The Department of Labor's attempts to “remake” its Erisa regulation may finally come to fruition with the agency’s most recent proposal as its third-party payment exemption essentially serves the same function as the best interest contract exemption of its now-defunct 2016 rule, according to lawyers.
The DOL’s Obama-era rule aimed to restructure the “banking, insurance and securities industries at least as they did business with retirement plans and investors, and without reference to the pattern of heavy regulation to which those industries were otherwise subject,” Carol McClarnon and W. Mark Smith, partners at the law firm Eversheds Sutherland, and Caitlin Naylor, an associate at the firm, write in a column in Bloomberg Law. It was that “regulatory overreach” that led to the rule getting vacated by the U.S. Court of Appeals for the Fifth Circuit in 2018.
In June, the DOL proposed a revised version of the Obama-era rule that focused on an exemption that would allow financial institutions and professionals to “receive a wide variety of payments that would otherwise violate the prohibited transaction rules, including, but not limited to, commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs and revenue sharing payments from investment providers or third parties.”
But the proposal also “continues to respect Erisa as an independent source of law for financial services companies in the retirement space, but purposefully undertakes to align with these other bodies of regulation,” the authors write.
Before Alexander Acosta resigned as Labor Secretary in July 2019, prompted by criticism of his handling of a 10-year-old plea deal with convicted sex offender Jeffery Epstein, Acosta had revealed that the DOL was “working with the SEC” to design the new rule, as reported. And once the DOL proposed its exemption last month, SEC chairman Jay Clayton said that it “reflects in part the [SEC’s] constructive and ongoing engagement with the [DOL].”
The DOL’s new proposal is “consistent” with the decision doled out by the Fifth Circuit because it “restores” the so-called five-part test — the agency’s 1975 investment advice regulation — to the Code of Federal Regulations, as well as the 1996 investment education guidance, the Eversheds authors write. Both the regulation and the guidance had been removed in the Obama-era rule, and the DOL’s most recent proposal “reinstates its pre-2016 complex of Erisa class exemptions,” they write.
In addition, the DOL has since said that its opinion on rollovers, released in 2005, “was incorrectly reasoned, and that rollover advice is fiduciary investment advice if and when it meets the terms of the five-part test,” according to the authors.
The proposed exemption on prohibited transactions, meanwhile, “would serve the same function as the now vacated best interest contract exemption did in the 2016 final rule: as a principles-based exemption for conflicted investment advice that is not tied to any particular investment product and is available for fiduciary recommendations (if any) as to investment service arrangements,” they write.
The difference, however, is that providers will be able to rely on any available exemption instead of the new relief, according to the authors. The terms of the exemption are “intended to be agnostic as to the fiduciary’s business model or form of compensation,” they write.
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