The U.S. Department of Labor confirmed today that its exemption allowing investment advisor fiduciaries to engage in previously prohibited activities will go into effect as scheduled on Tuesday.
The exemption, called “Improving Investment Advice for Worker & Retirees,” permits advisors to accept conflicted compensation, including commissions, for fiduciary advice they provide to retirement plans, participants and IRA investors.
“This exemption allows for important investor protections, including a stringent ‘best interest’ standard of care for fiduciary recommendations of rollovers from ERISA-protected retirement accounts,” Ali Khawar, deputy assistant secretary of labor for the Employee Benefits Security Administration, said in a press release.
“We recognize that investment advice providers have been preparing for the exemption, and this step will allow them to implement important system changes. That said, we will continue our stakeholder outreach to determine how we might improve this exemption, the rule defining who is an investment advice fiduciary, and related exemptions to build on this approach," he said.
The rule affirms the DOL’s five-part test of investment advice fiduciary status that firms must meet to qualify for the exemption.
It also takes an aggressive stance regarding when it will consider rollovers to an IRA to be fiduciary investment advice. For instance, this new interpretation forbids an advisor who recommends the purchase or sale of a proprietary mutual fund's shares from charging a sales commission or surrender charges or duplication of an advisory fee. It also requires the advisor to seek independent fiduciary approval for proprietary products.
The DOL’s position is likely to compel some broker-dealers and other firms to reconsider how or whether they want to provide rollover advice to retirement investors, attorneys at Eversheds and Sutherland said.
Eversheds Sutherland attorneys said applying the system to rollovers is "optimistically" a 12-month process for most providers.
Barbara Roper, Consumer Federation of America director of investor protection, said the rule “may be better than nothing in the short term. This flawed rule must not be the stopping point for the department’s efforts to better protect retirement savers from conflicted advice.”
Roper said it’s important for the agency “to ensure that its best-interest standard has meaning, that it is backed by real restrictions on harmful conflicts, and that it applies to all rollover recommendations.”
Roper claimed that many of the weaknesses in the DOL rule are rooted in its reliance on the SEC’s “vague and undefined” Regulation Best Interest governing retail investor advice.
“But Reg BI’s chief weakness—that key terms like 'best interest' and mitigation of conflicts are undefined—could now be its chief strength, if new leaders at the agency interpret and enforce these requirements to the benefit of investors, as we expect they will,” Roper said.
Roper said she hopes under the Biden administration that the DOL and SEC work together “to ensure that investors get protections of a real best interest standard, and real restrictions on harmful incentives, in retirement and non-retirement accounts alike.”