PLANADVISER - July/August 2019 - 50

compliance consult
Now Who Is a Fiduciary?
How the SEC's best interest rule could affect plans, IRAs
REGULATION Best Interest or " Reg BI " will become effective
on June 30, 2020. In the preamble to its final rulemaking,
the Securities and Exchange Commission (SEC) made clear
that Reg BI applies in some circumstances, but not others, to
securities recommendations made regarding plans covered
by the Employee Retirement Income Security Act (ERISA).
Reg BI also applies to recommendations involving individual
retirement accounts (IRAs). Thus, firms and their representatives
that act as broker/dealers (B/Ds) under the Exchange
Act of 1934 must determine whether they are acting as fiduciaries
under ERISA even if not acting as advisers under the
Investment Advisers Act of 1940.
If they are acting as advisers, the firms and their representatives
must navigate how they will apply both ERISA's
and Reg BI's requirements. Importantly, there is a question
as to whether the Department of Labor (DOL) will now
change its views about whether a person is, or is not, acting
as a fiduciary when providing " investment advice " as the
term is defined under ERISA Section 3(21)(A)(ii) and Section
4975(e)(3) of the Internal Revenue Code (IRC).
Reg BI applies when a firm or its representative recommends
any securities transaction or investment strategy
that involves securities to a retail customer. As is relevant
here, a retail customer includes a participant in an ERISAcovered
plan as well as an IRA owner. However, a retail
customer does not include persons who act as a named fiduciary
to the plan as a whole, but only in that capacity to a
plan participant.
Additionally, these types of recommendations include
any regarding trading securities within a plan account
or IRA, or selecting account types, which, the SEC states,
include advice to take a distribution from a plan and roll
the money into an IRA.
The 5th Circuit Court of Appeals in Chamber of Commerce of
the U.S. v. U.S. Department of Labor, a year ago March, vacated
the DOL's regulation intended to change its definition of
investment advice. Therefore, in Field Assistance Bulletin
(FAB) No. 2018-02, the DOL states that firms and their representatives
should treat the regulation as if it never existed.
This means the longstanding regulation promulgated under
ERISA Section 3(21)(A)(ii) and IRC Section 4975(e)(3), which
includes the five-part test for determining whether a person
provides investment advice, applies.
The DOL has not explicitly stated whether its views
in Advisory Opinion 2005-23A, commonly known as the
Deseret opinion, have changed. In the Deseret opinion, the
department said a recommendation to take a distribution
and roll over the proceeds to an IRA was investment
advice under the five-part test only if the person making
the recommendation was already a fiduciary to the plan.
In that case, such a recommendation would be an exercise
of discretionary management over the plan, and thus the
adviser would be acting as a fiduciary.
Historically, many broker/dealers concluded that they
and their representatives do not provide investment advice
to ERISA plans and IRAs under the five-part test. They
concluded that, while they make recommendations as to
the advisability of buying, investing in, or selling securities
or other property, they do not meet one or more of the test's
other requirements: that their advice is on a " regular basis, "
by " mutual agreement, " is the " primary basis " for a decision,
and is " individualized. "
Additionally, they looked to the Deseret opinion to
conclude that they do not provide investment advice when
making rollover recommendations.
Notably, after they reviewed the nature of their customer
relationships in order to comply with the now vacated DOL
investment advice regulation, some B/Ds realized they
might not have been passing the five-part test. Those firms
are now relying on the transition relief found in FAB No.
2018-02 or considering whether other strategies are available
to address prohibited transactions that arise under
ERISA Section 406 and IRC Section 4975.
In reaction to the promulgation of a final Reg BI, firms
should consider whether complying with the rule will give
them fiduciary status under the five-part test. At least arguably,
if a firm and its representatives make recommendations
covered by Reg BI, and subsequently comply with the rule's
disclosure obligation, care obligation, conflict of interest obligation
and compliance obligation, this could result in those
advisers moving closer to fiduciary status under the test.
Further, the DOL states in its 2019 regulatory agenda
that the Employee Benefits Security Administration (EBSA)
will issue a proposed regulation concerning the definition
of " investment advice " under ERISA Section 3(21)(A)(ii).
Departed DOL Secretary Acosta also publicly stated that the
agency will synchronize its own regulations with the SEC's
rulemaking. Exactly what this means remains to be seen.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He has
an extensive background in the financial services sector. His range of
experience includes handling fiduciary matters affecting investment
managers, advisers,
broker/dealers,
insurers, banks and service
providers. He served on the DOL's ERISA Advisory Council from 2012
through 2014.
50 | planadviser.com July-August 2019
Art by Tim Bower
http://www.planadviserdigital.com/planadviser/july_august_2019/TrackLink.action?pageName=50&exitLink=http%3A%2F%2Fplanadviser.com
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