The New DOL Rule Eviscerates Fiduciary Duties

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By requiring brokers and advisers to offer true fiduciary services under a very limited set of circumstances, the new DOL rule1 has eviscerated fiduciary principles.

The Employee Retirement Income Security Act (ERISA)2 was enacted to protect the employees’ savings from abuses by their employers, who held their savings, and others who were advising them with respect to these savings.3 The Act imposed fiduciary duties on those who exercised power over the employees’ savings. Those objectives were watered down through the years, as employee savings were invested in risky investments and employees were allowed to be counseled by advisers and brokers with conflict of interests.

ERISA was enacted because brokers and advisers served retirees at the behest of corporate management, and those serving employees close to retirement age and did not act as fiduciaries in the best interests of the workers. Often employees had no control over their investments and lost their savings. Therefore, ERISA imposed fiduciary duties on those who managed and advised employees with respect to their savings.

On June 29, 2020, the U.S. Department of Labor (DOL) announced the following actions regarding the regulation of investment advice under ERISA and the Internal Revenue Code:4 The Department proposed a new class of exemption from fiduciary duties for brokers and other advisers. The DOL announced that this exemption would improve investment advice for the workers! This exemption from fiduciary duties, however, released the duties of investment advisers undermining the services they prove to their advisees. Such an exemption from fiduciary duties hardly protects the employee-advisees from fraud and deceit by investment experts.

The Department of Labor submitted a technical amendment to conform the text of the Code of Federal Regulations to a 2018 decision by the U.S. Court of Appeals for the 5th Circuit. That decision vacated the Department’s 2016 rule that imposed specific fiduciary duties, which had the effect of reinstating the previous regulatory text.5 The new rules were updated on the Department’s website to reflect changes to its pre-existing prohibited transaction class exemptions and to reflect a court’s decision to vacate the 2016 rule. Hence the Department followed the court decision, which sided with the brokers against a prior rule and supported the broker-dealers’ arguments. The new head of the DOL, Eugene Scalia, represented the brokers in that case.