able to investment professionals , pending the Texas court rulings . Most ERISA fiduciaries look to Prohibited Transaction Exemption ( PTE ) 2020-02 , a widely recognized exemption that allows advisors to receive payment otherwise disallowed for certain kinds of advice , and whose rules have been in effect since June 30 , 2022 . Though advisors have felt comfortable working within that framework , they were likely worried by the DOL ’ s reinterpretation of the “ regular basis ” element of the five-part test , which introduced some controversy , particularly in the context of onetime rollover recommendations from ERISA retirement plans to IRAs .
In the preamble to PTE 2020-02 , the DOL argued that even someone giving a onetime rollover recommendation was acting as a fiduciary if they expected to have an ongoing relationship with the client after the rollover , hence meeting the “ regular basis ” requirement of the five-part test . The DOL reasoned that the advisor would be providing advice on the same assets under the same fiduciary standards . This interpretation of PTE 2020-02 ’ s conditions was reiterated in a list of FAQs the DOL released in 2021 .
However , in 2023 , a Florida court ruling removed this interpretation , saying the advice provided on ERISA plan assets could not be combined with advice on IRA assets to meet the “ regular basis ” test . As a result , unless there is an existing advisory relationship with the ERISA plan or participant , a recommendation to roll over plan assets to an IRA does not constitute fiduciary advice under the DOL ’ s current rules .
Meanwhile , the SEC has implemented its own set of rules for RIAs , brokers and other financial professionals , most notably Regulation Best Interest , which took effect on June 30 , 2020 . Reg BI is designed to create consistency in standards of conduct for brokers and RIAs in their dealings with retail investors , including retirement savers . RIAs have long been subject to fiduciary obligations under the Investment Advisers Act of 1940 , and Reg BI reinforces these duties while holding brokers to a “ best interest ” standard when recommending securities-related transactions or strategies .
When providing securities-related advice to retirement savers , including rollover recommendations , investment professionals subject to SEC rules must comply with the agency ’ s requirements . If they are a fiduciary under the DOL ’ s definition and their compensation creates potential conflicts of interest , they also must comply with the conditions outlined in PTE 2020-02 ( or another applicable PTE ) to receive that compensation . While both the SEC and DOL aim to protect investors by requiring professionals to prioritize the client ’ s best interests , the two agencies ’ standards differ in key ways . For instance , both require a thorough analysis of existing and recommended accounts to ensure that a rollover is in the client ’ s best interests . However , the SEC does not require brokers to assume fiduciary status or disclose the details of their rollover evaluation to clients .
Given this complex regulatory framework , investment professionals must work closely with their compliance departments to evaluate their business models and compensation structures . By doing so , they can determine which compliance obligations apply under the SEC , the DOL or a state ’ s law , and ensure they are meeting the required standards of conduct when working with retirement savers .
Any misstep in adhering to the required standards , whether under the SEC ’ s or DOL ’ s rules , can expose both the advisor and their firm to legal and financial risks .
Navigating the regulatory maze surrounding fiduciary responsibility is not just a legal necessity — it is also critical to maintaining trust with clients and safeguarding the long-term integrity of financial advice . Any misstep in adhering to the required standards , whether under the SEC ’ s or DOL ’ s rules , can erode client trust and expose both the advisor and their firm to legal and financial risks . Moreover , this evolving regulatory landscape emphasizes the importance of transparency and clear communication with clients , ensuring they understand how rollover recommendations align with their best interests .
Staying informed about changes in the regulatory environment , as well as court rulings and potential revisions to fiduciary rules , is crucial for investment professionals . By remaining vigilant and adaptable , advisors can continue to offer sound , ethical advice while protecting both their clients and their reputations .
LOWELL M . SMITH JR . is co-founder and chief compliance officer at IRALOGIX , a retirement industry fintech provider .
NOVEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 51