The U.S. Department of Labor on Monday announced the proposal of a new exemption for investment advice fiduciaries designed to replace retirement-focused fiduciary rules made invalid two years ago.
The proposed exemption would allow investment advice fiduciaries under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code of 1986 to receive compensation when acting in retirement savers’ best interests. “The exemption would apply to registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents, and representatives that are investment advice fiduciaries,” the proposal notice states.
The proposed exemption is rooted in the Impartial Conduct Standards for fiduciaries providing investment advice: a best interest standard; a reasonable compensation standard; and a requirement to make no misleading statements about investment transactions and other relevant matters.
The proposal is derived from an existing temporary policy adopted after the 5th Circuit Court of Appeals in 2018 vacated the Department’s 2016 fiduciary rule package. It is designed to align with the Securities and Exchange Commission’s new Regulation Best Interest (Reg BI) rules that came together in the wake of the 2018 decision.
“Today’s proposed exemption would give Americans more choices for investment advice arrangements, while protecting the retirement savings of American workers,” U.S. Secretary of Labor Eugene Scalia said in a press release. “The exemption would add to the tools individuals need to make the right decisions for their financial future.”
In April 2016, the Department of Labor finalized a new rule that created a fiduciary duty for brokers and registered investment advisers who offer retirement advice. The rule expanded the “investment advice fiduciary” definition under ERISA and provided exemptions that, if applied for and granted, would allow covered advisers to maintain fee-based arrangements.
Very quickly, critics of the changes came together, resulting in the Appeals Court’s 2018 decision that the Department of Labor exceeded its statutory authority under ERISA in developing the rule. In their victory statement, plaintiffs challenged the SEC to take the lead on a clear, consistent, and workable best interest standard that does not limit choice for investors.
The SEC in 2019 proposed Reg BI, the compliance date for which began Tuesday. Reg BI is intended to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations while preserving access (in terms of choice and cost) to a variety of investment services and products. Reg BI has little impact on retirement plans but does cover 401(k) rollovers into an IRA.
“The proposed exemption announced today reflects in part the Commission’s constructive and ongoing engagement with the Department [of Labor],” SEC Chairman Jay Clayton said in a statement on Monday’s proposal. “I look forward to continuing our work with the Department so that collectively we can enhance investor choice and increase investor protections.”
The Department of Labor’s Employee Benefits Security Administration developed the proposed exemption. The proposal will be published in the Federal Register for notice and comment.
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