On October 31, President Biden announced the Department of Labor’s new proposed Retirement Security Rule: Definition of an Investment Advice Fiduciary at an event held in the White House. The proposed rule would revise the definition of investment advice fiduciary by replacing the five-part test with a new test that omits the regular basis, primary basis, and mutual understanding prongs. This will vastly expand the universe of ERISA fiduciaries to include almost every financial professional who provides any form of advice about retirement savings and is compensated for their services. Under the proposal, a financial services provider would be considered an investment advice fiduciary if:
They provide investment advice or makes an investment recommendation to a retirement investor;
The advice or recommendation is provided for a fee or other compensation, and;
The financial services provider makes the recommendation in the context of a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in their best interest:
the provider has discretion over investment decisions for the retirement investor;
the provider makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or
the provider states that they are acting as a fiduciary when making investment recommendations.
The proposal also makes changes to the definition of “recommendation” – amending the definition in a way to treat even a suggestion as a recommendation. Rollovers are also covered under the proposal.
In addition, the proposal makes amendments to PTE 84-24, PTE 2020-02, and other PTEs. Under PTE 84-24, the proposal would incorporate many of the conditions in PTE 2020-02 in an effort to create a level playing field. Independent insurance producers would not be required to have a financial institution serve as co-fiduciary; however, the relief would only be available to independent producers with respect to the recommendation of annuities and insurance products that are not securities. The proposed amendments would also add potentially problematic new conditions to PTE 84-24.
The proposal would also revise PTE 2020-02 to “make clarifying changes that build on the existing exemption conditions to provide more certainty for fiduciary investment advice providers and more protection for retirement investors.” Finally, the proposal would also revise PTEs 75-1, 77-4, 80-83, 83-1, and 86-128 to exclude investment advice transactions from the scope of these exemptions, meaning all investment advice transactions that would have previously been covered by one of these exemptions would now have to instead comply with PTE 2020-02.
IRI is continuing to analyze the proposal and will continue to provide updates and insights.
IRI Vows to Fight the DOL Proposal
Following the President’s announcement, IRI issued a press statement highlighting how the proposed rule will cause millions of lower- and middle-income workers to lose access to financial advice. “This proposal is inconsistent and incompatible with President Biden’s stated priorities and the goal of Bidenomics to grow the economy from the middle out and bottom up by investing in all of America, empowering workers, and lowering costs for families,” said IRI President and CEO Wayne Chopus. “Ironically, the President is labeling this proposal as ‘retirement security,’ when it will actually worsen the existing retirement insecurity of millions of workers and retirees.”
The press release notes that rather than adding an additional new regulation to the existing regime – including the SEC’s Regulation Best Interest and the NAIC’s Model Regulation – the Biden Administration should focus on implementing the SECURE Act and the SECURE 2.0 Act.
In addition to a press statement, IRI President and CEO Wayne Chopus penned an IRI Vision post entitled, “We Do This Work Proudly, Mr. President,” to refute the remarks President Biden made about financial professionals and annuity products. “Rather than explain why the rule is necessary, the President demonized and joked about the insured retirement industry and our products to justify a misguided and previously failed investment advice regulation,” said Chopus. “IRI will fight this latest proposal as tenaciously as we fought and defeated the 2016 rule. We are committed to protecting the rights of workers, retirees, and their families to ensure that they are not deprived of access to retirement savings strategies, choice of products to execute those strategies, and the right to choose their financial advisor on terms that best fit their needs.”
IRI to Host Webinar Briefing on DOL Fiduciary Proposal
Join IRI and Groom Law Group for a deep dive into the details and meaning of President Biden’s fiduciary rule proposal. This 90-minute webinar will cover changes to the five-part test, who is affected, changes to prohibited transaction exemptions, and more.
IRI Engages in Panel Discussion with DOL on Fiduciary Proposal
On November 3, IRI’s Chief Legal & Regulatory Affairs Officer Jason Berkowitz led a robust panel discussion with Tim Hauser from the DOL and Tom Roberts from Groom Law Group at an industry conference here in DC. It was an open and honest exchange of views on the implications of the proposal. Berkowitz challenged the Department on many of the issues raised by the proposal, including the objectives of the rule and the conflict with existing SEC and state best interest regulations. In response, Hauser emphasized that the DOL believes the proposed rule is a reasonable response to the Fifth Circuit decision and changing complexities in the marketplace and products, and that regulation within this space is well within their authority under ERISA. Berkowitz also expressed concern with the extremely aggressive timeline for a hearing and comments and closed by expressing IRI’s concerns about the tone of the President’s remarks and sharing key passages from Wayne Chopus’ blog post. Overall, this was an engaging, lively discussion where Berkowitz and Roberts effectively represented industry’s priorities and concerns relating to this proposal.
Capitol Hill Responds to DOL Fiduciary Proposal
Members of Congress were quick to share their thoughts on the Biden Administration’s DOL proposal following the President’s announcement on October 31.
Representative Virginia Foxx (R-NC), Chair of the House Committee on Education and the Workforce, said in a statement, “In the last two years, DOL has espoused at least three separate positions on what it means to be an investment advice fiduciary. This latest proposal is just new lipstick on the same old pig, and it will harm retirement plans, retirees, and savers.” Chair Foxx called the proposal an overreach of the DOL’s jurisdiction. “Instead of regulating retirement plans, DOL is trying to regulate what individuals do with their own retirement savings.”
