Fiduciary issues

DOL Investment Advice Guidance Published in Federal Register

Today’s Federal Register contains the Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) proposed guidance announced by the agency on June 29, 2020, entitled Improving Investment Advice for Workers and Retirees Exemption.

This guidance is meant to replace the DOL’s 2016 final regulations and accompanying exemptions regarding fiduciary investment advice, which—after several implementation delays—were vacated (struck down) as “regulatory overreach” by the U.S. Fifth Circuit Court of Appeals in 2018. Written comments or requests for a public hearing on this new EBSA guidance must be submitted by August 6, 2020.

Accompanying this EBSA proposed exemption is a second “vacatur” document that officially implements the Court’s vacating of the 2016 EBSA guidance, and reinstates earlier guidance that had been superseded by it.

DOL Issues Guidance on Investment Advice for Workers, Retirees to Replace Vacated 2016 Regulations and Exemptions

The Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) has released a guidance package entitled Improving Investment Advice for Workers and Retirees Exemption. The guidance package includes a News Release, Fact Sheet, Proposed Class Exemption, and a Technical Amendment.

This guidance, to a greater or lesser degree, is meant to replace the DOL’s 2016 final regulations and accompanying exemptions on fiduciary investment advice. After several implementation delays, that 2016 guidance was struck down as “regulatory overreach” by the U.S. Fifth Circuit Court of Appeals in 2018.

DOL Issues Regulations Prescribing Conditions for ESG Investments in Retirement Plans

The Department of Labor’s Employee Benefits Security Administration (EBSA) has issued proposed regulations intended to govern the use of so-called “socially responsible” investments in retirement plans. Investments considered to have these characteristics are officially called environmental, social, and governance (ESG) investments. This guidance is being widely viewed as advising greater caution when retirement plan fiduciaries consider ESG investments for their retirement plans.

In general terms, ESG investments involve investment strategies that take into account environmental, social, and governance factors. Investors in such funds or strategies may do so with the motive of investing in entities that—for example—are considered environmentally responsible, or that support certain social causes.

EBSA has a history of issuing sub-regulatory guidance on the use of ESG investments as options for retirement plans, because of employers’ fiduciary obligation to administer their plans in a manner that places the interests of participants and their beneficiaries above other considerations. Prior EBSA guidance has generally taken the form of Interpretive Bulletins, the latest being IB-2016-1.

EBSA policy towards ESG investments in retirement plans has tended to reflect the philosophy of the administration in power. IB 94-2, issued during President Bill Clinton’s administration, asserted that—while selecting investments to achieve social objectives does not justify inferior returns for plan participants and beneficiaries, considering ESG factors was acceptable as a “tie-breaker” in investment selection.

IB-94-2 was viewed by the succeeding administration of President George Bush as unduly encouraging fiduciaries to include social, environmental, or political considerations in plan investment decisions, and it was replaced by IB 2008-2. To continue the swing of the pendulum, IB-2015-1 and IB-2016-1—issued during President Barack Obama’s administration—expressed an intention to revert to the less cautionary tone of EBSA’s guidance issued under President Clinton.

Now, under President Donald Trump’s administration, EBSA has gone beyond sub-regulatory Interpretive Bulletins by issuing proposed regulations. Public comments will be accepted for a 30-day period following the guidance’s publication in the Federal Register. Elements of these proposed regulations in prepublication form, and as articulated in an EBSA news release, include the following.

  • Fiduciaries may not invest in an ESG if they understand that its underlying investment strategy would give less priority to investment returns, or would increase investment risk, for the sake of a nonfinancial objective.
  • Compliance with ERISA’s exclusive-purpose and loyalty duties prohibits fiduciaries from subordinating the interests of plan participants and beneficiaries in retirement income and financial benefits under the plan to nonfinancial goals.
  • The regulations describe required investment analysis and documentation for what EBSA describes as “the rare circumstances” when fiduciaries are choosing among investments that are truly “indistinguishable” from one another—investments essentially equal—from an economic standpoint.
  • The proposed regulations state that “The Department does not believe that investment funds whose objectives include non-pecuniary [i.e., ESG] goals …even if selected by fiduciaries only on the basis of objective risk-return criteria…should be the default investment option in an ERISA plan.”



SEC Issues Reminder of June 30 Deadline for Compliance with Broker-Dealer Reg BI Conduct Standards

In an announcement Monday, the Securities and Exchange Commission (SEC) again confirmed that June 30, 2020, is the deadline to comply with the agency’s Regulation Best Interest (Reg BI), and requirements to provide new Form CRS, Relationship Summary, to retail customers. In early April, the SEC issued a similar reminder. Reg BI was officially adopted by the SEC in June 2019, with a delayed compliance date of June 30, 2020.

