On the eve the SEC's best-interest standard taking effect, the Department of Labor unveiled a proposed prohibited transaction exemption that would permit investment advice fiduciaries to receive compensation for their advice.
The proposed exemption would include fiduciary investment advice to roll over a participant's account in an employee benefit plan to an individual retirement account and other similar types of rollover recommendations.
The Employee Retirement Income Security Act prohibits fiduciaries from self-dealing, meaning they cannot cause themselves, their affiliates or related entities to receive additional compensation from transactions involving plans and IRAs unless an exemption applies.
The proposed exemption would be available to registered investment advisers, broker-dealers, insurance companies, banks and individual investment professionals who are their employees or agents, the Labor Department said.
“The proposal would allow a wide range of investment advice in service to ERISA plans and IRA investors and ensure that retirement investors receiving advice under the exemption get advice that is in their best interest,” a senior Labor Department official said in a call with reporters Monday.
To receive the exemption, an investment professional or financial institution, among other requirements, must abide by the impartial conduct standards, which, as outlined in a 2018 Labor Department field assistance bulletin, have three components: a best interest standard; a reasonable compensation standard; and a requirement to make no misleading statements about investment transactions and other relevant matters.
Joshua A. Lichtenstein, ERISA and benefits partner at Ropes & Gray, said in a statement that the proposal is “dramatically narrower in scope than the DOL’s (fiduciary) 2016 rule,” which was vacated after a legal challenge in 2018. “While the rule does not expand the range of persons who may be fiduciaries to retirement plans or IRAs, it does provide expansive relief for those fiduciaries who seek to provide investment advice for a fee or engage in certain principal transactions with plans.”
Also, the proposal does not affect the department’s definition of fiduciary or its five-part test used to determine whether a person is a fiduciary.
Labor Department officials have said for more than year that a revamped fiduciary rule would harmonize with the SEC’s rule package, which was approved in June 2019 and is commonly known as Reg BI for its centerpiece best-interest standard that aims to compel brokers to put clients’ financial interests ahead of their own and requires them to mitigate financial conflicts.
“The best interest standard in the proposed exemption is aligned with the conduct standards in the SEC’s Regulation Best Interest and the fiduciary duty of SEC-regulated investment advisers,” the senior Labor Department official said.
SEC Chairman Jay Clayton commended the Labor Department’s efforts. “The proposed exemption announced today reflects in part the commission’s constructive and ongoing engagement with the department,” Mr. Clayton said in a statement. “I look forward to continuing our work with the department so that collectively we can enhance investor choice and increase investor protections.”
Kenneth E. Bentsen, Jr., SIFMA president and CEO, said in a statement that the “standards of conduct under the proposed DOL exemption will be aligned with the standards required by Reg BI, offering compliance efficiencies.”
The senior Labor Department official said Secretary Eugene Scalia participated in crafting the proposed exemption. Before taking the helm at the Labor Department in September, Mr. Scalia was a partner at Gibson Dunn & Crutcher and was part of a team representing the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and other associations in successful challenges to the Obama administration’s fiduciary rule, including during oral arguments before the 5th U.S. Circuit Court of Appeals in New Orleans.
Career ethics attorneys at the Labor Department in October “determined that neither the applicable ethics rules nor the Trump administration’s ethics pledge required recusal by the secretary because the new rule-making is not a ‘particular matter involving specific parties’ and litigation related to a prior rule (that) the secretary handled while in private practice has ended,” Labor Department Solicitor Kate S. O’Scannlain said in a statement at the time.
The proposal will have a 60-day comment period.