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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.
The new Rule is indeed an improvement. But for whom?
The new rule includes drastic changes from the current rule regarding fiduciary duties towards employees. This article does not describe the details, but there is one important difference between the prior rule of 2016 (rule 1) and the new one (rule 2). Rule 1 was more general, based on principles. In contrast, rule 2 describes fiduciary duties in specific terms. But since it does not mention certain specific activities or results – those are not regulated.
Rule 2 produces a vast silence.
Fiduciary duties have shrunk to a small number of actions. The rest is free – depending only on the sophistication and abilities of employees to trust and negotiate with brokers and advisers. Specificity is the gate to freedom of so-called fiduciaries and trusted experts! The new rule generously offers it them. This indeed is the “improvement” of the new rule for brokers and those whom ERISA classified as “fiduciaries.”
But fiduciary law is as far from the Rule as could be. The door is open to conflicts of interests by those who serve retirees’ savings. Conflicts of interest infect the DOL as well. The rule is a shameful interpretation of fiduciary duties for those who advise and manage employees’ savings.
Tamar Frankel is professor of law emerita, Boston University Law School.
1 Employee Benefits Security Admin., Dept. of Labor, Improving Investment Advice for Workers & Retirees (June 29, 2020), 85 Fed. Reg. 40,834 (July 7, 2020), available at https://www.govinfo.gov/content/pkg/FR-2020-07-07/pdf/2020-14261.pdf (last visited July 7, 2020).v
2 Employee Retirement Income Security Act of 1974, 29 U.S.C. §§1001-1461.
3 See S. Rep. 93-4, at 204, in Legislative History of the Employee Retirement Income Security Act of 1974, at 93, 204, available at https://ufdc.ufl.edu/AA00024841/00001/256j (last visited July 14, 2020) (introductory remarks of Sen. Javits) (noting abuses by both employers and fiduciaries).
4 Employee Benefits Security Admin., Dept. of Labor, Improving Investment Advice for Workers & Retirees (June 29, 2020), 85 Fed. Reg. 40,834, 40,862-65 (July 7, 2020), available at https://www.govinfo.gov/content/pkg/FR-2020-07-07/pdf/2020-14261.pdf (last visited July 7, 2020) (proposed exemption); Employee Benefits Security Admin., Dept. of Labor, Conflict of Interest Rule—Retirement Investment Advice: Notice of Court Vacatur (June 29, 2020), 85 Fed. Reg. 40,589 (July 7, 2020), available at https://www.govinfo.gov/content/pkg/FR-2020-07-07/pdf/2020-14261.pdf, to be codified at 29 C.F.R. §2510.3–21 (last visited July 7, 2020)
5 Chamber of Commerce of the United States v. United States Department of Labor, 885 F.3d 360 (5th Cir. 2018), vacating Dept. of Labor, Definition of the Term ‘‘Fiduciary,’’ 81 Fed. Reg. 20,946 (Apr. 8, 2016), formerly codified at 29 C.F.R. §2510.3-21 (vacated 2018) (removed 2020). That decision reinstated the 1975 regulation and its five-part test for defining an investment-advice fiduciary as well as Interpretive Bulletin 96-1 regarding participant investment education. Pre-existing class exemptions that were amended in 2016 have reverted to their pre-amendment form. This includes Prohibited Transaction Exemptions (PTEs) 75-1, 77-4, 80-83, 83-1, 84-24 and 86-128. 85 Fed. Reg. 40,589, at 40,589-90.
Read more articles by Tamar Frankel