The New Fiduciary Rule (52): The Loper Bright Decision and What it Means for DOL Exemptions (2)


2020-02, 84-24, DOL, fiduciary, prohibited transaction, reg BI
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Key Takeaways

  • The lawsuits against the DOL’s new regulation on fiduciary advice and the related exemptions—and the likely appeals—will probably last for years.
  • Two key issues in the lawsuits and appeals are whether the DOL has the authority to amend its existing regulation—the 5-part test—to cover one-time recommendations and whether the DOL has the authority to issue prohibited transaction exemptions that require a standard of care (e.g., prudence and loyalty) where the law does not otherwise.
  • The DOL will argue that circumstances have change since 1975, for example, the enactment of Code section 401(k) and the post-ERISA growth in the importance of those plans. As a part of that, the DOL asserts that rollover recommendations should be fiduciary advice and that the compensation from the rollover IRA (account or annuity) would be a prohibited transaction.
  • My last post, Fiduciary Rule 51, discussed the impact of the Supreme Court’s Loper Bright decision on the new fiduciary regulation. This post discusses the impact of Loper Bright on the validity of the amended PTEs, 84-24 and 2020-02.

As I explained in my last post, Fiduciary Rule 51, I have been asked whether the Supreme Court’s decision in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce et al. could affect the outcome of the litigation about the validity of the DOL’s fiduciary regulation and related exemptions. The answer is “yes,” but perhaps not in the way you might think. This article discusses the Loper Bright decision in the context of a review of the DOL’s Prohibited Transaction Exemptions (PTEs) 84-24 and 2020-02.

To be fair, I am not an expert on constitutional law and I don’t want to create the impression that this is an authoritative article. Instead, my goal is to highlight the issues for consideration by the courts.

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The New Fiduciary Rule (51): The Loper Bright Decision and What it Means for DOL Regulations (1)


DOL, fiduciary, reg BI
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Key Takeaways

  • The lawsuits against the DOL’s new regulation on fiduciary advice and the related exemptions—and the likely appeals—will probably last for years.
  • A key issue in the lawsuits and appeals is the authority of the DOL to amend its existing regulation—the 5-part test—to cover one-time recommendations (subject to specified limits).
  • The DOL will argue that circumstances have change since 1975, for example, the enactment of Code section 401(k) and the post-ERISA growth in the importance of those plans. As a part of that, the DOL asserts that rollover recommendations should be fiduciary advice.
  • On the other hand, some financial industries, and particularly the insurance industry, will argue that a one-time recommendation associated with a rollover is a sales transaction that should not be held to a fiduciary standard.
  • A critical question for the courts is whether the DOL has authority to issue a new fiduciary recommendation that, among other things, says that a rollover recommendation, explicit or implicit, is fiduciary advice. The Supreme Court’s decision in the Loper Bright case establishes the standard for the courts to evaluate an agency’s authority.

I have been asked whether the Supreme Court’s decision in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce et al. could affect the outcome of the litigation about the validity of the DOL’s fiduciary regulation and related exemptions. The answer is “yes”, but perhaps not in the way you might think. This article discusses the Loper Bright decision in the context of a review of the DOL’s fiduciary regulation.

To be fair, I am not an expert on constitutional law and I don’t want to create the impression that this is an authoritative article. Instead, my goal is to highlight the issues for consideration by the courts.

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The New Fiduciary Rule (50): What is a Best Interest Process?


best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, reg BI, rollovers, SEC
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Key Takeaways

  • The DOL’s new regulation defining fiduciary advice to include one-time recommendations has been stayed, but advisers who make ongoing individualized recommendations to ERISA-governed retirement plans, participants in those plans, and IRA owners continue to be fiduciaries subject to fiduciary standards. Those standards—prudence and loyalty—can be called a best interest standard.
  • However, the SEC’s fiduciary standard for one-time recommendations by investment advisers continues to apply. The SEC position is most recently documented in its Commission Interpretation Regarding Standard of Conduct for Investment Advisers. The SEC said that the investment adviser duties of care and loyalty—taken together–are a best interest standard.
  • The best interest standard for both broker-dealers and investment advisers has been further defined by the SEC Staff in its Bulletin entitled Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors.
  • In addition, one-time recommendations of insurance products are regulated by state insurance departments and almost all of the states have adopted NAIC Model Regulation #275, “Suitability in Annuity Transactions”, either verbatim or in large part, for recommendations of annuities. The NAIC has referred to this as a best interest standard.
  • This post discusses the basic requirements for a best interest process for making recommendations to ERISA-governed retirement plans, participants in those plans, and IRA owners.
  • Note that Reg BI and the NAIC model rule do not apply to recommendations to retirement plans, but do apply to participants and IRA owners, including rollover recommendations and recommendations to transfer IRAs.

If you study the rules of the various standard-setters, a pattern emerges about their expectations for the process for developing a best interest recommendation. The DOL and SEC are consistent in that regard, while the NAIC model rule is less demanding, as explained later in this article.

