The proposal would replace the Obama-era fiduciary rule the Trump Labor Department refused to defend.
On June 29, 2020, the Department of Labor announced that is proposing a new fiduciary rule for investment advice fiduciaries. The much-anticipated proposal follows a colored history in which the Trump Labor Department refused to defend the Obama-era fiduciary rule after a panel of the Fifth Circuit Court of Appeals overturned it. Many, including Senator Elizabeth Warren, have expressed concern about a replacement rule that would be too weak to protect investors, especially since the new rule would be developed under Secretary of Labor Eugene Scalia, who represented the U.S. Chamber of Commerce in its successful litigation to upend the Obama rule.
Obama-era rule vacated. Three federal district courts and the Tenth Circuit Court of Appeals had upheld the Obama Administration’s controversial fiduciary rule. But on March 15, 2018, a three-judge panel of the Fifth Circuit Court issued a split decision overturning the rule, in Chamber of Commerce of the USA v. U.S. Department of Labor, with Chief Judge Carl Stewart dissenting. The Fifth Circuit found that the fiduciary rule conflicted with the text of ERISA and the Internal Revenue Code, and was unreasonable under Chevron and the Administrative Procedure Act. The rule not only departed from the common law definition without good reason, it also broke with 40 years of established regulatory interpretation, the court said. Because its provisions were not severable, the Fifth Circuit vacated the rule in entirety.
DOL refused to defend on appeal. The Trump Administration’s Labor Department refused to defend the fiduciary rule, and so the Fifth Circuit took action that closed off all other avenues that might have revived the rule. The appeals court denied the request of the Attorneys General of California, New York, and Oregon to intervene in the case in order to defend the rule through a rehearing en banc. The appeals court also denied AARP's motion to intervene.
New rule planned. After the fiduciary rule was defeated, the DOL announced plans to write a new rule defining conflicts of interest for retirement advisors. Then-DOL Secretary Acosta suggested that the new rule should mirror a deeply flawed 2019 Securities and Exchange Commission rule that governs standards of conduct for all broker-dealers and investment advisers, a view that Secretary Scalia appeared to share. Senator Warren and others saw the SEC rule as one that weakens longstanding protections for investors and does not require broker-deals to eliminate conflicts of interest.
New proposed rule. Although the Department of Labor did not provide a copy of the proposed rule along with its announcement, it explained that the exemption offers a new prohibited transaction class exemption for investment advice fiduciaries that is based on an existing temporary policy adopted after the Fifth Circuit’s ruling. Under the proposal, investment advice fiduciaries would be able to provide more choices for retirement using "Impartial Conduct Standards," which the DOL described as a best interest standard; a reasonable compensation standard; and a requirement to make no materially misleading statements. These standards align with the those issued by the SEC.
The proposed exemption would also implement the DOL’s views on when rollover advice could be considered fiduciary advice under ERISA and the Internal Revenue Code.
Ministerial amendment. The DOL also said that it is "taking the ministerial action of amending the Code of Federal Regulations to implement the 5th Circuit’s order," which had the effect of reinstating the Department’s 1975 regulation defining who is an investment advice fiduciary under ERISA and the Code, commonly known as the "five-part test." The court’s order also had the effect of reinstating the Department’s Interpretive Bulletin 96-1 regarding participant investment education.
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