US Department of Labor announces proposed rule to protect retirement savers’ interests by updating definition of investment advice fiduciary

On October 31, 2023, the Employee Benefits Security Administration (EBSA) announced an upcoming consultation on proposed revisions to the definition of „investment advice fiduciary“ in its rules under the Employee Retirement Income Security Act of 1974. The revisions aim to enhance the protection of pension plan members and their retirement income and raise the standards for investment advisers when advising pension funds, other fiduciaries, or scheme members on investments. It shall be noted at this point that the consultation has meanwhile been published in the Federal Register (November 3, 2023), the publication of which may be accessed via this link.
The existing framework used to determine whether a (legal) person qualifies as an „investment advice fiduciary“ relies on a „five-part test.“ According to this test, a financial institution or investment professional assumes the role of an „investment advice fiduciary“ if it meets the following criteria:
– It provides advice regarding the value of securities or other assets or offer recommendations on investments, including the purchase or sale of assets;
– This advice is provided on a regular basis.
– The advice is offered pursuant to a mutual agreement, arrangement, or understanding with a plan or plan fiduciary.
– The advice plays a pivotal role in the plan’s investment decisions.
– The advice is tailored to meet the specific needs of a pension plan.
The EBSA now suggests new criteria for identifying an „investment advice fiduciary“ under ERISA, thereby expanding the current scope of (legal) persons falling under the definition. According to the proposal, a (legal) person would be considered an „investment advice fiduciary“ if it:
– provides investment advice or make investment recommendations to a retirement investor, including plans, plan fiduciaries, plan participants or beneficiaries, individual retirement account (IRA) account holders, IRA beneficiaries, and IRA fiduciaries;
– offers this advice or recommendation in exchange for compensation, whether it be direct or indirect, as defined within the proposed rule;
– makes such recommendations based on the following premises:
– it possesses discretionary authority or control, either directly or indirectly through affiliations, over the purchase or sale of securities or other investment assets for the retirement investor regardless of the fact whether or not there is a mutual agreement, arrangement, or understanding, with respect to purchasing or selling securities“;
– it regularly provides investment recommendations to investors as part of its business, and these recommendations are based on the unique needs or circumstances of the retirement investor, who relies on them for decisions that align with an investor’s best interests.
– it explicitly declares or acknowledges its role as a fiduciary when offering investment recommendations.
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In conjunction with the proposal to revise the definition of „investment advice fiduciary“, the EBSA has also launched consultations on proposed changes to various existing prohibited transaction exemptions (PTEs). These exemptions enable investment advice fiduciaries to receive compensation and engage in specific transactions that would typically be prohibited, contingent upon meeting specific conditions. These consultations will be addressed in other events.