The Department of Labor’s “Fiduciary Rule,” PTE 2020-02:  The FAQs

This series focuses on the DOL’s new fiduciary “rule”, which was effective on February 16. This, and the next several, articles look at the Frequently Asked Questions (FAQs) issued by the DOL to explain the fiduciary definition and the exemption for conflicts of interest.

Background

The DOL’s prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees) allows investment advisers, broker-dealers, banks, and insurance companies (“financial institutions”), and their representatives (“investment professionals”), to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to retirement plans, participants and IRA owners (“retirement investors”). In addition, the DOL announced, in the preamble to the PTE, an expanded definition of fiduciary advice, meaning that many more financial institutions and investment professionals will be fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.

In April, the DOL issued FAQs that explain its reasons for issuing the guidance.

Fiduciary Status for Rollovers

This article discusses FAQ 7, which explains the DOL’s new interpretation of the “regular basis” prong of the 5-part test. (The 5 parts were discussed in my last blog article, Best Interest #56.)

Q7. When is advice to roll over assets from an employee benefit plan to an IRA considered to be a on a “regular basis”?

A single, discrete instance of advice to roll over assets from an employee benefit plan to an IRA would not meet the regular basis prong of the 1975 test. However, advice to roll over plan assets can also occur as part of an ongoing relationship or as the beginning of an intended future ongoing relationship that an individual has with an investment advice provider. When the investment advice provider has been giving advice to the individual about investing in, purchasing, or selling securities or other financial instruments through tax-advantaged retirement vehicles subject to ERISA or the Code, the advice to roll assets out of the employee benefit plan is part of an ongoing advice relationship that satisfies the regular basis prong. Similarly, when the investment advice provider has not previously provided advice but expects to regularly make investment recommendations regarding the IRA as part of an ongoing relationship, the advice to roll assets out of an employee benefit plan into an IRA would be the start of an advice relationship that satisfies the regular basis requirement. The 1975 test extends to the entire advice relationship and does not exclude the first instance of advice, such as a recommendation to roll plan assets to an IRA, in an ongoing advice relationship. [The bolding is mine.]

Comment:  The DOL’s re-interpretation of the regular basis prong is a reversal of its prior position in the Deseret Advisory Opinion.

In that opinion, the DOL said:

It is the view of the Department that merely advising a plan participant to take an otherwise permissible plan distribution, even when that advice is combined with a recommendation as to how the distribution should be invested, does not constitute “investment advice” within the meaning of the regulation (29 CFR § 2510-3.21(c)). The investment advice regulation defines when a person is a fiduciary by virtue of providing investment advice with respect to the assets of an employee benefit plan. The Department does not view a recommendation to take a distribution as advice or a recommendation concerning a particular investment (i.e., purchasing or selling securities or other property) as contemplated by regulation § 2510.3-21(c)(1)(i). Any investment recommendation regarding the proceeds of a distribution would be advice with respect to funds that are no longer assets of the plan.

In other words, a recommendation to take a rollover was not viewed as fiduciary advice. (Note, though, that the opinion went on to say that, if a person was already a fiduciary to the plan and then made a rollover recommendation, the rollover recommendation would be fiduciary advice.) The DOL has withdrawn the Deseret opinion and the new interpretation is that, in the circumstances described in FAQ #7, a rollover recommendation would satisfy the regular basis prong of the 5-part test and therefore, if the other 4 parts are satisfied, an investment professional (e.g., a securities based advisor or an insurance agent) will be a fiduciary for the rollover recommendation. In turn, that means that the investment professional must engage in a prudent process to make the recommendation and would need to satisfy the terms of a prohibited transaction exemption (e.g., PTE 2020-02 or 84-24) in order to earn compensation for the services to the rollover IRA. As a cautionary note, those are two separate requirements (e.g., fiduciary process and compliance with an exemption’s conditions). It is not enough to comply with one or the other.

Concluding Thoughts

My next article will discuss the DOL’s interpretation of the “mutual understanding” and “a primary basis” prongs of the 5-part test. But suffice it to say at this point, the combination of the new interpretation of the “regular basis” prong, together with the “clarification” of the meaning of those other two parts, means that many, perhaps most, rollover recommendations will be considered by the DOL to be fiduciary advice to participants, subject to ERISA’s standards and its private right of action for fiduciary breach.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.