plan or IRA will acquire. For example, the assessment of an investment fund manager or management is often a critical part of the analysis of which fund to pick for investing plan or IRA assets.

Under this proposal, the Department does not intend to suggest, however, that a person could become a fiduciary merely by engaging in the normal activity of marketing themselves as a potential fiduciary to be selected by a plan fiduciary or IRA owner, without making a recommendation of a securities transaction or other investment transaction or any investment strategy involving securities or other investment property. Touting the quality of one's own advisory or investment management services would not trigger fiduciary obligations. This view is made clear by the language in proposed paragraph (f)(10)(ii) that extends to recommendations of “other persons” to provide investment advice or investment management services.

However, this discussion should not be read to exempt a person from being a fiduciary with respect to any of the investment recommendations covered by proposed paragraphs (c)(1) and defined in proposed paragraph (f)(10). There is a line between an investment advice provider making claims as to the value of its own advisory or investment management services in marketing materials, on the one hand, and making recommendations to retirement investors on how to invest or manage their savings, on the other. An investment advice provider can recommend that a retirement investor enter into an advisory relationship with the provider without acting as a fiduciary. But when the investment advice provider recommends, for example, that the investor pull money out of a plan or invest in a particular fund, that advice may be given in a fiduciary capacity even if part of a presentation in which the provider is also recommending that the person enter into an advisory relationship. As proposed, the complete facts and circumstances surrounding each piece of advice would be considered. The Department believes that this is consistent with the functional fiduciary test laid out in the statute in which an entity is an investment advice fiduciary to the extent that they satisfy the definition. Just because one piece of advice is not fiduciary investment advice (here, the “hire me” recommendation) does not mean that the rest of the advice is necessarily excluded from the definition (here, the advice to pull money out of the plan and invest in a particular fund). The investment advice fiduciary could not prudently recommend that a plan participant roll money out of a plan into investments that generate a fee for the fiduciary but leave the participant in a worse position than if the participant had left the money in the plan. Thus, when a recommendation to “hire me” effectively includes a recommendation on how to invest or manage plan or IRA assets (

e.g.,

whether to roll assets into an IRA or plan or how to invest assets if rolled over), that recommendation would need to be evaluated separately under the provisions in the proposed regulation.

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The Department believes this approach is consistent with the SEC's approach in Regulation Best Interest. In FAQs, the SEC described a scenario involving broker-dealer communications with a prospective retail customer that would not rise to the level of a recommendation. However, the SEC cautioned that a recommendation made in the context of a “hire me” conversation or otherwise would be subject to Regulation Best Interest.

See

Questions on Regulation Best Interest, available at

https://www.sec.gov/tm/faq-regulation-best-interest.

Proxy Voting Appurtenant to Ownership of Shares of Corporate Stock

Proposed paragraph (f)(10)(ii) also extends to recommendations as to the “voting of proxies appurtenant to securities.” The Department has long viewed the exercise of ownership rights as a fiduciary responsibility; consequently, advice or recommendations on the exercise of proxy or other ownership rights are appropriately treated as fiduciary in nature if the other conditions of the regulation are satisfied.

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See

Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, 85 FR 81658 (Dec. 16, 2020) (“In connection with proxy voting, the Department's longstanding position is that the fiduciary act of managing plan assets includes the management of voting rights (as well as other shareholder rights) appurtenant to shares of stock.”).

Similar to other types of broad, generalized guidance that would not rise to the level of investment advice, however, guidelines or other information on voting policies for proxies that are provided to a broad class of investors without regard to a client's individual interests or investment policy and that are not directed or presented as a recommended policy for the plan or IRA to adopt, would not rise to the level of a covered recommendation under the proposal. Similarly, a recommendation addressed to all shareholders in an SEC-required proxy statement in connection with a shareholder meeting of a company whose securities are registered under Section 12 of the Exchange Act, for example, soliciting a shareholder vote on the election of directors and the approval of other corporate action, would not, under the proposed rule, constitute fiduciary investment advice from the person who creates or distributes the proxy statement.

