1. The Definition of an Investment Advice Fiduciary
Section 3(21)(A) of ERISA defines the term “fiduciary” for purposes of the Act by providing three categories of functions in connection with a plan that would cause a person to become a fiduciary. The “second” category sets forth that a fiduciary is someone who is providing “investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of” an ERISA-covered plan. The following discusses this portion of the statute.
With regard to the history of the “fiduciary investment advice” rule, in 1975, the DOL was confronted dealt with the issue as to whether broker-dealers would be deemed to be providing investment advice for compensation (and, therefore, be fiduciaries) because they provided routine stock buy-and-sell recommendations to plan fiduciaries. The DOL issued a class exemption (PTE 75‑1) to permit broker-dealers to execute securities transactions for plans without engaging in technical violations of the prohibited transaction restrictions of ERISA. The government recognized that Congress that Congress did not intend that such activities would make these broker-dealers “fiduciaries” under ERISA. DOL PTE 75-1. In addition to the class exemption, in 1975, the DOL issued regulations in an effort to clarify that such recommendations would not make persons fiduciaries by reason of providing “investment advice” (the “Original Regulations”). See Labor Reg. § 2510.3-21(c)(1), 40 Fed. Reg. 54842 (Oct. 31, 1975).
2. An Overview of the DOL’s Regulatory Efforts
After 35 years from the time that the Original Regulations were promulgated, in 2010, the DOL attempted to revise them by issuing proposed regulations (“2010 Proposed Regulations”). [Prop. Labor Reg. § 2510.3-21(c), 75 Fed. Reg. 65263 (Oct. 22, 2010); see A. Scialabba, “The Department of Labor Newly Proposed Regulation to Expand the Definition of Fiduciary Under ERISA,” Journal of Pension Benefits, Vol. 18, No. 4 Summer 2011. However, the proposed regulations were withdrawn due to intense industry criticism. D. Carleen, J. Ross, and J. Gelfand “U.S. DOL ERISA Fiduciary Rule” a Fried Frank Memorandum (2015).
Subsequent to the withdrawal of the 2010 Proposed Regulations, the DOL again reviewed the Original Regulations. As a result, in April 14, 2015, the DOL published another set of proposed regulations (“2015 Proposed Regulations”) that would revise the Original Regulations to deal with many of the criticisms of the 2010 Proposed Regulations. Prop. Labor Reg. § 2510.36-21, 80 Fed. Reg. 21928 (April 20, 2015); see A. Scialabba, “DOL Proposes Significant Expansion of ‘Investment Advice’ Fiduciary Definition,” Journal of Pension Benefits, Vol. 22, No. 4, Summer 2015. In 2017, during the last year of President Obama’s administration, the 2015 Proposed Regulations were finalized in substantially the same form as the proposed regulations (“2017 Regulations”). See A. Scialabba, “The Status of the New DOL Fiduciary Regulations and How Plan Sponsors and Plan Fiduciaries Should Respond to Them,” Journal of Pension Benefits, Summer 2018, Vol. 25, No. 4. [hereinafter cited as “Scialabba 2017 Regulations Article”] In this regard, the 2017 Regulations technically became effective June 7, 2016. DOL Reg. § 2510.3-21(h)(1). However, some of the provisions of the 2017 Regulations were not made “enforceable” (technically “applicable”) until April 10, 2017, and other provisions of the regulations were not made enforceable until January 1, 2018. See Scialabba 2017 Regulations Article (setting forth a more in-depth discussion of the history of the DOL’s regulatory efforts in this area from April 10, 2017 to March 2018).
On March 15, 2018, the Fifth Circuit Court of Appeals, in the case of Chamber of Commerce of the USA v. US Dep’t of Labor, No. 17-10238 (5thCir. 2018), vacated the fiduciary rule in a 2-1 decision. The court stated that the rule constituted “unreasonableness,” and that the DOL’s implementation of the rule was “an arbitrary and capricious exercise of administrative power.” The U.S. Chamber of Commerce, The Financial Services Institute, and other litigants initiated the case against the DOL. After the decision, the DOL decided not to enforce the rule or challenge the Fifth Circuit’s decision. The 5th Circuit Court of Appeals confirmed its decision to vacate the rule on June 21, 2018.
In June 2020, the DOL released Proposal 3.0, which formally reinstated the Original Regulations. DOL News Release, U.S. Department of Labor Proposes to Improve Investment Advice and Enhance Financial Choices to Workers and Retirees (6/29/20). The proposal was accompanied by new interpretations that extended it reach in the rollover setting, and proposed a new exemption for conflicted investment advice and principal transactions. Id.
The Rule 3.0 was adopted by the DOL in December 18, 2020. DOL News Release, U.S. Department of Labor Announces Exemption to Improve Investments Advice and Enhance Financial Choices for Workers and Retirees (12/18/20). The “non-enforcement” policy of the DOL is scheduled to sunset on December 20, 2021.
3. The Fiduciary Rule Under President Biden’s Administration
In a surprise to many in the retirement plan industry, President Biden’s administration allowed the Rule 3.0, a “President Trump era” rule, to take effect as scheduled on February 16, 2021. DOL News Release, Improving Investment Advice for Workers and Retirees (2/16/21). In making the announcement for this decision, the new Principal Deputy Assistant Secretary of Labor for the DOL, Ali Khawar, stated: “[W]e 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.” DOL News Release U.S. Department of Labor Confirms Investment Advice Exemption (2/12/21). The DOL’s actions suggest that the agency may be interested in building on and reinforcing the interpretations of the Original Regulations and providing other rulemaking and guidance in this area.