Back in 2018, we worried the DOL might never get moving and the resulting process would create a patchwork of confusing rules for advisors to follow. Now, states will have the ability to comment on the proposed rule via the NPRM process. That process may help harmonize the rules.
It may be hard to remember a time before the pandemic, but once a upon a time, federal (and some other) regulators wanted to tackle the topic of who gave investment advice and how they gave it. The so called “fiduciary rule” was a hot topic until the stock market staggered through multiple iterations of shocks. But according to the Department of Labor, it has plans to tackle the fiduciary duty rule as well as make changes to prohibited transactions. Because the language here is essential, it might be helpful to look specifically at what the Department of Labor has articulated it’s proposed rule change involves, via it’s Employee Benefits Security Administration (EBSA): This rulemaking would amend the regulatory definition of the term fiduciary set forth at 29 CFR 2510.3-21(c) to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries within the meaning of section 3(21) of ERISA and section 4975(e)(3) of the Internal Revenue Code. The amendment would take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest. In conjunction with this rulemaking, EBSA also will evaluate available prohibited transaction class exemptions and consider proposing amendments or new exemptions to ensure consistent protection of employee benefit plan and IRA investors.
That’s quite a mouthful, and worth a quick pause to understand how rulemaking at executive agencies, like the DOL works. Each executive agency differs slightly in how the proposed rulemaking process works. That’s mostly because the stakeholders of those agencies differ. For example, the stakeholders involved in a change in rules made by the Nuclear Regulatory Commission aren’t the same as those involved in the EBSA.
The key to an NPRM is timing. According to the EBSA, it plans to publish the proposed rule for public comment on or around December of 2021. Until the NPRM is released, the exact text of the proposed rule won’t be known. That means, all we know right now is that a new rule is coming. Usually that NPRM will also set forth what exactly it is working to address or set right in the new rule. From there, the public as well as other stakeholders can comment on the rule, suggest changes to it or oppose it entirely. After the public comment period, there may be public hearings on the rule.
But DOL isn’t the last word on this issue. As we’ve discussed before, “ A key point in looking at this issue is that both the DOL and the Securities Exchange Commission (“SEC”) have a say in exclusion from the definition of Investment Advice.” That means, the EBSA and therefore the DOL can only issue a rule concerning their own jurisdiction. For DOL, that would mean it can create a rule for who counts as a fiduciary for employment-related investments (like 401(k)s, 403(b)s, and employer sponsored IRAs), but it cannot create a rule for all investment advisors. Instead, that would be the purview of the Securities Exchange Commission (SEC), which took action in this area back in 2019.[1]
And, if you recall states started to fill in the gap in this area that DOL and SEC created when they threw their collective hands up in 2017. As we wrote back in 2018 “the Department of Labor’s fiduciary rule feels like the train that will never come on a Friday afternoon. Unfortunately, while more passengers gather on the platform, they aren’t all merely waiting for the 5:02 express to the suburbs; instead, more regulators on different levels are itching to weigh in with their own policies.”[2] At that time, we worried the DOL might never get moving and the resulting process would create a patchwork of confusing rules for advisors to follow. Now, states will have the ability to comment on the proposed rule via the NPRM process. That process may help harmonize the rules.
[1] https://www.sec.gov/news/press-release/2019-89
[2] https://www.bcgbenefits.com/blog/dol-and-sec-and-blue-sky-law
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
get xpress proposal
