3 July 2025

All Eyes On DOL Plan to Revisit Fiduciary Rule

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The political landscape in Washington has changed in the year since the SEC's best-interest standard took effect, which could mean different interpretations and enforcement practices from regulators. But the attention among investment-advice stakeholders this month is focused on the Department of Labor, as it announced plans to issue a proposed rule that could broaden who's considered a fiduciary under ERISA.

The rule-making, unveiled as part of the Labor Department's semiannual regulatory agenda June 11, would amend the regulatory definition of the term fiduciary "to more appropriately define when persons who render investment advice for a fee to employee benefit plans and (individual retirement accounts) are fiduciaries" within the meaning of the Employee Retirement Income Security Act and the Internal Revenue Code, according to a Labor Department explanation.

Moreover, the amendment would "take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment market- place, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest," the department said.

"There are a lot of career people at the DOL still working there and it's not clear to me that their views would have necessarily changed just because of the 5th Circuit's action," said Joshua A. Lichtenstein, an ERISA and benefits partner in New York who heads Ropes & Gray LLP's ERISA fiduciary practice. "So I am expecting to see a pretty fulsome rewrite of the definition of who is a fiduciary."

In 2018, a three-judge panel at the 5th U.S. Circuit Court of Appeals in New Orleans vacated a Labor Department rule, commonly known as the fiduciary rule, in a 2-1 decision because it said the department exceeded its legal authority.

The fiduciary rule, finalized in 2016 under the Obama administration, broadened the definition of when a person or entity was taking on fiduciary responsibilities and replaced the five-part test used to determine whether an investment professional or financial institution is a fiduciary.

The Labor Department last year under the Trump administration reinstated the five-part test and in the preamble to an investment-advice exemption that took effect in February, said the five-part test applies to rollover recommendations.

"I think there's concern in the department and in general that people go from retirement plans to IRAs — a retail environment where there are higher costs, less protections from conflicts of interest and there isn't a fiduciary standard," said Fred Reish, a partner in Faegre Drinker Biddle & Reath LLP's benefits and executive compensation practice group. "It's not so much about a person 30 years old leaving their job and putting money in an IRA, this is really about baby boomers retiring in a defined contribution world."

Another challenge? 

As it currently stands, the five-part test makes it "too easy" for financial firms to avoid fiduciary obligations under ERISA, said Barbara Roper, Pueblo, Colo.-based director of investor protection at the Consumer Federation of America.

She would like the Labor Department to ensure all rollover recommendations are considered fiduciary investment advice and close the "loopholes" in the fiduciary definition.

But much like with the 2016 rule, Ms. Roper expects the Labor Department to face a legal challenge if it broadens the fiduciary definition.

The Employee Benefits Security Administration takes "judicial decisions into account when pursuing rule-making," A Labor Department spokesman said in an email. "The 5th Circuit's decision will shape our thinking on approaches to these issues."

Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute in Washington, expects the Labor Department to expand the definition to include rollovers. "We don't feel that that's an appropriate move, but we'll reserve judgment until we see exactly what they propose, and we'll take a thoughtful and measured approach to reviewing it and analyzing it and providing feedback through the regulatory process," he said.

It's far too soon to say whether the rule will face a legal challenge, Mr. Berkowitz added, but "given the stakes here all options do have to remain on the table and we'll wait and see how things play out."

The previous case decided in 2018 was filed by business groups such as the U.S. Chamber of Commerce, the Financial Services Institute, the Financial Services Roundtable, the Insured Retirement Institute and the Securities Industry and Financial Markets Association.

Stakeholders are also watching how the SEC, with Gary Gensler at the helm since April, will enforce its best-interest standard, known as Reg BI.

The best-interest standard was the centerpiece of a package designed to address the obligations of broker-dealers and investment advisers when they provide recommendations or investment advice to retail investors. It was adopted in June 2019 and went into effect June 2020. Shortly before the rule package took effect last year, the SEC said initial examinations would be less onerous and focus on "good faith" efforts because of the disruptions caused by the COVID-19 pandemic. In January, it announced the scope of its examinations would expand.

During testimony before the House Financial Services Committee in May, Mr. Gensler said it's important that "investors actually have brokers take their best interest at heart and that's what we're going to do through examination and enforcement, (and) guidance to ensure that that rule is fully complied with as written."

Because the rule doesn't have specific definitions of terms like "best interest" and "conflicts of interest," the SEC's interpretation will be what's enforced, Mr. Reish said. A Democratic-led SEC is likely to focus more on the cost differentials investors pay and the different commission incentives financial professionals receive for giving advice than a Republican-led SEC would have, Mr. Reish added.

"Republicans still want to protect investors — it's just, 'Where is the line drawn and how heavily should financial intuitions be regulated?'" he said.

Ms. Roper said Reg BI is "too weak and undefined to deliver the promised protections of a true best-interest standard backed by meaningful restrictions on harmful incentives," in an April letter to Mr. Gensler. She would like the SEC to clarify "best interest" and state how it will determine whether firms are adequately mitigating conflicts of interest.

Others, like Mark Quinn, San Diego-based director of regulatory affairs at Cetera Financial Group, Inc., a network of independently managed broker-dealers, said Reg BI defines best interest well enough so firms know what's expected.

All the while, through the first year of Reg BI, there haven't been any major compliance issues, stakeholders said.

Brynn Rail, a partner in the asset management group at Ropes & Gray, does not expect the new administration to make any major changes to Reg BI. It wasn't included in the SEC's semiannual regulatory agenda released June 11.

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