The Department of Labor (DOL) has issued a Final Rule reinstating the DOLs 2016 regulation defining who is a fiduciary under ERISA (2016 rule). The Final Rule, which is solely a ministerial action, restored the original five-part test for fiduciary status as set forth in the 1975 regulation; eliminated the Best Interest Contract Exemption and the principal exemption associated with the 2016 Rule; and restored to their pre-2016 form six prohibited transaction class exemptions that were modified to conform to the 2016 Rule.
The 2016 Rule dismantled the so-called five-part test for fiduciary status set forth in the 1975 regulation (Five-Part Test). The Final Rule formally reinstated the Five-Part Test as it existed before the 2016 Rule, thereby confirming the effect of the 2018 Court of Appeals decision that vacated the 2016 Rule. Under the Five-Part Test, the adviser was determined to be a fiduciary if, for a direct or indirect fee or other compensation, he or she: (i) rendered advice as to the value of securities or other property, or made recommendations as to the advisability of investing in, purchasing or selling securities or property (ii) on a regular basis, (iii) pursuant to a mutual agreement, arrangement, or understanding, written or otherwise, between the plan, plan fiduciary, or IRA that (iv) the advice would serve as a primary basis for investment decisions with respect to plan or IRA assets, and (v) the advice would be individualized based on the particular needs of the plan or IRA.
A financial institution or investment professional that meets this Five-Part Test, and receives a fee or other compensation, direct or indirect, is an investment advice fiduciary under ERISA and under the Code.
With regard to the “primary basis” component, the DOL indicated that the rollover recommendation does not have to be “the” primary basis for the recommendation, so long as it was “a” primary basis.
With respect to the condition that the arrangement reflect the “mutual agreement or understanding of the parties that the advice be a primary basis for the investment decision,” this determination would be based upon the “reasonable” understanding of the parties. As a contractual matter, specific language indicating that there was no mutual agreement or understanding of the parties would be permissible and would be given some effect but would not be determinative.
With regard to the “regular basis” prong of the Five-Part Test, the DOL indicated that “regularly” would be read broadly. Thus, a preexisting relationship with a plan participant can be taken into account, as well as a potential future relationship of which the rollover into an IRA is simply the first step. This interpretation may require investment advisers to reconsider their relationships with unrelated outside solicitors. In other words, the DOL may view a one-time recommendation by an outside solicitor for a registered investment adviser as advice provided on a “regular basis” if that rollover recommendation was the first step in a future, ongoing relationship with the investment adviser managing the IRA assets of the participant.