08-11-2020 | Blogs

The DOL Fiduciary Rule and NAIC Showdown:  Fiduciary or Not? 

By: BrownWinick

image of twenty dollar bill


Despite the apparent harmonization between the SEC Regulation BI (Section 240.151-1, eff. 6/5/19) https://www.sec.gov/rules/final/2019 and the NAIC’s Revised Model on Suitability https://www.naic.org/store/free/MDL-275., the Department of Labor proposed a new fiduciary rule which contradicts the Model’s explicit language…the Care Obligation DOES NOT create a fiduciary obligation or relationship. 

The DOL’s new fiduciary rule issued on 6/29/20 and published in the Federal Register on 7/7/2020 https://www.federalregister.gov/documents/2020/07/07/2020-14261/improving-investment-advice-for-workers-and-retirees has three parts:

  • Affirms the 1975 Regulation’s definition of fiduciary and its “five-part test”
  • Advice on taking a distribution from a retirement plan and rolling it into an IRA constitutes “investment advice” after considering the facts and circumstances surrounding the advice
  • The DOL has proposed a new prohibited transaction exemption giving “investment advice” fiduciaries more flexibility to provide advice (including “qualified rollovers”) impacting their compensation.

Under the DOL’s five-part test, for advice to establish “investment advice,” a financial institution or investment professional who is not a fiduciary under ERISA will be deemed to provide investment advice: 

  1. As to the value of securities or other property, or makes recommendations as to 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, the plan fiduciary or IRA owner that,
  4. That will serve as a primary basis for investment decisions with respect to the plan or IRA assets, and
  5. That will be individualized based on the particular needs of the plan or IRA.

A person who meets all five prongs of the test and receives direct or indirect compensation will be considered an “investment advice” fiduciary with respect to the applicable plan or IRA.

Historically, the DOL did not consider advice to roll assets out of a plan to an IRA constituted “investment advice,” (see Deseret Letter) but the DOL’s commentary to the Proposed Exemption undermines the prior position. They now say the “better view” is that advice on whether to take a distribution from a retirement plan and roll it over to an IRA may be covered by the “five-part test,” “informed by all the surrounding facts and circumstances.”

Clearly, there is partiality in the determination of each prong of the “five-part test.” The industry, likely in the comment letters to the draft rule, will ask for clarity and more objectivity as to what each prong means in practice.

The impact of being a “fiduciary” under ERISA and the IRC, means that the person is subject to the prohibited transaction rules under Section 406 of ERISA/Section 4975 of the IRC. The DOL, however, provided relief from the prohibited transaction rules through a proposed exemption for specific “investment advice” fiduciaries.  The fiduciary must be willing and able to comply with the “impartial conduct” standards aligning with the SEC and Regulation Best Interest and the NAIC’s revised Model on suitability. The DOL failed to provide a “safe harbor” for producers or financial institutions that comply with the Model despite the precise language in the Model. Accordingly, the DOL proposed rule and the NAIC model are in direct conflict.  Both the industry and the state regulators should be rebutting the DOL’s overreach and intentional goal of superseding the states’ insurance regulations.