Reg BI is intended to govern relationships between retail investors and the broker-dealers and “associated persons” with whom they deal. In addition to adhering to the principles in Reg BI—chief among them that “investment professionals should not put their interests ahead of the interests of their clients and customers”—there is a requirement to provide a new Form CRS, which includes general information about the investment firm, services the client will be receiving, and how the client will be charged for those services. Form CRS is also to be filed with the SEC.

In April, SEC Chairman Jay Clayton stated that “firms should continue to make good faith efforts around operational matters to ensure compliance by June 30, 2020, including devoting resources as necessary and available in light of the circumstances,” a reference to the uncertainties cause by the coronavirus (COVID-19) pandemic.

In this week’s announcement, Clayton noted that “our work across the Commission over the past several months has strengthened my view that the effects of the COVID-19 pandemic weigh substantially in favor of implementing the Reg BI and Form CRS requirements as soon as practicable.”

SEC Reveals Focus of Examinations for Compliance with Regulation Best Interest

The Securities and Exchange Commission (SEC) continues to share information on its plans to gauge compliance with Regulation Best Interest (Reg BI), the soon-to-be-effective SEC guidance intended to govern relationships between retail investors and broker-dealers.

Initial insight was provided in a public statement issued on Thursday, April 2, when SEC Chairman Jay Clayton confirmed that the June 30, 2020, compliance date for Reg BI would not be postponed, despite business disruptions as the nation deals with the coronavirus (COVID-19) pandemic.

The overarching principle of Reg BI is that investment professionals should not put their interests ahead of their clients’ and customers’ interests. In tandem with Reg BI is a requirement to provide a new Form CRS, Relationship Summary, with information on the investment firm, services a retail client will be receiving, and how a client will be charged for those services.

In a press release issued Tuesday, April 7, the SEC’s Office of Compliance Inspections and Examinations (OCIE) offered more detail on the focus of its examinations of compliance with Reg BI and new Form CRS. Examinations will look for the following.

  • Evidence that there has been a good faith effort to implement policies and procedures to comply with Reg BI
  • Evidence that the broker-dealer has made a good faith effort to comply with new Form CRS requirements, including filing Form CRS with the Department of Labor, and delivering to existing and new investors

The OCIE news release noted that compliance examinations would be “taking into account firm-specific effects from disruptions caused by COVID-19.”



Second Lawsuit Filed Against SEC Investment Advice Rule

On September 11, 2019, XY Planning Network filed a lawsuit against the United States Securities and Exchange Commission (SEC) to invalidate its new fiduciary standards, known as the Regulation Best Interest Rule. The plaintiffs argue that the regulation fails to meet standards imposed under the Investment Advisers Act of 1940, and frustrates the intent of the Dodd-Frank Act.

The lawsuit argues that the SEC rule imposes a different standard of fiduciary responsibility for broker dealers than it does for financial advisers who might be selling the same or similar products. Financial advisers are held to a standard that the advice they provide to clients must be in the client’s best interests, but broker-dealers are not held to this same standard when providing advice. This is because broker-dealers are considered to be in the business of selling financial products rather than financial advice. The plaintiff claims that the new rule makes this distinction less clear, and as a result, “the rule thus circumvents a key goal of Dodd-Frank—leveling the playing field—and increases investor confusion.” The plaintiff claims it will be financially harmed as a result of the rule. The plaintiff represents over 1,000 financial advisers who expect to lose business to broker-dealers who are subject to the less stringent standards.

The lawsuit comes shortly after seven states and the District of Columbia filed a similar case seeking to invalidate the SEC rule. The SEC has yet to file a response in either case.

States File Lawsuit to Invalidate SEC Investment Advice Rule

On September, 9, 2019, seven states and the District of Columbia filed a lawsuit seeking to invalidate the recently announced Securities and Exchange Commission (SEC) investment advice rule. The Regulation Best Interest Rule, which is currently scheduled to be implemented by June 30, 2020, increases disclosures that must be provided to investors, but preserves many existing industry practices, such as the ability for brokers to use a commission-based sales model.

The plaintiffs contend that the rule undermines existing consumer protections because it will permit brokers to market themselves as trusted advisers while actually engaging in conflicts of interest that may harm their clients. The plaintiffs contend that practices such as sales contests, which they argue represent an obvious conflict of interest, are still permissible in many circumstances under the regulations.

Additionally, the plaintiffs argue that the rule causes confusion about which standards might apply when consumers are seeking investment advice. The regulations allow for different standards of advice to apply to investment advisers than those standards that apply to broker-dealers. The plaintiffs cite evidence from an SEC study that retail investors do not understand the difference between these two classifications, and the separate standards to which they are held.

