DOL likely inching close to a full fiduciary rule, analysts say

Virtually the only thing left for the Department of Labor to do with its fiduciary definition rewrite is to essentially make all first-time advice fiduciary, analysts agreed during a Thursday webinar.

If it happens, that change would be significant and basically return the DOL to its initial 2016 fiduciary rule, said Brad Campbell, partner at Faegre Drinker law firm. As it stands, the DOL's package known as the investment advice rule makes rollover advice fiduciary.

"Once the rollover occurs, DOL is taking the position that fiduciary starts with the initial conversation," Campbell said. "That's a pretty aggressive reinterpretation of what they historically had said, which frankly, was the opposite, that most rollovers were not fiduciary."

The investment advice rule has two main parts: a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" from 1975 to determine what constitutes investment advice.

With the latter change, the DOL nudged advisors closer to a blanket fiduciary rule. Still, the department carefully noted that "truly one time advice, perhaps like recommending a fixed annuity, would not be fiduciary advice," Campbell explained.

More tinkering

With the Biden administration back in place at the DOL, work quickly began to do more tinkering with the regulation of financial product sales. The DOL’s spring 2021 Regulatory Agenda confirmed that it will rewrite the definition of fiduciary. The Employee Benefits Security Administration was expected to issue the notice of rulemaking in the spring, analysts had predicted.

But that deadline came and went. Meanwhile, the industry is fully immersed in doing business under the investment advice rules that took full effect in July.

"So, most of the industry is now already complying with a standard that ... is pretty far down the road," said Campbell, former assistant secretary of labor in the Bush administration. "Yet, the DOL still says it's not enough and wants to again change the rules on us. It's not the most regulatory efficient way to reduce costs and turbulence in the marketplace, but it's the path they've chosen."

Complicating things further, the DOL faces two lawsuits seeking to toss out the investment advice rule.

Written during the Trump administration, the investment advice rules would hamper sales of retirement products, advisors say. The Federation of Americans for Consumer Choice and the American Securities Association filed separate lawsuits in February in Texas and Florida, respectively.

Hefty regulations

To execute a prohibited transaction under the new rules, there are very specific disclosures about any conflicts that must be made, along with detailed evidence that the sale is in the best interest of the client.

The lawsuits claim the DOL overstepped its authority in writing the rule, both pointing to the guidance that first-time advice to transfer retirement assets out of a federally regulated plan can constitute fiduciary advice. Issued as a series of FAQs, the guidance essentially created new rules, the ASA claimed in its lawsuit.

In 2018, the Fifth Circuit Court of Appeals tossed out the fiduciary rule, ruling that the DOL exceeded its authority by creating a new regulatory scheme for the retirement plan space. The 2-1 decision ended a long legal fight to stop the Obama administration's fiduciary rule.

The current lawsuits cite the Fifth Circuit decision as the precedence on what the DOL can and cannot do in regulating retirement plans. Campbell declined to handicap the lawsuits, noting the unpredictability of the courts.

"If we go back to 2016 when the DOL did the fiduciary rule that was ultimately struck down by the Fifth Circuit, the DOL had won something like five lawsuits at different district court levels before the Fifth Circuit knocked it out," he said.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.