Tag Archives: Regular Basis

Rollovers, Regulation, Litigation: Where Are We and What’s Next?


2020-02, fiduciary, prohibited transaction, rollovers
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Key Takeaways

  • The recent decisions on the DOL’s interpretation of fiduciary status are significant but limited in scope. Fiduciary status for plan-to-IRA rollover recommendations, standing alone, has been vacated. But other important transactions, such as IRA transfers, have not.
  • Also, where an advisor is a fiduciary to a plan or participant, and then recommends a rollover, the DOL will likely take the position that the rollover recommendation is a fiduciary act, necessitating the use of PTE 2020-02.
  • In addition, the SEC’s guidance on rollover recommendations by investment advisers and broker-dealers is closely aligned with the DOL’s, particularly on the best interest process, and the relevant plan information, needed to engage in a best interest process.

Let’s take a break from my SECURE 2.0 series of articles to discuss what is going on with the DOL’s fiduciary rule.

The Past

As background, in the preamble to Prohibited Transaction Exemption (PTE) 2020-02, the DOL re-interpreted the 5-part test in its regulation defining fiduciary status for nondiscretionary investment advice. The most significant part of the reinterpretation was the DOL position that recommendations to participants to take distributions from their retirement plans and to rollover to IRAs could be connected to subsequent investment advice to the rollover IRAs to satisfy the “regular basis” prong of the 5-part test.

Under that theory most rollover recommendations would be fiduciary recommendations, which in turn would require satisfaction of the conditions in PTE 2020-02 to obtain relief from the resulting prohibited transaction. (The prohibited transaction is the receipt of compensation from the rollover IRA.)  Among other things, the PTE requires a best interest process that includes comparison of the investments, expenses and services in the plan and the IRA, in light of the needs and circumstances of the participant.

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The DOL’s Fiduciary Interpretation and the Florida Court Decision


DOL, fiduciary, IRA, rollovers
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In 2020, the Department of Labor (DOL) issued its Prohibited Transaction Exemption (PTE) 2020-02 to provide an exemption to most prohibited transactions resulting from nondiscretionary fiduciary advice to retirement plans governed by either ERISA or the Internal Revenue Code, or both, as well as nondiscretionary fiduciary advice to IRAs.

The DOL’s Fiduciary Interpretation and Prohibited Transaction Exemption

In the preamble to the PTE, the DOL expanded its view of the nature of the advice that would result in fiduciary status. One of those expanded interpretations was that, in a rollover context, IRAs and plans should be viewed as having a continuous connection because they are retirement assets on a continuum. More specifically, the DOL said that, if an advisor has been providing investment advice on a regular basis to an IRA and then recommends that the IRA owner make a rollover to the IRA, the plan-to-IRA rollover recommendation would be connected to the advice to the IRA that had been provided on a regular basis and, as a result, the advisor would be a fiduciary for the rollover recommendation. Similarly, if an advisor made a plan-to-IRA rollover recommendation and then provided investment advice to the rollover IRA on a regular basis, the advisor would be a fiduciary for the rollover recommendation because the rollover recommendation and the advice to the rollover IRA would be on a continuum. (For the purposes of this article, “advisor” includes broker-dealers and investment advisers, and their representatives, and insurance agents.)

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Best Interest Standard of Care for Advisors #58


2020-02, DOL, fiduciary, investment adviser, IRA, prohibited transaction
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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.

Key Takeaways

  • This article looks at a DOL FAQ that explains the DOL’s interpretation of the “mutual understanding” and “primary basis” parts of the 5-part test.
  • The new fiduciary “rule”—Prohibited Transaction Exemption (PTE) 2020-02–has two parts. One part is the expanded interpretation of the definition of fiduciary advice (in the preamble to the PTE).
  • The expanded interpretation is just that—a broadening of the 5-part test in a 1975 regulation. The new interpretation dramatically changes the landscape of advice to participants (particularly for rollovers) and to IRA owners.
  • The combination of these interpretations (together with the “regular basis” interpretation) make it increasingly difficult to avoid fiduciary status for advice to retirement plans, participants and IRA owners where the financial relationship is ongoing

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.

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Best Interest Standard of Care for Advisors #57


2020-02, DOL, fiduciary, investment adviser, IRA, prohibited transaction, rollovers
, , , , , , ,

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.

Key Takeaways

  • The new fiduciary “rule”—Prohibited Transaction Exemption (PTE) 2020-02–has two parts. One part is the expanded interpretation of the definition of fiduciary advice (in the preamble to the PTE).
  • The expanded interpretation is just that—a broadening of the 5-part test in a 1975 regulation. The new interpretation dramatically changes the landscape of advice to participants (particularly for rollovers) and to IRA owners.
  • This article looks at a DOL FAQ that discusses the “regular basis” part of the 1975 regulation and explains how it reverses the prior DOL position–and how that change means that many, if not most, rollover recommendations will be fiduciary advice subject to ERISA’s prudent man rule.

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.

Continue reading Best Interest Standard of Care for Advisors #57 →

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