The Dodd-Frank Act required the SEC to study where regulations are weak, and enact necessary changes to improve regulations to protect retail investors where necessary. The legislation also authorized the SEC to create regulations which would ensure uniform standards of investment advice applied to broker-dealers and investment advisers. The plaintiffs argue that the SEC ignored the conclusions of its own study, which demonstrated the need for a more robust regulation than what was actually proposed, and for rules which apply equally to both broker-dealers and investment advisers. For these reasons, the plaintiffs are asking the U.S. District Court for the Southern District of New York to hold the SEC regulation invalid.

SEC Approves Long-Awaited Investment Advising Regulation and Accompanying Guidance

The Securities and Exchange Commission (SEC) today approved by a 3-1 vote its guidance package for broker-dealers and investment advisers who provide investment advisory services to retail clients. This guidance was first proposed in April 2018, the impetus being a directive contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

In the interim following Dodd-Frank’s enactment, the Department of Labor (DOL) proposed and finalized guidance on investment advice standards that were to apply to retirement investors, but this guidance was later overturned by a federal court.

The Commission’s vote today adopts the full package of its investment fiduciary advice guidance.

Included in Guidance Package

  • Regulation Best Interest, which establishes a standard of conduct for broker-dealers when making recommendations to retail customers
  • A requirement for investment advisers and broker-dealers to provide a client relationship summary (Form CRS) to retail investors
  • An interpretation of the standard of conduct for investment advisers
  • An interpretation of the “solely incidental” prong of the Investment Advisers Act of 1940

Notable Changes

  • The scope of Regulation Best Interest is modified to include account recommendations, including rollovers or transfers from workplace retirement plan accounts to IRAs and recommendations to take a plan distribution.
  • Regulation Best Interest would require broker-dealers to disclose whether monitoring will be provided and the scope of that service.
  • Regulation Best Interest would specifically require broker-dealers to adopt policies and procedures designed to eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.
  • The consideration of cost is explicitly required as part of a broker-dealer’s care obligation.
  • More flexibility in describing a firm’s offerings on Form CRS will be allowed.
  • Broker-dealers must establish, maintain, and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.

Effective Date

  • Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register, and include a transition period until June 30, 2020, to give firms sufficient time to come into compliance.
  • The interpretations under the Advisers Act become effective upon publication in the Federal Register.

Jerry Bramlett Discusses Retirment Plan TPAs

​​In a recent 401(k) Fridays podcast​​, Jerry Bramlett ​​shares his perspective on the future of TPAs in the retirment industry. ​​Bramlett covers the current challenges faced by TPAs and the effects of the consolidation wave on the business and service models of TPAs. He also answers listeners’ questions relating to the impact fee of compression on TPAs, the evolution of payroll integration and ERISA 3(16) fiduciary services, and the future of local TPAs.

Washington Pulse: Finally Final: Court’s Mandate Terminates DOL Fiduciary Guidance

The U.S. Fifth Circuit Court of Appeals has finally made it official: the 2016 Department of Labor (DOL) fiduciary investment advice final regulations and accompanying guidance are repealed. On June 21, 2018, the Fifth Circuit issued the formal mandate that implements its March 2018 ruling “vacating” (i.e., making null and void) this much-contested guidance, whose purpose was to provide retirement savers with greater protection from conflicted and potentially exploitive investment advice. Attempts during the March-to-June interval to appeal the Fifth Circuit’s ruling and save the fiduciary guidance ultimately proved unsuccessful.

It is not completely clear what this outcome will mean for investment advisors and advisory firms in their future relationships with retirement savers. DOL regulations dating back to 1975—intended for replacement by the now-repealed 2016 guidance—may once again provide the standard that determines fiduciary status. 1996 and 2005 DOL sub-regulatory guidance may also shed additional light. It is hoped that the DOL will release formal guidance soon in order to provide greater clarity regarding future investment fiduciary standards.

How the DOL Investment Fiduciary Guidance Was Defeated

Several earlier District Court challenges to the fiduciary guidance ended with multiple lower courts all upholding it. One of these was a Texas District Court decision, which was appealed to the Fifth Circuit Court of Appeals. There the fiduciary guidance suffered its first defeat. Perhaps more important, the Fifth Circuit’s March ruling had sufficient authority to vacate “in toto” the final regulations and several accompanying prohibited transaction exemption (PTE) components. All were eliminated, in all legal jurisdictions nationwide. The Fifth Circuit judge writing for the majority rebuked the DOL for over-stepping its authority in issuing the 2016 guidance.

