The Labor Department in the preamble said the five-part test's "regular basis" prong would be satisfied when an entity with a pre-existing advice relationship with a retirement investor advises them to roll over assets from a plan to an individual retirement account. But it also said that an investment advice provider who establishes a new relationship with a plan participant and advises a rollover "could satisfy the regular basis prong of the five-part test depending on the facts and circumstances."
Kent Mason, a partner with law firm Davis & Harman LLP in Washington who testified at a Sept. 3 Labor Department hearing on the proposal on behalf of brokerage firm, mutual fund, insurance company and asset manager clients, said the language in the preamble effectively reinstates the 2016 fiduciary rule. He took issue with a section that he said essentially eliminates the mutual understanding and primary basis prongs of the five-part test.
"There are millions of broker-client relationships where there's no mutual understanding of reliance," Mr. Mason said. "For the preamble to say out of the blue that typically any individualized recommendation satisfies mutual understanding and primary basis, there is no basis for it."
Mr. Mason urged the Labor Department to repudiate the preamble language when it issues its final exemption, adding that as currently written the language is "invalid" because it contradicts the 2018 court ruling and the regulation itself.
But Barbara Roper, Pueblo, Colo.-based director of investor protection at the Consumer Federation of America, said there's "plenty of room for firms to craft a new way to establish that the recommendation isn't intended to create a primary basis for the investor's decision. (The critiques are) just hyperbole on the part of the firms."
Ms. Roper would like any recommendation or call to action made by an investment professional to be explicitly covered by the test, especially rollover advice.
If the proposal and preamble were to go into effect as written, the potential for litigation from investors would rise and many financial professionals would stop serving small accounts, Mr. Mason said. He referenced research published in 2017 by Deloitte that surveyed 21 SIFMA member firms and found that 53% of financial advisers reported limiting or eliminating access to brokerage advice for retirement accounts after the 2016 fiduciary rule was announced.
Moreover, to satisfy the exemptions a financial professional would have to acknowledge fiduciary status. "People will give less advice because it exposes them to liability," he said. "Others who don't pull back will be forced to accept fiduciary status and because of the liability will stop serving small accounts. It was ill-advised to require it."
Andrea Seidt, Columbus-based Ohio securities commissioner, said the test "needs to be clear when you are, either through agreement or mutual understanding, serving in a fiduciary capacity to an investor that you are in fact a fiduciary and that all of the obligations that come with that should apply." Ms. Seidt testified on behalf of the North American Securities Administrators Association during the Labor Department hearing.