The Department of Labor has ended its efforts to defend its own Biden-era Retirement Security Rule by deciding to drop its appeal of recent court decisions challenging that fiduciary rule.
Instead, Labor said it intends to issue a revised fiduciary standard around May. And that leaves many financial advisors left to wonder about their current compliance obligations.
While a more restrictive fiduciary standard that would have applied even to one-time rollover advice is not in effect, advisors and firms should understand that fiduciary regulation efforts are not entirely dead — and that PTE 2020-02 remains in effect.
Rather than take the uncertainty as a free pass, advisors may wish to reacquaint themselves with the PTE 2020-02 requirements to avoid compliance-related headaches. They also should monitor the situation for ongoing developments around the fiduciary standard itself.
Fiduciary rule challenges: Background
Ahead of its expected effective date, the U.S. District Courts for the Eastern District of Texas and the Northern District of Texas granted separate stays to block the DOL from enforcing its investment advice fiduciary standard.
According to the Eastern District, Labor’s rule suffered from the same problems that caused the court to enjoin enforcement of the 2016 standard. The court found that the rule conflicted with ERISA in many ways, notably because it would have applied to impose fiduciary status in cases involving one-time rollover recommendations. The injunction applied on a nationwide basis, rather than only to the named plaintiffs in the case, and the DOL appealed.
After review, Labor withdrew its appeal last month. Until revised rules are released, the 2024 fiduciary standard will not be in effect, and the historically applicable five-part test will remain in place.
For fiduciary investment advice standards to apply under that test, a person who is not otherwise a fiduciary must (1) render advice about the value of securities or other property, or make 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, plan fiduciary or IRA owner that (4) the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that (5) the advice will be individualized based on the particular needs of the plan or IRA.
PTE 2020-02 continues
Fiduciaries are generally prohibited from engaging in transactions that involve self-dealing if they receive compensation for those transactions. In 2020, the DOL introduced PTE 2020-02, which allows advisors and institutions to receive compensation related to transactions that would otherwise be prohibited under the self-dealing prohibitions if the terms of the PTE are satisfied. The PTE applies to riskless principal transactions and covered principal transactions.
Generally, PTE 2020-02 requires that the compensation received by the advisor be reasonable and ensure that any statements related to the advice and recommendations are not misleading. This requirement is known as the impartial conduct standard, which requires the advisor to act in the client’s best interests.
The PTE also requires advisors to provide certain written disclosures, including disclosure of their fiduciary status, any conflicts of interest and a description of the services they will be providing to the client. Before executing any transaction, an advisor must disclose why the recommendation is being made.
Finally, the fiduciary must develop and implement policies designed to minimize the effects of any conflicts of interest so that it can ensure it is acting in the clients’ best interests. Fiduciaries are generally required to amend these procedures as needed and to keep records related to their recommendations on an ongoing basis — as well as conduct regular retrospective reviews.
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