Recommendations on Rollovers, Benefit Distributions, or Transfers From Plan or IRA

Proposed paragraph (f)(10)(iii) describes, as a category of covered recommendations, recommendations “as to rolling over, transferring, or distributing assets from an employee benefit plan or IRA, including recommendations as to whether to engage in the transaction, and the amount, the form, and the destination of such a rollover, transfer, or distribution.” This aspect of the proposal is consistent with the Department's longstanding interest in protecting retirement investors in the context of a recommendation to roll over employee benefit plan assets to an IRA, as well as other recommendations to roll over, transfer, or distribute assets from a plan or IRA.

The Department continues to believe that decisions to take a benefit distribution or engage in rollover transactions are among the most, if not the most, important financial decisions that plan participants and beneficiaries, and IRA owners and beneficiaries are called upon to make. The Department continues to believe that advice provided in connection with a rollover decision, even if not accompanied by a specific recommendation on how to invest assets, should be treated as fiduciary investment advice. A distribution recommendation involves either advice to change specific investments in the plan or to change fees and services directly affecting the return on those investments. Even if the assets would not be covered by Title I or Title II of ERISA when they are moved outside the plan or IRA, the recommendation to change the plan or IRA investments is investment advice under Title I or Title II of ERISA.

Thus, recommendations on distributions (including rollovers or transfers into another plan or IRA) or recommendations to entrust plan assets to a particular IRA provider would fall within the scope of investment advice in this proposed regulation, and would be covered by Title I of ERISA, including the enforcement provisions of section 502(a). Further, in the Department's view, the evaluation of whether a recommendation constitutes

fiduciary investment advice should be the same regardless of whether it is a recommendation to take a distribution or make a rollover to an IRA or a recommendation not to take a distribution or to keep assets in a plan.

The proposal's approach also aligns with the SEC's Regulation Best Interest and Advisers Act fiduciary obligations, which extend to account recommendations generally as well as recommendations to roll over or transfer assets from one type of account to another.

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Regulation Best Interest release, 84 FR 33318, 33339 (July 12, 2019); SEC Investment Adviser Interpretation, 84 FR 33669, 33674 (July 12, 2019).

5. Application of Paragraph (c)(1)

The proposal provides a general rule under which investment advice providers could determine their status through application of the facts and circumstances surrounding their interactions with their customers. To aid parties in conducting the analysis, the Department provides the following discussion of the application of the general rule in certain common circumstances and requests comment on the discussion. The Department also seeks comment on whether any adjustment should be made to the regulatory text to address issues discussed herein.

Sophisticated Retirement Investors

The proposed regulation does not include any special provision for recommendations to sophisticated advice recipients. Rather, under the proposal, fiduciary status would turn on the application of proposed paragraph (c)(1). In the absence of investment discretion (see proposed paragraph (c)(1)(i)) or a fiduciary acknowledgment (see proposed paragraph (c)(1)(iii)), the investment advice provider's fiduciary or non-fiduciary status would depend on the parties' understandings under the particular facts and circumstances (see proposed paragraph (c)(1)(ii)).

The Department acknowledges that some commenters in previous rulemakings have asserted that a specific “counterparty” provision is necessary to avoid limiting plan and IRA investors' choices in investment transactions.

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Commenters have suggested that the Department should adopt certain metrics, such as wealth or income, as conclusively establishing that the retirement investor has sufficient expertise and sophistication to foreclose fiduciary status of an advice provider. The Department is unaware, however, of compelling evidence that wealth and income are strong proxies for financial sophistication or inconsistent with a relationship of trust and confidence.

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Moreover, and independently, nothing in the statute's text suggests that Congress intended to categorically deny fiduciary protection to “sophisticated investors.” Instead of a specific “counterparty” provision or a provision for sophisticated plan- and IRA-level fiduciaries, proposed paragraph (c)(1)(ii) generally states an appropriate test for fiduciary status to apply to a covered recommendation, even if made to a plan or IRA fiduciary. To the extent counterparties wish to avoid fiduciary status, they can avoid structuring their relationships to fall within the circumstances described in that subparagraph.

