A new U.S. Department of Labor fiduciary rule will allow advisors to continue receiving compensation from third parties for the sale of investment and insurance products.

The DOL issued a revised fiduciary rule on Monday to harmonize its policies with the Securities and Exchange Commission’s Regulation Best Interest (Reg BI).

The revised rule will allow financial advisors to receive many payments that would have been restricted or forbidden by the previous DOL rule, including commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue-sharing payments from investment providers or third parties, even within qualified plans and IRAs.

Like Reg BI, the DOL’s rule requires disclosures of conflicts of interest, but does not require advisors to avoid them altogether.

The rule creates an exemption for ERISA fiduciaries allowing them to conduct what were, for a time, defined as “prohibited transactions” involving third-party compensation as long as certain “impartial conduct standards” are met. ERISA forbids recommendations that involve any form of self-dealing - as long as advisors can demonstrate impartial conduct, the DOL will exempt them from those ERISA rules.

The DOL’s revised impartial conduct standard consists of three parts: A best-interest standard; a reasonable compensation standard; and a requirement to avoid making misleading statements on investment transactions.

Advisors will not be required to seek the lowest-cost investment options for their clients. In fact, the revised rule argues that choosing investment options on the basis of cost alone without considering other factors might violate its rulemaking.

Recommendations regarding retirement assets would now be subjected to the “five-part test” to determine whether the advisor is acting in a fiduciary capacity.

Based on rules established in 1975, the test holds that an advisor is a fiduciary if they render advice regarding the value of securities or make recommendations as to the advisability of purchasing or selling them; the advice is rendered on a regular basis; the advice is rendered pursuant to a mutual agreement with the end account owner; the advice is intended to serve as a primary basis for investment decisions with respect to plan or IRA assets; and the advice will be individualized based on the particular needs of the client. All five elements of the test must hold true for an advisor to be acting in a fiduciary capacity.

The proposed rule does not address potential conflicts of interest within digital advice platforms like roboadvisors, though some fiduciary advocates have argued that self-dealing within the digital realm is an issue that regulators should consider acting upon.

The revised rule also lifts much of the scrutiny around rollovers from workplace retirement plans to IRAs, but would abandon a DOL advisory opinion that rollovers from workplace plans fall outside of the realm of fiduciary advice. Advisors and plan recordkeepers can be held to a best-interest standard for any recommendations regarding rollovers, and will have to document why their recommendations were made in the clients best interest.

The proposed rule also clarifies that advice given to a retirement plan constitutes advice given to individual participants, and thus must fall into the fiduciary realm.Unlike the DOL’s previous fiduciary rulemaking, the revised rule does not create a private right of action between retirement investors and advisors, plan sponsors or recordkeepers.

Kenneth Bentsen, president and CEO of SIFMA, spoke out in support of the DOL’s rulemaking in comments released on Monday.

“We applaud the Department of Labor’s work to preserve investor choice, which allows for many different investment advice and education options consistent with the Securities and Exchange Commission’s new heightened standard Regulation Best Interest (Reg BI),” said Bentsen. “The standards of conduct under the proposed DOL exemption will be aligned with the standards required by Reg BI, offering compliance efficiencies.  In addition, putting back in the Federal Register the five-part test that applies for fiduciary advice in light of the 2018 decision from the 5th U.S. Circuit Court of Appeals provides important clarification of the law.”

Not all the responses were so upbeat. In comments released on Tuesday, the Financial Planning Coalition, consisting of the Financial Planning Association (FPA), the Certified Financial Planner Board of Standards (CFP Board) and the National Association of Personal Financial Advisors (NAPFA) expressed doubt that the proposal was anything but a watering down of previous attempts at fiduciary rulemaking.

“Unlike the past when Defined Benefit plans assured financial independence in retirement, Defined Contribution plans offer no such assurance and place the burden of investment decision-making squarely on the shoulders of American workers and Main Street investors. We believe financial advisers who provide advice to consumers on their ERISA-qualified plans must act in a fiduciary capacity at all times.

“The Financial Planning Coalition will review the ‘Investment Advice Rule,’ engage a range of stakeholders to assess the efficacy of the Rule and provide comments on the proposal to DOL prior to the conclusion of the 30-day comment period. The Coalition intends to focus on the extent to which DOL’s Investment Advice Rule would provide additional protections for retirement savers under ERISA beyond those under the Securities and Exchange Commission’s (SEC) new Regulation Best Interest which goes into effect today. 

“In our public comment letters to the SEC concerning Regulation Best Interest, the Coalition strongly encouraged the SEC to use as a template CFP Board’s revised Standards that extend the fiduciary obligation of a CERTIFIED FINANCIAL PLANNER™ professional to all financial advice. We hope that the DOL proposal does not merely mirror language from Regulation Best Interest, but instead proposes strengthened safeguards under ERISA that are consistent with the robust fiduciary standard contained in CFP Board’s revised Standards.”

The Financial Services Institute (FSI), which was critical of the DOL’s initial fiduciary rule, sounded hesitant but positive about the new exemption.

“We are thoroughly reviewing the rule proposal. However, we expect the Department heeded the concerns outlined by the Fifth Circuit Court of Appeals and consulted with the SEC to avoid conflicts with Regulation Best Interest (Reg BI),” said FSI President & CEO Dale Brown in released comment. “These regulations must work in tandem to prevent conflicting requirements for financial advisors working to diligently comply with the rules and to avoid creating confusion among investors. This will also ensure Main Street Americans have access to the quality, affordable financial advice they need to achieve their financial goals.”

Jasmin Sethi, associate director of policy research at investment research firm Morningstar, applauded a more comprehensive impartial conduct rule for the industry, but also expressed concern that it doesn’t do enough to protect investors.

“We are still digesting the proposed rule and its implications. We are supportive of the DOL applying impartial conduct and other standards to investment advice fiduciaries advising on rollovers,” said Sethi in comments released on Tuesday. “We are still assessing the implications of the fact that the five-part test does not apply to advice on a single rollover transaction. We are also considering the implications of the DOL’s view on product costs, the lack of a private action, and the lack of discussion around collaboration with the SEC on future enforcement.

“Thus, while at first blush the proposed rule appears to be protective of investors, we are concerned that it may not go far enough. We plan to examine the proposed rule in greater detail and submit our analysis in a comment letter.”

The new proposal comes just after the XY Planning Network failed in an attempt to block the SEC’s new regulation, which many fiduciary advocates view as a watered-down version of the DOL’s original fiduciary rulemaking.

The prior DOL fiduciary rule was struck down by the Fifth Circuit Court of Appeals in 2018, a decision which temporarily re-established the five-part test to determine fiduciary status. The new rule brings the DOL's proposal in line with the Fifth Circuit's decsion.

Labor Secretary Eugene Scalia was the lead plaintiffs’ counsel in the lawsuit that overturned the DOL’s previous fiduciary rulemaking.

“Today’s proposed exemption would give Americans more choices for investment advice arrangements, while protecting the retirement savings of American workers. The exemption would add to the tools individuals need to make the right decisions for their financial future,” Scalia said in comments released on Monday.

The public will have 30 days to comment on the new rule. The DOL’s proposal is available here.