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The New Fiduciary Rule (22): Can Wholesalers Become Fiduciaries

The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • It is, by now, well known that the expansive definition of fiduciary in the DOL’s proposed regulation will cause many more advisors and insurance agents to be fiduciaries for their recommendations to retirement investors. However, it is less known that the same rules can apply to wholesalers of securities and insurance products.
  • When a wholesaler becomes a fiduciary to a plan or an IRA, and the recommendation is made by the advisor or agent to and accepted by the IRA investor or plan fiduciary, there will likely be a prohibited transaction due to the wholesaler’s firm making money on the investment or insurance product.
  • Where a wholesaler prohibited transaction occurs, an exemption (PTE) will be needed, most likely PTE 2020-02.

When a person makes a “covered” fiduciary recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

The proposed regulation defines a “retirement investor” as a: …plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary (retirement investor). (The emphasis is mine.)

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