DOL Fiduciary Rule 3.0 – Will the Third Time Be the Charm?

On October 31, 2023, the U.S. Department of Labor (DOL) issued a proposed rule (the Proposed Rule) to redefine the meaning of “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (ERISA). For these purposes, an “investment advice fiduciary” is any person who renders “investment advice for a fee or other compensation, direct or indirect.” According to the DOL, the Proposed Rule would update the regulatory definition of investment advice fiduciary to better reflect the purpose of ERISA and to close certain loopholes that the currently effective definition may have unintentionally created.

Current Regulatory Definition: The Five-Part Test

The current framework for determining whether a person is an investment advice fiduciary (which the DOL reaffirmed in its most recent proposed iteration of the fiduciary rule in 2020) adheres to the longstanding “five-part test.” Under this test, a financial institution or investment professional will be an “investment advice fiduciary” if such person (1) renders advice to a plan as to the value of securities or other property or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property (2) on a regular basis (3) pursuant to a mutual agreement, arrangement, or understanding with the plan or plan fiduciary that (4) the advice serves as a primary basis for investment decisions with respect to such plan assets and (5) the advice will be individualized based on the particular needs of the plan.

Proposed Amendment to Definition

In the Proposed Rule, the DOL proposes that a person would be an investment advice fiduciary for purposes of ERISA if

• the person provides investment advice or makes an investment recommendation to a retirement investor (i.e., a plan, plan fiduciary, plan participant or beneficiary, individual retirement account (IRA), IRA owner or beneficiary, or IRA fiduciary)
• the advice or recommendation is provided “for a fee or other compensation, direct or indirect,” as defined in the Proposed Rule and
• the person makes the recommendation in one of the following contexts:
  • The person either directly or indirectly (e.g., through or together with any affiliate) has discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities or other investment property for the retirement investor;
  • the person either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of its business and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and the retirement investor may rely on it as a basis for investment decisions that are in the retirement investor’s best interest; or
  • the person making the recommendation represents or acknowledges that such person is acting as a fiduciary when making investment recommendations.

According to the DOL, this revised framework is “designed to ensure that ERISA’s fiduciary standards uniformly apply to all advice that retirement investors receive concerning investment of their retirement assets in a way that ensures that retirement investors’ reasonable expectations are honored when receiving advice from financial professionals who hold themselves out as trusted advice providers.”

Analysis

In the Proposed Rule, the DOL focused its attention on aspects of the “five-part test” that, in the DOL’s opinion, caused it to be underinclusive — particularly, the “regular basis” requirement and the requirement of “a mutual agreement, arrangement, or understanding” that investment advice will serve as “a primary basis for investment decisions.”

“Regular Basis”

According to the DOL, prior interpretations of the “regular basis” requirement under the five-part test (i.e., effectively excluding one-time advice from being considered fiduciary investment advice) could serve to undermine reasonable expectations of retirement investors. Instead, the Proposed Rule would include any advice given by a person who makes investment recommendations to investors “on a regular basis as part of their business,” provided that the other components of the test are satisfied. As an example, the Proposed Rule states that an insurance agent’s recommendation to invest a retiree’s retirement savings in an annuity would be considered fiduciary advice if the agent regularly makes investment recommendations to investors as part of its business, and the circumstances indicate that the recommendation is based on the retiree’s particular needs and circumstances and may be relied on for making an investment decision that is in the investor’s best interest.

“Mutual Agreement, Arrangement or Understanding”

According to the DOL, the “mutual agreement, arrangement or understanding” requirement under the five-part test has, over time, encouraged the use of fine-print disclaimers of fiduciary status by investment professionals. Although the DOL has previously cautioned that such written disclaimers are not determinative, the Proposed Rule officially removes the “mutual agreement, arrangement or understanding” requirement. Instead, the Proposed Rule purports to focus on the objective circumstances surrounding an investment recommendation, including how an investment professional markets themselves to a retirement investor. Specifically, the DOL noted that it believes that investment professionals’ using titles such as financial consultant, financial planner, or wealth manager “routinely involves holding themselves out as making investment recommendations that will be based on the particular needs of the retirement investor and that may be relied upon as a basis for investment decisions that are in the retirement investor’s best interest.”

“Primary Basis”

In the DOL’s view, the requirement under the five-part test that advice serve as a “primary basis” for investment decisions with respect to a retirement investor’s assets is practically difficult to interpret and is ultimately unrelated to whether a recommendation was presented as investment advice on which an investor could rely in making a decision. Instead, the Proposed Rule looks to whether circumstances indicate that a recommendation “may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.”

In addition to the above analysis, the Proposed Rule is clear that it applies to investment recommendations as to rolling over, transferring, or distributing assets from an employee benefit plan or IRA. The DOL indicated that inclusion of these recommendations as investment advice is intended to address the DOL’s “longstanding interests in protecting retirement investors in the context of a recommendation to roll over employee benefit plan assets to an IRA, as well as other recommendations to roll over, transfer, or distribute assets from a plan or IRA.”

Hearing and Comments

The DOL indicated that it anticipates holding a public hearing approximately 45 days after the Proposed Rule is formally published in the Federal Register. In addition, the DOL will accept comments on the Proposed Rule for 60 days after such publication.

Amendments to Prohibited Transaction Exemptions

Concurrently with the Proposed Rule, the DOL issued proposed amendments to several existing prohibited transaction exemptions (PTEs) that permit investment advice fiduciaries to receive compensation and engage in certain transactions that would otherwise be prohibited, subject to certain conditions. The PTEs subject to such proposed amendments are 2020-02, 84-24, 75-1, 77-4, 80-83, 83-1, and 86-128. Although a description of these proposed amendments is beyond the scope of this client alert, Sidley will provide guidance via additional client alert(s) on these proposed amendments in the near future.