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The 2016 Final Rule provided that, subject to specified conditions, certain transactions with independent fiduciaries with financial expertise would not constitute fiduciary investment advice. 81 FR 20946, 20980 (Apr. 8, 2016).

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High net worth investors and sophisticated investors are not carved out of protections under the SEC's Regulation Best Interest or the Advisers Act fiduciary duty.

In the context of “wholesaling” activity, which involves communications by product manufacturers or other financial service providers to financial intermediaries who then directly advise plans, participants, beneficiaries, and IRA owners and beneficiaries, the Department believes that communications to financial intermediaries would typically fall outside the scope of proposed paragraph (c)(1)(ii) because they would not involve recommendations based on the particular needs or individual circumstances of the plan or IRA serviced by the intermediary. There may also be other circumstances in which application of proposed paragraph (c)(1)(ii) would not result in a covered recommendation being treated as fiduciary investment advice. In general, however, the Department envisions that proposed paragraph (c)(1)(ii) would apply broadly to recommendations to plan and IRA fiduciaries acting on behalf of plans and IRAs.

More fundamentally, the Department rejects the purported dichotomy between a mere “sales” recommendation to a counterparty, on the one hand, and advice, on the other, in the context of the retail market for investment products. As reflected in recent regulatory developments from both the SEC and NAIC, financial service industry marketing materials, and the industry's comment letters reciting the guidance they provide to investors, sales and advice typically go hand in hand in the retail market.

In the Department's view, the updated conduct standards adopted by the SEC and the NAIC also reflect an acknowledgment of the fact that broker-dealers and insurance agents commonly provide paid investment and annuity recommendations to their customers. The SEC stated in the Regulation Best Interest release that “there is broad acknowledgment of the benefits of, and support for, the continuing existence of the broker-dealer business model, including a commission or other transaction-based compensation structure, as an option for retail customers seeking investment recommendations.”

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The NAIC Model Regulation, section 6.5.M defines a recommendation as “advice provided by a producer to an individual consumer that was intended to result or does result in a purchase, an exchange or a replacement of an annuity in accordance with that advice.” Further, “cash compensation” is defined as “any discount, concession, fee, service fee, commission, sales charge, loan, override, or cash benefit received by a producer

in connection with the recommendation

or sale of an annuity from an insurer, intermediary, or directly from the consumer.”

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When retirement investors talk to investment advice providers about the investments they should make, they commonly pay for, and receive, advice within the meaning of the statutory definition.

120

84 FR 33318, 33319 (July 12, 2019).

121

NAIC Model Rule section 5.B. (emphasis added).

Platform Providers and Pooled Employer Plans

Platform providers are entities that offer a platform or selection of investment alternatives to participant-directed individual account plans and their fiduciaries who choose the specific investment alternatives that will be made available to participants for investing their individual accounts. In connection with such offerings, platform providers may provide investment advice, or they may simply provide general financial information such as information on the historic performance of asset classes and of the investment alternatives available through the provider.

In the case of a platform provider, application of the proposed regulation may often focus on whether the communications fall within the threshold definition of a “recommendation.” As discussed in section 4, whether a recommendation exists under the proposal will turn on the degree to which a communication is

“individually tailored” to the retirement investor or investors, and providing a selective list of securities to a particular retirement investor as appropriate for the investor would be a recommendation as to the advisability of acquiring securities even if no recommendation is made with respect to any one security. Therefore, the inquiry may turn on whether the provider presents the investments on the platform as having been selected for and appropriate for the investor (

i.e.,

the plan and its participants and beneficiaries). In this regard, platform providers who merely identify investment alternatives using objective third-party criteria (

e.g.,

expense ratios, fund size, or asset type specified by the plan fiduciary) to assist in selecting and monitoring investment alternatives, without additional screening or recommendations based on the interests of plan or IRA investors, would not be considered under the proposal to be making a recommendation.

In the Department's view, this same analysis is likely to apply in the context of pooled employer plans (PEPs), which are individual account plans established or maintained for the purpose of providing benefits to the employees of two or more employers, authorized in the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

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PEPs are required to designate a pooled plan provider (PPP) who is a named fiduciary of the PEP.

