"I can tell you that there will be changes to the rule and the exemption text based on what we've heard from folks," said Timothy D. Hauser, deputy assistant secretary for program operations of the Labor Department's Employee Benefits Security Administration, during a Jan. 25 virtual event hosted by American Law Institute Continuing Legal Education.
"In some cases, I think there'll be changes because it was demonstrated to us that some of the language is susceptible to interpretations that weren't as intended, in other cases it's more substantive," Hauser added. "I've never been involved in a rule at the department that hasn't been changed for the better as a result of the notice and comment process, and certainly one as important as this one will not be an exception to that rule."
Opponents to the proposal, like those in the advice business, have called on the department to withdraw the proposal for a host of reasons, including that the proposed fiduciary definition is too broad, the proposal is a rehash of a 2016 rule that was vacated in court, and that there are already sufficient regulations covering the marketplace, like 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.
Hauser on Jan. 25 said both Reg BI and the NAIC standard are good steps, but a department rule is needed to fill regulatory gaps.
"We truly believe that this is a workable model," Hauser said. "That it's common sense that people that hold themselves out as being your best interest adviser, looking out for your individualized interest based on your individualized circumstances should be held to a fiduciary standard and that it's not too much to ask of folks that when they do that they be prudent, loyal, they don't mislead people, and that they don't overcharge them, and they have policies to make that happen. That's the essence of this project and what we're trying to achieve."
Under the proposal, which was unveiled Oct. 31 and includes prohibited transaction amendments, the department calls for changing its fiduciary definition by removing three prongs in the five-part test, which was established in 1975 and is used to determine when a financial professional is considered an investment advice fiduciary under the Employee Retirement Income Security Act.
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 ERISA 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 if the recommendation is made in at least one of several contexts.
The changes would lead one-time advice, such as rollovers to individual retirement accounts or annuity purchases, to fall under the fiduciary definition if the other parts of the test are met.