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The New Fiduciary Rule (49): Recommendations to Transfer IRAs (NAIC)


best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, reg BI, SEC
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Key Takeaways

  • Two Texas Federal District Courts have “stayed” the effective dates of the DOL’s new fiduciary regulation and related exemptions, meaning that the private sector will not have to comply with those rules until the cases are resolved and if the guidance is vacated, those rules will never be effective.
  • As a result, one-time recommendations to plans, participants and IRA owners will not be fiduciary advice for purposes of ERISA and the Internal Revenue Code.
  • However, one-time recommendations of securities (and insurance products that are securities) are regulated by the SEC for broker-dealers and investment advisers.
  • In addition, one-time recommendations of insurance products are regulated by state insurance departments and almost all of the states have adopted NAIC Model Regulation #275, either verbatim or in large part.
  • This post covers NAIC Model Regulation #275’s provisions for recommending exchanges of individual retirement annuities (also referred to as qualified annuities).

The stay of the effective dates of the amended fiduciary regulation and amended exemptions means that the “old” DOL fiduciary regulation (the 5-part test) and the existing exemptions continue in effect indefinitely.

My last post, Fiduciary Rule 48, discussed the DOL’s “old” and continuing definition of fiduciary advice—the 5-part test—and how it might apply to recommendations to transfer IRAs—individual retirement accounts and individual retirement annuities. The post before that, Fiduciary Rule 47, discussed SEC and SEC staff guidance on recommendations to transfer IRAs. This post is about the application of the conduct standards in NAIC Model Regulation #275 to the recommendation of annuities. The Model Regulation has been adopted by substantially all of the states, either verbatim or in large part.

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The New Fiduciary Rule (48): Recommendations to Transfer IRAs (DOL)


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, reg BI, SEC
, , ,

Key Takeaways

    • Two Texas Federal District Courts have “stayed” the effective dates of the DOL’s new fiduciary regulation and related exemptions, meaning that the private sector will not have to comply with those rules until the cases are resolved and if the guidance is vacated, those rules will never be effective.
    • As a result, one-time recommendations to plans, participants and IRAs will not be fiduciary advice for purposes of ERISA and the Internal Revenue Code.
    • However, one-time recommendations are regulated by the SEC for broker-dealers and investment advisers and by state insurance departments for insurance producers (primarily under the NAIC Model Regulation #275 which has been adopted by most states).
    • My last post discussed SEC and SEC staff guidance on recommendations to transfer IRAs.
    • This post covers likely DOL interpretations concerning recommendations to transfer or exchange of individual retirement accounts and individual retirement annuities.
    • The third post in this series will cover NAIC Model Regulation #275’s provisions for recommending exchanges of individual retirement annuities (also referred to as qualified annuities).

The stay of the effective dates of the amended fiduciary regulation and amended exemptions means that the “old” DOL fiduciary regulation (the 5-part test) and the existing exemptions continue in effect indefinitely.

My last post, Fiduciary Rule 47, discussed SEC and SEC staff guidance on recommendations to transfer IRAs. This post is about the DOL’s likely interpretation of how the existing 5-part fiduciary definition applies to IRA transfer recommendations.

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The New Fiduciary Rule (47): Recommendations to Transfer IRAs (SEC)


best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, reg BI, SEC
, , ,

Key Takeaways

  • Two Texas Federal District Courts have “stayed” the effective dates of the DOL’s new fiduciary regulation and related exemptions, meaning that the private sector will not have to comply with those rules until the cases are resolved.
  • As a result, one-time recommendations to plans, participants and IRAs will not be fiduciary advice for purposes of ERISA and the Internal Revenue Code. However, one-time recommendations are regulated by the SEC for broker-dealers and investment advisers and by state insurance departments for insurance producers (primarily under the NAIC Model Regulation #275 which has been adopted by most states).
  • This post discusses SEC and SEC staff guidance on recommendations to transfer IRAs. The next two will cover likely DOL interpretations and NAIC Model Regulation #275’s provisions concerning the transfer or exchange of individual retirement accounts and individual retirement annuities.

The stay of the effective dates of the amended fiduciary regulation and amended exemptions means that the “old” DOL fiduciary regulation (the 5-part test) and the existing exemptions continue in effect indefinitely. As a result, it is unlikely that one-time plan-to-IRA rollover recommendations will be fiduciary recommendations under ERISA or the Internal Revenue Code. However, the standards of conduct for recommendations to transfer IRAs (that is, either individual retirement accounts or individual retirement annuities) are also governed by other regulators (and may still be subject to the DOL’s “old” fiduciary definition). This article and the next two will discuss conduct standards for IRA (including qualified annuities) of  the SEC, NAIC and DOL.

The SEC’s guidance is found in Regulation Best Interest (Reg BI) for broker-dealers and the Commission Interpretation Regarding Standard of Conduct for Investment Advisers (IA Interpretation). While Reg BI imposes a “best interest” standard and the IA Interpretation concerns  a fiduciary standard, the SEC staff, in its SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors explained: Although the specific application of Reg BI and the IA fiduciary standard may differ in some respects and be triggered at different times, in the staff’s view, they generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors. [The emphasis is mine.]

