The proposal calls for changing the department's fiduciary definition by removing three prongs in the five-part test used to determine when a financial professional is considered an investment advice fiduciary. The three prongs at issue require that the person providing the advice does so on a regular basis; the advice is pursuant to a mutual understanding; and that the advice will serve as a primary basis for decision-making.
Instead, the department proposes that a person should be considered an investment advice fiduciary under the Employee Retirement Income Security Act if they provide investment advice or make an investment recommendation to a retirement investor, such as to a plan participant or the plan itself; the advice or recommendation is provided "for a fee or other compensation, direct or indirect"; and the recommendation is made in at least one of several contexts.
The changes would put one-time advice, such as rollovers to individual retirement accounts or annuity purchases, under the fiduciary definition if the other parts of the test are met.
Labor Department officials have said that while changes are coming in a final rule, the rule is needed to better protect investors and to create a level playing field within the financial adviser community.
Three of the four witnesses who testified during the Feb. 15 hearing — titled "Protecting American Savers and Retirees from DOL's Regulatory Overreach" — opposed the proposal, including Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute.
Berkowitz, who also testified last month before the House Financial Services Capital Markets Subcommittee about the proposal, said the department's initiative runs afoul of a 2018 decision by the 5th U.S. Circuit Court of Appeals, New Orleans, that vacated a 2016 rule with similar objectives and that current regulations already protect investors.
Trade groups like IRI and industry firms have called on the department to withdraw the proposal. Among the concerns raised in a public comment period that closed last month and again by witnesses at the Feb. 15 hearing, opponents say the proposed fiduciary definition is too broad, the proposal is a rehash of the 2016 rule that was vacated in court in 2018, and that there are already sufficient regulations covering the marketplace, such as the Securities and Exchange Commission's Regulation Best Interest and the National Association of Insurance Commissioners' conduct standards for insurance agents and insurance companies recommending annuities.
But Democrats on the subcommittee mostly backed the proposal.
Rep. Mark DeSaulnier, D-Calif., the subcommittee's ranking member, said the proposal is more narrowly tailored than the 2016 rule that was struck down in court, and that there are loopholes in the department's five-part test, in the SEC's Reg BI and in the NAIC's conduct standards.
"The Biden administration's Retirement Security Rule levels the playing field and will ensure that workers, retirees and retirement plan sponsors receive advice that is in their best interest," DeSaulnier said.
The lone witness called by Democrats, Joseph C. Peiffer, president of the Public Investors Advocate Bar Association, said the proposal is totally different than the 2016 rule, "With a much, much more narrow, more of a rifle-shot focus. The earlier rule made a lot of people fiduciaries ... the 5th Circuit overturned that and (the department) went back to work and they sharpened their pencils and really narrowed the rule."
He urged the department to swiftly finalize the proposal.
