The Department of Labor is moving toward tightening its existing fiduciary definition by possibly labeling all advice, even first-time conversations, as fiduciary advice, according to a securities industry attorney.

The DOL’s investment advice package, which went live in July, already renders as fiduciary any rollover advice an advisor or financial professional delivers to investors regarding their retirement accounts.

Edging advisors closer to a blanket fiduciary rule would return the DOL to its 2016 fiduciary rule, which was overturned in court, Brad Campbell, partner at the Faegre Drinker law firm, said during the firm’s “Inside the Beltway” webinar last week.

The DOL’s new fiduciary initiative “is likely to be a very substantial proposal that will harken back to legal fights of 2016, which the DOL ultimately lost,” Campbell said.

The “DOL is taking the position that fiduciary starts with the initial [rollover] conversation. That's a pretty aggressive reinterpretation of what they historically had said, which frankly was ... that most rollovers were not fiduciary,” he noted.

The current DOL rule requires that firms and their advisors follow impartial conduct standards and "self-correct" any violations when making retirement rollover recommendations if they want an exemption from prohibited transactions, such as accepting commissions, revenue-sharing and 12b-1 fees.

Firms and advisors must also make disclosures about any conflicts and provide written analysis showing that the rollover is in the investor’s best interest.

The DOL, however, signaled in its spring 2021 regulatory agenda report that it would once again be rewriting the fiduciary definition. The Employee Benefits Security Administration was expected to issue the notice of rulemaking this past spring. That never happened, and now the industry has done the extensive compliance and training to do business under the DOL rule package that took effect in July.

As a result, “most of the industry is now already complying with a standard that ... is pretty far down the road," said Campbell, a former assistant labor secretary under President Bush.

"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, he said.

The American Securities Association and the Federation of Americans for Consumer Choice, a trade group that represents insurance and annuities businesses, each filed suits in February to set aside the DOL’s attempt to define fiduciary investment advice. Both lawsuits assert that the agency has overstepped its legal and regulatory authority.

In particular, both lawsuits allege that the DOL’s ruling that first-time advice to transfer retirement assets out of a federally regulated plan or IRA can constitute fiduciary advice oversteps the DOL’s authority.

In 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the Obama-era DOL rule, ruling that the creation of a new regulatory scheme for retirement investments and the expansion of service providers’ obligations and investors’ ability to enforce the law in court requires an act of Congress rather than an unelected agency of the executive branch.

The new lawsuits assert that the Fifth Circuit decision is the precedent with regard to the DOL’s authority to regulate retirement assets. 

Campbell warned that the outcome of such lawsuits can be unpredictable.

"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.