123

PPPs are in a unique statutory position in that they are granted full discretion and authority to establish the plan and all of its features, administer the plan, act as a fiduciary, hire service providers, and select investments and investment managers. When a PPP or another service provider interacts with an employer about investment options under the plan, whether they have made a recommendation under the proposal will turn, in part, on whether they present the investments as selected for, and appropriate for, the plan, its participants, or beneficiaries.

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ERISA section 3(43), 29 U.S.C. 1002(43).

123

ERISA Section 3(43)(B), 29 U.S.C. 1002(43)(B).

Swaps and Security-Based Swaps

Swaps and security-based swaps are a broad class of financial transactions defined and regulated under amendments to the Commodity Exchange Act and the Securities Exchange Act of 1934 (Securities Exchange Act) by the Dodd-Frank Act. Section 4s(h) of the Commodity Exchange Act

124

and section 15F of the Securities Exchange Act

125

establish similar business conduct standards for dealers and major participants in swaps or security-based swaps. Special rules apply for swap and security-based swap transactions involving “special entities,” a term that includes employee benefit plans covered under ERISA. Under the business conduct standards in the Commodity Exchange Act as added by the Dodd-Frank Act, swap dealers or major swap participants that act as counterparties to ERISA plans must, among other conditions, have a reasonable basis to believe that the plans have independent representatives who are fiduciaries under ERISA.

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Similar requirements apply for security-based swap transactions.

127

The CFTC and the SEC have issued final rules to implement these requirements.

128

124

7 U.S.C. 6s(h).

125

15 U.S.C. 78o-10(h).

126

7 U.S.C. 6s(h)(5); 17 CFR 23.450.

127

15 U.S.C. 78o-10(h)(4), (5).

128

See

17 CFR 23.400-451; Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012); 17 CFR 240.15Fh-3-h-6; Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, 81 FR 29960 (May 13, 2016).

In the Department's view, when Congress enacted the swap and security-based swap provisions in the Dodd-Frank Act, including those expressly applicable to ERISA-covered plans, it did not intend to broadly impose ERISA fiduciary status on the plan's counterparty as it engaged in regulated conduct as part of the swap or security-based swap transaction with the employee benefit plan. The Department conferred with both the CFTC and the SEC at the time of those agencies' rulemakings, and assured harmonization of any change in the ERISA fiduciary advice regulation so as to avoid unintended consequences.

The Department makes the same assurance with respect to this proposed regulation. The disclosures required of plans' counterparties under the business conduct standards would not generally constitute a “recommendation” as defined in the proposal, or otherwise compel the dealers or major participants to act as fiduciaries in swap and security-based swap transactions conducted pursuant to section 4s of the Commodity Exchange Act and section 15F of the Securities Exchange Act. This includes disclosures regarding material risks, characteristics, incentives and conflicts of interest; disclosures regarding the daily mark of a swap or security-based swap and a counterparty's clearing rights; disclosures necessary to ensure fair and balanced communications; and disclosures regarding the capacity in which a swap or security-based swap dealer or major swap participant is acting when a counterparty to a special entity, as required by the business conduct standards.

This is not to say that a dealer or major participant would necessarily fall outside the scope of the proposed regulation if, in addition to providing the disclosures mandated above, it also chose to make specific investment recommendations to plan clients. In that circumstance, a swap dealer could become a fiduciary by virtue of their voluntary decision to make individualized investment recommendations to an ERISA-covered plan if the subparagraph's conditions were met.

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To the extent dealers wish to avoid fiduciary status under the proposal, however, they can structure their relationships to avoid making such investment recommendations to plans. Additionally, clearing firms would not be investment advice fiduciaries under the proposed rule merely as a result of providing such services as valuations, pricing, and liquidity information. As discussed in greater detail in the next section, the proposed rule does not include valuation and similar services as a category of covered recommendations.

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The business conduct standards do not preclude a swap dealer from giving advice if it chooses to do so.

See, e.g.,

17 CFR 23.434 (imposing requirements on swap dealers that recommend a swap or trading strategy involving a swap to a counterparty);