This post first appeared on the Securities Arbitration Alert blog. The blog’s editor-in-chief is George H. Friedman, Chairman of the Board of Directors for Arbitartion Resolution Services, Inc.
The Department of Labor’s (“DOL”) final fiduciary rule has been published; it goes into effect September 23. We borrow heavily from our previous reporting.
As reported in SAA 2023-42 (Nov. 8), the DOL’s Employee Benefits Security Administration proposed last fall: “a new rule that would protect workers’ retirement savings by updating the regulation defining a fiduciary under the Employee Retirement Income Security Act (ERISA).” As described on the DOL’s dedicated Webpage:
“The ‘Retirement Security Rule: Definition of an Investment Advice Fiduciary’ would affect how investors get advice on their job-based retirement accounts and other retirement savings plans and how investment advice providers must act if they have a conflict of interest…. The proposed rule and related proposed amendments to prohibited transaction exemptions (PTEs) detail when advice providers are acting in a fiduciary role under federal pension laws and explain the conditions they must follow to protect retirement investors.”
The proposal was announced in an October 2023 Press Release.
Details
The DOL observed that: “Many people who give investment advice and get paid for it are currently not considered investment advice fiduciaries under ERISA. Investment advice fiduciaries legally must follow strict rules of conduct.[] Under these proposals, investment advice fiduciaries would:
- give advice that is prudent and loyal.
- avoid misleading statements about conflicts of interest, fees, and investments.
- follow policies and procedures designed to ensure the advice given is in an investor’s best interest.
- charge no more than is reasonable for their services.
- give investors basic information about any conflicts of interest.”
The Department provided substantial support materials, including: a Fact Sheet; a blog; and a video. There are also links to key documents.
Basis for the Proposed Rule
Said the DOL:
“EBSA’s mission is to protect the job-based retirement, health and other welfare plan benefits of America’s workers and their families. Requiring investment advice providers to comply with fiduciary standards protects retirement investors from harmful conflicts of interest. Conflicts of interest can put an investment advice provider in the position of choosing between what’s good for them and what’s best for you. That could result in excess fees and/or lost investment returns that reduce a person’s retirement savings.[] The existing definition is from 1975 and doesn’t work in today’s marketplace. Investors who are making decisions for their retirement accounts expect advice to be in their best interest — so, it should be.”
Publication and Comments
All rules were published in the Federal Register November 3, 2023 (Vol. 88, No. 212, P. 75890), with comments due January 24. The Department held public hearings on December 12-13, 2023, as described in a press release. Here is the agenda. Over 19,000 comments were received. In a 21-page January 2 letter, Charles Schwab asserted that the rule is not necessary, costly, counterproductive, not authorized, and should be withdrawn.
Final Rule
As reported in SAA 2024-11 (Mar. 14), the final rule was sent to OMB on March 8 (RIN: 1210-AC02). We reported then that OMB review typically takes 90 days, which turns out was accurate. The Final Rule — 89 FR 32122 – was published April 24; it is effective September 23, 2024. Says the summary:
“The Department of Labor (Department) is adopting a final rule defining when a person renders ‘investment advice for a fee or other compensation, direct or indirect’ with respect to any moneys or other property of an employee benefit plan, for purposes of the definition of a ‘fiduciary’ in the Employee Retirement Income Security Act of 1974 (Title I of ERISA or the Act). The final rule also applies for purposes of Title II of ERISA to the definition of a fiduciary of a plan defined in Internal Revenue Code (Code), including an individual retirement account or other plan identified in the Code. The Department also is publishing elsewhere in this issue of the Federal Register amendments to Prohibited Transaction Exemption 2020-02 (Improving Investment Advice for Workers & Retirees) and to several other existing administrative exemptions from the prohibited transaction rules applicable to fiduciaries under Title I and Title II of ERISA.”
First Suit Filed
According to a May 3 Law360 story: “The U.S. Department of Labor was hit with a lawsuit … in Texas federal court seeking to invalidate recently finalized regulations that broaden who qualifies as a fiduciary under the Employee Retirement Income Security Act, marking the first-filed legal challenge since the agency’s late-April final release.” The case is Federation of Americans for Consumer Choice, Inc. v. Department of Labor, No. 6:24-cv-00163 (E.D. Tex. May 2, 2024). The plaintiffs seek a judgment:
- Declaring that the 2024 Fiduciary Rule and amended PTE 84-24 were promulgated by the DOL in excess of its statutory jurisdiction, authority, or limitations within the meaning of 5 U.S.C. § 706(2)(C) and is arbitrary, capricious, or otherwise contrary to law within the meaning of 5 U.S.C. § 706(2)(A);
- Vacating and setting aside the 2024 Fiduciary Rule and the amendments to PTE 84-24 in their entirety;
- Preliminarily and permanently enjoining the DOL and all of its officers, employees and agents from implementing, applying, or taking any action of any type under the 2024 Fiduciary Rule or amended PTE 84-24 anywhere within the DOL’s jurisdiction;
- Awarding Plaintiffs their costs incurred in bringing this action; and
- Granting such other and further relief as the Court determines is appropriate.
(ed: We will certainly track this one!)