The Ranking Member of the Education and Workforce Committee, Rep. Bobby Scott (D-VA), also issued a statement, saying, “While most advisers put their retirement clients’ interests first, unscrupulous retirement professionals continue to pad their own pockets by steering clients to high-fee investment products that produce lower returns for retirement savers. That is why I applaud President Biden and Acting Secretary Su for their efforts to end this insidious practice and make clear that all retirement advisers must put their clients’ interests first.”
House Financial Services Committee Ranking Member Maxine Waters (D-CA) “welcomes” the proposed rule, saying it will “strengthen critically needed guardrails and protect working families and retirees from conflicted financial advice. […] A strong DOL rule will have a tremendous impact for moderate-income and working families who are typically only able to save for retirement in the smallest amounts and need all the help they can get in safeguarding their retirement nest eggs from financial firms and professionals without their best interest at heart.”
Senator Bill Cassidy (R-LA), the lead Republican of the Senate Committee on Health, Education, Labor, and Pensions, called on the Biden Administration to “prioritize making it easier for Americans to invest for a secure retirement.” “Instead, the proposed fiduciary rule imposes burdensome regulations that have already proven to make investing more difficult, especially for those who are lower- and middle-income.”
Rep. Ann Wagner (R-MO) said the “facts are clear – the current regulatory framework ensures investment professionals are working in the best interests of their clients. […] The bottom line is that today’s announcement will make investing more expensive, taking money out of the pockets of hardworking Missourians who are just trying to responsibly invest for retirement or even their children’s future. In addition to her statement, Rep. Wagner sent a letter to Acting Labor Secretary Julie Su, requesting the Secretary respond to several questions about proposal. These questions include specific rebuttals of how this proposal is different from the rule vacated by the 5th Circuit Court of Appeals, how do fees meet the current federal definition of “junk fees,” what evidence has been provided to demonstrate that this proposal will not have the same effect on workers and retirees, and what evidence exists that shows the current regulatory regime is not working.
IRI will continue to monitor Congress for statements and actions related to the DOL’s proposed fiduciary rule.
Financial Services Examines the SEC’s Agenda
On November 2, the House Financial Services Subcommittee on Capital Markets held a hearing entitled “Examining the SEC’s Agenda: Unintended Consequences for US Capital Markets and Investors.” In her opening statement, Subcommittee Chairwoman Ann Wagner (R-MO) said the hearing was intended to call attention to the “most concerning aspects of the SEC’s approach to rulemaking” – notably the pace at which the SEC is pursuing rulemaking, reductions in public comment periods, and the SEC’s “disregard for congressional concerns and inquiries.” In his opening statement, Subcommittee Ranking Member Brad Sherman (D-CA) said, “I think that it’s important to focus on some of the things that the SEC is doing right.” For examples, Rep. Sherman noted the SEC’s efforts related to cryptocurrency-financed terrorism and ESG. Rep. Sherman went on to add that “swing pricing is a mistake” as it is “unfair to the middle class.”
Providing testimony on the impact of the SEC’s agenda were:
Dr. SP Kothari, Gordon Y Billard Professor of Accounting and Finance, MIT Sloan School of Management
Dalia Blass, Partner, Sullivan & Cromwell, LLP
Tom Quaadman, Executive Vice President, Center for Capital Markets Competitiveness, US Chamber of Commerce
Ken Bentsen, President and CEO, SIFMA
May Borrus, Executive Director, Council of Institutional Investors
Financial Services Examines the SEC’s Agenda
Senator Tim Scott (R-SC), Ranking Member of the Senate Committee on Banking, announced a capital markets reform framework last week. The framework is designed, according to a press release, to “empower, support, and foster growth by providing streamlined access to funding through our capital markets system which can be used to innovate, job create, and accelerate economic growth.”
The framework would promote greater capital formation in public and private markets, expand investment opportunities for retail investors, enhance integrity, fairness, and transparency, and hold regulatory accountable through increased oversight.
IRI will continue to monitor and provide updates as necessary.
FINRA Reg BI Enforcement Actions
FINRA recently charged a former representative with violations of Reg BI for excessive trading in the accounts of two retail customers from September 2022 – May 2023. Collectively, the representative effectuated over 40 trades in the two customers’ accounts, which resulted in a cost-to-equity ratio exceeding 49% and 30%, respectively. The representative was issued a three-month suspension, however, no monetary fine was issued due to the representative’s statement of financial condition and inability to pay such a fine. Similarly to another recent FINRA case, during the review period the representative was affiliated with a firm that was expelled from FINRA membership in July 2023.
Additionally, FINRA released information related to a Reg BI compliant investigation where the representative excessively churned and traded five customer accounts between July 2020 and December 2022. Of the five customers, none were aggressive investors and three were retired seniors and collectively, they experienced losses of more that $2.22 million which generated move than $2.24 million in commissions for the representative and firm.
IRI Committee Meetings
SECURE 2.0 Implementation Task Force Meeting
November 7 | CANCELLED
Webinar: Biden Fiduciary Rule: Overview and Implications November 7 | 2 p.m. ET | Register
State Affairs Committee Meeting
November 8 | 2 p.m. ET