Determining when an investment professional is subject to a fiduciary standard of care for making a rollover recommendation to a retirement saver is challenging. Multiple agencies’ overlapping compliance requirements and fiduciary definitions complicate this determination. And the Department of Labor’s (DOL’s) thwarted efforts to revise its fiduciary rules leaves a trail of pockmarked guidance.
Below is an overview of the rules for brokers and advisors working with retirement savers today. Under these rules, a one-time recommendation to roll over retirement plan assets to an IRA is not fiduciary advice that requires a prohibited transaction exemption (PTE). But brokers and registered advisors providing securities recommendations must still meet the SEC’s requirements. These requirements are similar to the DOL’s PTE conditions with a few significant differences.
…a one-time recommendation to roll over retirement plan assets to an IRA is not fiduciary advice that requires a prohibited transaction exemption (PTE). But brokers and registered advisors providing securities recommendations must still meet the SEC’s requirements.
The DOL
The DOL’s latest fiduciary rule and amendments to existing PTEs are now on hold while two Texas courts determine whether to vacate these rules. Consequently, investment professionals working with retirement savers should look to the 1975 five-part test under ERISA and the Internal Revenue Code to determine what is considered fiduciary investment advice. Under this test, an investment professional will be a fiduciary if they render advice for a fee or other compensation and meet all five elements:
1. Render advice to a plan or IRA as to the value of or the advisability of investing in securities or other property;
2. The advice is on a regular basis;
3. Advice is given pursuant to a mutual agreement, arrangement, or understanding; that
4. The advice will serve as a primary basis for investment decisions with respect to the plan or IRA assets; and that
5. The advice will be individualized based on the needs of the plan or IRA.
If an investment professional meets this test (or otherwise assumes fiduciary status), they cannot engage in prohibited transactions that create conflicts of interest for themselves or their financial institution/firm. If there is a conflict of interest, such as earning commissions or other compensation that is dependent on the advice provided, the fiduciary (and their firm) must operate under a PTE.
While several PTEs are still available (pending the Texas courts’ decisions), most ERISA/Code fiduciaries will look to PTE 2020-02. The PTE’s conditions should be familiar to firms and advisors because full compliance has been required since June 30, 2022. The conditions that must be met under PTE 2020-02 have not changed from the original version. However, the DOL’s re-interpretation of the “regular basis” prong of the five-part test in the preamble to PTE 2020-02 has been vacated for one-time rollover recommendations from an ERISA retirement plan to an IRA.
The preamble to PTE 2020-02 re-interpreted “regular basis” to include a rollover recommendation to a new client if there would be an ongoing advice relationship after the rollover. The DOL reasoned that the same provider is giving advice to the same person with respect to the same assets (or proceeds of those assets), pursuant to identical five-part tests. The DOL reiterated this position in Q&A 7 of its 2021 FAQs on how to meet PTE 2020-02. But, in 2023, a Florida court vacated Q&A 7 and the applicable parts of the preamble, ruling that advice to an investor on ERISA plan assets could not be combined with advice on IRA assets to meet the “regular basis” test.
…if there is not an existing advice relationship with an ERISA plan or participant, a recommendation to roll over plan assets to an IRA will not meet the regular basis prong of the 1975 test…
As a result, if there is not an existing advice relationship with an ERISA plan or participant, a recommendation to roll over plan assets to an IRA will not meet the regular basis prong of the 1975 test, even if an advice relationship will be established with the IRA. This type of rollover recommendation is not fiduciary advice under the DOL’s rules in effect today, so the conditions of PTE 2020-20 do not need to be met.
The SEC
The SEC adopted “Regulation Best Interest” (Reg. BI), effective June 30, 2020, to create greater consistency in standards of conduct for brokers and Registered Investment Advisors (RIAs). RIAs are subject to fiduciary standards under the Investment Advisers Act of 1940. Reg BI affirms this standard for RIAs and holds brokers to a “best interest” standard when making recommendations to retail customers regarding any securities-related transaction or strategy. These rules apply when making recommendations to retirement savers, including transfer and rollover recommendations.
Comparing PTE 2020-02 and Reg. BI Requirements
Investment professionals who are subject to the SEC’s requirements must satisfy both the SEC requirements and the conditions of PTE 2020-02 (or another PTE) if providing fiduciary investment advice under ERISA or the Code and receiving conflicted compensation. The SEC’s and DOL’s compliance requirements and standards of care are similar but not the same. Both require investment professionals to put the investor’s interests ahead of their own and to compare relevant factors for the existing and recommended accounts to determine that a rollover is in the retirement saver’s best interests. However, the SEC does not require brokers to claim fiduciary status nor disclose the rollover analysis to the customer.
|
Agency – Rule |
SEC – Reg. BI |
DOL – PTE 2020-02 |
|
Applicable to |
Brokers recommending securities transactions to a retail customer, including a retirement investor |
Investment professionals providing nondiscretionary fiduciary advice or a fiduciary rollover recommendation to a retirement investor for conflicted compensation |
|
Fiduciary status |
N/A, but must disclose capacity in which broker is acting in the Client Relationship Summary (CRS) |
Advisor & firm must acknowledge fiduciary status under ERISA &/or the Code in writing to the investor |
|
Standard of care |
Act in the best interest of the customer at the time the recommendation is made, without placing the broker or broker-dealer’s interests ahead of the customer’s interests |
Adhere to Impartial Conduct Standards – Provide prudent & loyal advice in the best interest of the retirement investor – Charge only reasonable compensation – Avoid misleading statements |
|
Financial institution compliance |
Follow written policies & procedures to ensure compliance with Reg. BI & identify & eliminate or mitigate & disclose conflicts of interest |
– Follow written policies & procedures to ensure compliance with Impartial Conduct standards & to mitigate conflicts of interest – Conduct annual retrospective review, with a written report certified by a senior executive officer |
|
Disclosures |
Provide written disclosures of services, fees, material conflicts of interest & material limitations on the securities that may be recommended |
Provide written disclosures of services, fees & material conflicts of interest |
|
Rollover analysis |
Analyze relevant factors to determine if a rollover is in the best interest of the customer; documentation recommended to prove compliance |
Analyze relevant factors to determine if a rollover is in the best interest of the retirement investor; documentation & disclosure to retirement investor required |
For more details, see the SEC’s Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflicts of Interest and the DOL’s PTE 2020-02 Improving Investment Advice for Workers & Retirees Frequently Asked Questions (except Q&A 7).
Investment professionals should work with their compliance staff to evaluate their business model and compensation structure to determine their compliance requirements under the SEC, the DOL, and any other governing agencies or state law.