By Summer’s End, expect a new DOL Escrow rule: ERISA Attorney

By Melanie Waddell

Apr 18, 2023 at 11:04 am

ERISA attorney Fred Reish is also expecting a new proposal to strengthen the DOL’s PTE 84-24 for pension recommendations.

The recent Florida federal court ruling nullifying the Labor Department’s policy that stated fiduciary rollover advice “will force the DOL on hand” to release a new fiduciary definition rule likely by the end of the summer, predicts Fred Reish, partner at Faegre Drinker.

Labor appealed to the US District Court for the Middle District of Florida on Friday to overturn the verdict.

Reish said he also expects Labor to soon publish a proposal “to strengthen the DOL’s PTE 84-24 for recommendations on annuities for rollover”. With this plan, DOL will “demand more from both insurance agents and insurance companies.”

We caught up with Reish to review how companies are complying with Labour’s fiduciary PTE after his colleague Brad Campbell said in a recent webcast that the Florida judgment interpretation is not ‘dead’.

THINKADVISOR: What’s new on the DOL Trustee PTE? FRED REISH: A federal district court in Florida found that the DOL’s interpretation of fiduciary advice is not supported by the existing regulation.

While this was quite a blow to the DOL’s goal of providing an elevated standard of due diligence for rollover recommendations, the court found that the processes described in PTE 2020-02 were reasonable where an adviser is a trustee.

For example, a trustee would still need to have plan information and compare it to the investments, services and costs in a rollover IRA given the participant’s needs and circumstances.

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In addition, the court did not expand its ruling to include conflicting recommendations about plans or IRAs; Holding was all about rollover recommendations. As a result, the investment advice regularly provided to plans and IRAs will continue to be fiduciary advice and the protection of PTE 2020-02 will continue to be needed in the event of financial conflicts.

It seems highly likely that the DOL will appeal the Florida court decision. It would be risky for anyone to rely on this decision and make rollover recommendations without complying with the PTE. It may be a year or so before we hear from an appeals court.

Additionally, the court’s decision provides incentive for the Labor Department to enact a new regulation proposal that specifically states that a rollover recommendation is an act of trust. However, the DOL has been very quiet about its work on a new trust regulation.

Now, do you have any concerns about the advisors’ compliance with the fiduciary PTE?

I’m concerned about smaller broker-dealers and investment advisory firms. I’m also concerned about independent insurance brokers. These rules – and PTE 2020-02 in particular – require significant work from firms as well as compliant processes from individual consultants and agents. Larger companies are well equipped with their attorneys and compliance staff to meet fiduciary and prohibited transaction requirements.

Most large companies have cultures where working from home can set policies and practices. But when you get to smaller financial services firms with just one or two or three financial professionals, the requirements are more complex and expensive. Because of this, I am concerned that there might be an accidental non-compliance.

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What is the biggest compliance concern for broker-dealers right now?

It depends somewhat on the broker-dealer’s size and culture.

I think it is a challenge for all broker-dealers to ensure that all recommendations, including rollover recommendations, are made through a best-interest process and are actually in the best interests of the fixed income investor.

In addition, there is an obligation to minimize conflicts of interest. In the broker-dealer world, almost all compensation is transaction-based, which in turn means it’s inconsistent. As a result, broker-dealers must have appropriate policies and procedures in place — as well as oversight — to adequately ensure that compensation does not motivate individual agents to make recommendations that are in their best interest, rather than in their best interests as the bond investor.

For smaller businesses, some of the other requirements are also onerous. An example would be the annual retrospective review and report.