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Investment Advisory Trustee Redefined by US Dept. of Labor

The new fiduciary rule reinstates the previous 1975 regulation and its five-part test to define investment advice that was amended by the 2016 fiduciary rule. Currently, under section 3 (21) (A) (ii) of ERISA, a financial institution or investment professional is an investment advisory trustee to the extent that they “provide … investment advice in exchange for a fee or other compensation, direct or indirect, with respect to any money or other property of said plan, or has any authority to do so … “

Under the Department’s five-part test, for the advice to constitute “investment advice,” a financial institution or investment professional who is not a trustee under another statute provision must:

  1. Advise the plan on the value of securities or other property, or make recommendations on the advisability of investing, buying, or selling securities or other property.

  2. On a regular basis,

  3. Pursuant to an agreement, arrangement, or mutual understanding with the plan, the plan trustee, or the owner of the IRA, that

  4. The advice will serve as the primary basis for investment decisions regarding plan assets or IRA, and that

  5. Counseling will be individualized based on the particular needs of the plan or IRA.

Under 29 CFR § 2509.96 (d), the DOL provides examples of investment-related information and materials that would not be “investment advice” under ERISA.

However, this new rule does not affect the status of a financial institution or investment professional as an Investment Advisory Trustee, if the financial institution or investment professional has discretionary authority over an ERISA-covered plan.

It is not necessary to apply the five-part test to determine the status of the financial institution or investment professional as an Investment Advisory Trustee.

The US Department of Labor also announced that it is proposing a new exemption for investment advisory trustees.

In a Federal Register notice of July 7, 2020, the DOL’s proposed exemption “would allow investment advisory trustees under ERISA and the Code to receive compensation, including as a result of advice to transfer assets from a Plan to a IRA, and engage in major transactions, which would otherwise violate ERISA’s prohibited transactions provisions and the Code. “

“The exemption would apply to registered investment advisers, brokers, banks, insurance companies and their employees, agents and representatives who are investment advisory fiduciaries. The exemption would include protective conditions designed to safeguard the interests of the Plans, participants and beneficiaries, and IRA owners. “

Background on Fiduciary Rules Litigation

In previous litigation, the US Chamber of Commerce, the American Council of Life Insurers, and the Indexed Annuities Leadership Council filed lawsuits against the “Fiduciary Rule” enacted by the Department of Labor (DOL) in April 2016.

The Trust Rule was a package of seven different rules that broadly reinterpreted the term “investment advisory trustee” and redefined the exemptions to the trustee provisions in the Employee Retirement Income Security Act of 1974. .

The challenges presented by the three business groups, which were later consolidated into a single case, alleged the following:

(a) the inconsistency of the Rule with the current statutes,

(b) the DOL’s overreaching to regulate services and providers beyond its authority,

(c) the imposition by the DOL of contractual terms not legally authorized to enforce the new regulations,

(d) Violations of the First Amendment, and

(e) the arbitrary and capricious treatment of the Rule of variable and fixed indexed annuities.

The United States Court of Appeals for the Fifth Circuit (No. 17-10238) found merit in these objections and, as a result, overturned the district court’s decision, which had rejected the challenges.

The June 2020 DOL guidance regarding the term “Investment Advisory Trustee” responds to the 2018 appellate court ruling.

In March 2018, we wrote an article titled “Judicial Direction ERISA Fiduciary Responsibilities,” which discussed two court rulings addressing fiduciary requirements related to the Employee Retirement Income Security Act of 1974 (“ERISA”). The United States Department of Labor had announced that it would no longer enforce the 2016 fiduciary rule. At that time, the future of the fiduciary rule remained uncertain.

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