“Rolling” Ahead with New Fiduciary Guidance - Proposed ERISA Exemption Provides Some Early July 4th Fireworks

Yesterday, on June 29, 2020, the U.S. Department of Labor (the “DOL”) issued a release (the “Release”) proposing an important new initiative for retirement accounts (“Plans”) that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) or Section 4975 of the Internal Revenue Code of 1986 (the “Code”). This Release continues the decade-long saga that began with the DOL's highly controversial effort to remake the 1975 “fiduciary” rule, which many saw as dramatically extending ERISA's reach, even affecting the way financial services organizations conducted their general (non-ERISA) business. While the DOL's earlier multiple proposals had culminated in 2016 in a final rule (the “2016 Rule”), the 2016 Rule was then vacated in 2018 by the U.S. Court of Appeals for the Fifth Circuit.¹ Our March 23, 2018 OnPoint, ERISA's Fiduciary Rule - Dead Yet? Game Over? Maybe, Maybe Not . . . , chronicles this history, and our June 12, 2018 NewsFlash, ERISA's Amended Fiduciary Rule - Done, Done, on to the Next One, reports on the ultimate demise of the 2016 Rule. (An index of our other OnPoints on the topic may be found here.)   

This initiative comes at the time when Regulation Best Interest (“Reg BI”) issued by the U.S. Securities and Exchange Commission (the “SEC”) has become effective. Reg BI is generally intended to apply a heightened standard of behavior for all broker-dealers with respect to all retail relationships (extending both to retirement accounts and to other accounts), and incorporates some (but intentionally not all) of the features of the now-defunct 2016 Rule. We discussed Reg BI in our June 11, 2019 OnPoint, SEC Adopts Enhanced Standard of Conduct for Broker-Dealers and Clarifies Fiduciary Duties of Investment Advisers.² There had been discussion among the regulators regarding the benefits of harmonizing Reg BI with authority under ERISA's "investment advice” rules, and SEC Chair Jay Clayton issued a contemporaneous note of support of this initiative. However, the precise manner in which Reg BI principles would integrate with the conditions of the Proposed Exemption will presumably be the subject of ongoing significant focus.  

In the Release, the DOL:

• Proposed a new exemption for commission-based business models embracing fiduciary status. The DOL proposed a new exemption (the “Proposed Exemption”) from the prohibited transaction rules of ERISA and Section 4975 of the Code that would allow - subject to important conditions and limitations - broker-dealers, banks, insurance companies and registered investment advisers to act as fiduciary investment advisers to Plans and receive compensation that might otherwise have been inconsistent with the prohibited transaction rules, and to engage in certain otherwise prohibited principal transactions. 
• Reinstated the 1975 fiduciary rule. The DOL implemented steps to complete the reinstatement of its 1975 regulation defining with a five-part test (the “Five-Part Test”) what is “investment advice” for purposes of ERISA’s and the Code’s fiduciary rules (the “1975 Rule”) as it existed before being amended by the now vacated 2016 Rule.
• Signaled a change in the way that rollover-related advice is viewed under the fiduciary rules. The preamble to the Proposed Exemption provides additional color on the Department’s current thinking about rollovers from Plans to individual retirement accounts and other Plans, including the express discrediting of certain earlier DOL authority³ that had concluded that advice regarding rollovers was generally not fiduciary in nature. 
• Provided important color on the Five-Part Test generally. While the Release makes no changes to the text of the 1975 Rule, the preamble to the Proposed Exemption provides additional important color on the Department’s current thinking about key elements of the Five-Part Test contained therein. For example, in the context of rollovers, the DOL outlined when aspects of a continuing relationship might give rise to there being advice on a “regular” basis. And, as to the “a primary basis” prong of the Five-Part Test, the DOL said: “When financial service professionals make recommendations to a Retirement Investor, particularly pursuant to a best interest standard such as the one in [Reg BI], or another requirement to provide advice based on the individualized needs of the Retirement Investor, the parties typically should reasonably understand that the advice will serve as at least a primary basis for the investment decision.” 
• Reinstated 1996 investment education guidance. The DOL is restoring Interpretative Bulletin 96-1, which had been removed when it was largely incorporated into the 2016 Rule.
• Confirmed that the existing temporary enforcement policy remains in place. After the 2016 Rule was vacated, the DOL issued Field Assistance Bulletin (“FAB”) 2018-02, a temporary enforcement policy providing prohibited transaction relief to investment advice fiduciaries. In the FAB, the DOL stated it would not pursue prohibited transactions claims against investment advice fiduciaries who worked diligently and in good faith to comply with “impartial conduct standards” for transactions that would have been exempted in the new exemptions that (along with the 2016 Rule) had been vacated, or treat the fiduciaries as violating the applicable prohibited transaction rules. The DOL indicated that FAB 2018-02 will remain in place for now. However, the Department expressly noted that it does not regard this authority as “permanent.”

We anticipate issuing a detailed and comprehensive OnPoint regarding this important development. If you would like to discuss the Release, or any other aspect of ERISA’s fiduciary rules, please contact any of the Dechert lawyers listed below or any Dechert lawyer with whom you regularly work.