On April 25, 2024, the Department of Labor published its final regulation on defining fiduciary status for investment advice, and the related exemptions, in the Federal Register. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective on September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

However, there will be lawsuits filed to challenge the fiduciary definition. One of the claims will be that the new definition is, as a practical matter, the same as the fiduciary definition for one-time advice in the Obama-era regulation which was vacated by the Fifth Circuit Court of Appeals in 2018.

Let’s look at the Obama-era definition and the new one. Then you can decide if they are substantially the same.

The New Definition

The expanded definition of fiduciary advice in the new regulation is that a person is a fiduciary if the person:

…either directly or indirectly (e.g., through or together with any affiliate) makes professional investment recommendations to investors on a regular basis as part of their business and

• the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation

• • is based on review of the retirement investor’s particular needs or individual circumstances,
  • reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and
  • may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.

So, beginning September 23, the definition is that, to be a fiduciary a person must make an investment¹ recommendation to a retirement investor for which the person will receive some form of compensation and the person:

• is in the business of making investment (which includes insurance and annuities) recommendations, and
• the circumstances surrounding the recommendation would be viewed objectively as indicating that the recommendation:
  • is individualized,
  • reflects professional judgment, and
  • may be relied upon as being in the retirement investor’s best interest.

If all of those are present, the recommendation will be fiduciary advice. If one or more are missing, it will not be.

The Obama-era Regulation

The Obama-era regulation starts with a list of the types of recommendations that could be fiduciary advice (e.g., buying or selling securities, investment strategies, rollovers) and then continues to say:

With respect to the investment advice described in paragraph (a)(1) of this section [the list of types of recommendations], the recommendation is made either directly or indirectly (e.g., through or together with any affiliate) by a person who:

• Represents or acknowledges that it is acting as a fiduciary within the meaning of the Act or the Code;²
• Renders the advice pursuant to a written or verbal agreement, arrangement, or understanding that the advice is based on the particular investment needs of the advice recipient; or
• Directs the advice to a specific advice recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA.

Comparison

As these quotes illustrate, Obama-era definition was less restrictive. It required that a recommendation be personalized, so that is similar. It required a mutual understanding that the advice would be individualized, which might be viewed as an additional condition that is not in the new regulation. But most observers viewed that as an objective test that would be based on the circumstances—and not as an explicit understanding, so it isn’t that different.

However, the new regulation has additional requirements. For example, it requires that the circumstances indicate that (i) there was an exercise of professional judgment in developing the recommendation and (ii) that the retirement investor would conclude that the recommendation could be relied upon as being in the investor’s best interest. Those suggest that the new definition is more demanding.

A counter argument might be that, while the words are different, the outcome is the same. That argument would be that securities advisors and insurance agents are generally required to give individualized advice, that they regularly exercise professional judgment, and that they are obligated to provide recommendations that are in the best interest of their clients and customers.

In addition to a comparison with the Obama-era rule, another argument by the opponents to the regulatory definition will be that the DOL’s new definition does not describe a relationship of “trust and confidence”, which was the measurement used by the Fifth Circuit.

Regardless of the arguments and counter arguments of proponents and opponents, the matter will be resolved by the courts, and probably ultimately by an appeals court (and possibly by the Supreme Court).

Concluding Thoughts

The outcome is unknowable. There will be lawsuits that challenge the regulatory definition. That much is certain. However, we won’t know the ultimate outcome for a period of time…maybe years.

Unless a court issues a stay of the regulation—which is generally considered to be extra ordinary relief, the new rules will come into effect on September 23. If broker-dealers, investment advisers, banks and insurance companies are relying on the lawsuits, and that relief isn’t provided, there could be fiduciary breeches and prohibited transactions that could have been avoided by complying with the DOL’s guidance. As a result, and at least until we know if a stay will be issued, those financial service firms should be preparing for compliance. The first step is to become familiar with the rules.

---

1. “Investment recommendation” is an oversimplification. A fiduciary recommendation can cover a range of securities, insurance products, and other properties with investment value, as well as certain investment services and rollovers and distributions.
2. Note that the new regulation also says that, if a person represents that they are a fiduciary under ERISA or the Code, the regulation will treat them as a fiduciary.

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.