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The New Fiduciary Rule (46): The Regulation and Exemptions are Stayed—What Remains? (6)


best interest, IRA, rollovers, SEC
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Key Takeaways

  • Two Texas Federal District Courts have “stayed” the effective dates of the DOL’s new fiduciary regulation and related exemptions, meaning that the private sector will not have to comply with those rules until the cases are resolved.
  • The next step will be for those courts to determine if the regulation and exemptions are valid or should be vacated. After that there will likely be appeals. As a result, the “old” regulation and exemptions will continue to be in effect.
  • In addition to the DOL’s guidance, the securities and insurance industries are subject to regulators that focus on the distribution of their products and services. My last post, Fiduciary Rule 45, discussed NAIC Model Regulation #275, which addresses recommendations of annuities generally and, as a result, covers recommendations of annuities in connection with rollover recommendations.
  • This post contrasts the SEC and SEC staff guidance on rollover recommendations—which would cover annuities that are securities, and the NAIC Model Regulation #275’s provisions concerning rollovers into annuities that are not securities.

The stay of the effective dates of the amended fiduciary regulation and amended exemptions means that the “old” DOL fiduciary regulation (the 5-part test) and the existing exemptions continue in effect indefinitely. As a result, it is unlikely that an insurance producer will be a fiduciary under ERISA or the Internal Revenue Code  when making a recommendation to a participant to take his or her money out of a retirement  plan and roll over into a “qualified” annuity (or, more technically, an Individual Retirement Annuity).

Since the probability is that an insurance producer will not be an ERISA or Code  fiduciary, the applicable standard of conduct for a rollover recommendation will either be NAIC Model Rule #275 (“Suitability in Annuity Transactions Model Regulation”, as adopted by almost all of the states MDL-275.pdf (naic.org)) for insurance-only annuities or, for annuities that are securities (e.g., variable annuities or registered index-linked annuities, or RILAs), the SEC’s Regulation Best Interest for broker-dealers or its  “Commission Interpretation Regarding Standard of Conduct for Investment Advisers”.

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The New Fiduciary Rule (45): The Regulation and Exemptions are Stayed (5)—What Remains?


best interest, DOL, rollovers, SEC
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Key Takeaways

  • Two Texas Federal District Courts have “stayed” the effective dates of the DOL’s new fiduciary regulation and related exemptions, meaning that the private sector will not have to comply with those rules until the cases are resolved.
  • The next step will be for those courts to determine if the regulation and exemptions are valid or should be vacated. After that there will likely be appeals. As a result, the “old” regulation and exemptions will continue to be in effect.
  • In addition to the DOL’s guidance, the securities and insurance industry are subject to regulators that focus on their industries. My three prior posts, Fiduciary Rule 42, Fiduciary Rule 43 and Fiduciary Rule 44 discussed SEC and SEC staff guidance about rollover recommendations.
  • This post discusses the NAIC Model Regulation #275 for the insurance industry.

The stay of the effective dates of the amended fiduciary regulation and amended exemptions means that the “old” fiduciary regulation (the 5-part test) and the amended exemptions continue in effect indefinitely. As a result, it is unlikely that an insurance producer will be a fiduciary when making a recommendation to a participant to take his or her money out of the plan and roll over into a “qualified” annuity (or, more accurately, an Individual Retirement Annuity). And, if an insurance producer happened to be a fiduciary, the recommendation would need to satisfy ERISA’s prudent person rule and duty of loyalty and the conditions of the existing PTE 84-24, which are much less demanding than PTE 2020-02, which applies to other rollover recommendations.

However, as I said above, it is unlikely that an insurance producer would be a fiduciary. As a result, the standard of conduct would be established by state laws and regulations. By and large, those rules are based on NAIC Model Regulation #275.

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The New Fiduciary Rule (44): The Regulation and Exemptions are Stayed (4)—What Remains?


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, prohibited transaction, rollovers, SEC
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Key Takeaways

  • Shortly after the DOL’s new regulation defining fiduciary advice and amended Prohibited Transaction Exemptions 2020-02 and 84-24 were finalized, two lawsuits were filed in Federal District Courts in Texas.
  • The lawsuits sought to “vacate,” or overturn, the regulation and exemptions as being beyond the authority of the DOL. In addition, the plaintiffs requested that the courts “stay” the effective dates of the regulation and exemptions pending the outcome of the lawsuits.
  • Both courts have “stayed” the effective dates, meaning that the private sector will not have to comply with those rules until the cases are resolved.
  • The next step will be for those courts to determine if the regulation and exemptions are valid or should be vacated.
  • However, there are still compliance issues related to one-time rollover recommendations.

The DOL’s fiduciary regulation was scheduled to become effective this September 23. The exemptions were scheduled to become partially effective this September 23 and fully effective September 23, 2025.

Two Federal district courts—one in the Eastern District of Texas and the other in the Northern District—have stayed the effective dates. That means that the new rules will not be effective until the courts have decided on the validity of the regulation and exemptions and, most likely, until the appeals are exhausted one way or the other.

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