The Fifth Circuit’s decision was not unanimous. The three-judge Fifth Circuit panel (the full Fifth Circuit Court of Appeals has nine members) that rendered the decision was split 2-1. Had this ruling occurred during the Obama administration, with the same DOL leadership that had issued the guidance, the loss would in all probability have been appealed. With the Trump administration and its new DOL leadership committed to revising or withdrawing the guidance, the Fifth Circuit’s ruling was welcomed by the DOL, rather than challenged. Others—including the states of California, Oregon, and New York, in concert with the American Association of Retired Persons (AARP)—sought standing to appeal, but were denied. The ultimate deadline of June 13, 2018, for a DOL appeal to the Supreme Court passed as expected, and eight days later came the Fifth Circuit mandate that sealed the fiduciary guidance’s fate.

What Happens Next?

Over the slightly more than two years since the DOL investment fiduciary final regulations and exemptions were issued in April 2016, many financial organizations and investment advisors have made changes to their business models, compensation practices, and investment lineups to comply with new rules. Some even acknowledged fiduciary status as part of the new compliance regime. Will these changes be modified or reversed?  Can a firm or advisor disclaim a fiduciary role after having embraced it?  Does any DOL guidance issued from 2016 to the present have continued purpose or bearing on investment advising relationships?

Other DOL Investment Fiduciary Guidance; More is Needed 

Financial organizations, investment advisors, and service providers who serve them are wondering what past guidance can—or should—be relied on now that the 2016 final regulations and accompanying PTEs have become invalid. Possibilities include the following.

  • The DOL 1975 regulations specified a five-part test to determine if investment advice is fiduciary in nature, but generally apply only to advising that is associated with employer-sponsored retirement plans, not IRAs.
  • Interpretive Bulletin (IB) 96-1 clarified what constitutes investment information versus investment advice. IB 96-1 describes safe harbors to help employers guard against unintentionally providing information that could be construed as investment advice.
  • DOL Advisory Opinion 2005-23A addressed limited circumstances in which a person who is already a fiduciary to an employer-sponsored retirement plan could become an investment fiduciary when plan assets are rolled over from the plan to an IRA. According to this 2005 guidance, an individual who is not already a plan fiduciary may provide IRA rollover advice without becoming an investment fiduciary.
  • DOL Field Assistance Bulletin (FAB) 2018-02 was written after the Fifth Circuit’s March ruling vacating the final investment fiduciary regulations and exemptions. Anticipating this guidance to be eliminated, FAB 2018-02 provided for a transition period during which relaxed impartial conduct standards are to apply, accompanied by lenient enforcement. The impartial conduct standards require that those who provide investment advice for a fee
  • make no misleading statements,
  • receive only reasonable compensation, and
  • act in a client’s best interest.

FAB 2018-02 states that these standards are to apply “until after regulations or exemptions or other administrative guidance has been issued.”

The DOL has remained silent following the Fifth Circuit’s June 21, 2018, mandate officially invalidating the investment fiduciary guidance. Within the investment advisory and retirement industries it is widely hoped that the DOL will soon release more definitive guidance, providing greater clarity and assurance regarding the agency’s investment fiduciary standards and compliance expectations.

Proposed SEC Fiduciary Guidance

As the fate of the DOL investment fiduciary guidance was being determined in the judicial system, the Securities and Exchange Commission (SEC) in April issued proposed guidance for broker-dealers and registered investment advisors who make recommendations to retail clients. The agency did so eight years after the Dodd-Frank Wall Street Reform and Consumer Protection Act gave the agency a directive to consider issuing standards of conduct for investment recommendations.

The proposed rules generally do not apply to banks or credit unions unless they are (or own) a broker-dealer or a registered investment advisor. The rules do appear to cover individual plan participants receiving direct investment recommendations, but exclude employer plans per se as a business exception. The guidance is also believed to cover investors in individual tax-advantaged accounts, such as IRAs, health savings accounts, and education savings accounts, but only for securities investments, which greatly limits the reach of this SEC guidance. The proposed SEC package contains three items.

  1. A “Regulation Best Interest” for broker-dealers
  2. A rule requiring disclosure of the nature of the advising relationship (fiduciary or not), and restraints on use of the term “advisor”
  3. Clarifications on fiduciary standards applicable to investment advisors

Although the full impact of the SEC proposed guidance is undetermined at this time, the SEC has indicated that the final guidance will generally include advice given to retirement savers who are invested in securities and are receiving investment advice from broker-dealers or registered investment advisors. The SEC is accepting public comments for a 90-day period, which began on May 9, 2018.

Still unknown at this time is the extent to which there will be coordination—and hopefully commonality—between the SEC and DOL guidance that will ultimately govern investment advising relationships.

NOTE: See SEC Best Interest Standard is Major Departure from DOL Fiduciary Guidance, for more information on the proposed SEC guidance or visit for the latest developments.