“Rolling” Ahead with New Fiduciary Guidance - Proposed ERISA Exemption Provides Some Early July 4th Fireworks

This week, on June 29, 2020, the U.S. Department of Labor (the “DOL”) issued a release (the “Release”) proposing an important new initiative for retirement accounts (“Plans”) that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) or Section 4975 of the Internal Revenue Code of 1986 (the “Code”). This Release continues the decade-long saga that began with the DOL's highly controversial effort to remake the 1975 “fiduciary” rule, which many saw as dramatically extending ERISA's reach, even affecting the way financial services organizations conducted their general (non-ERISA) business. While the DOL's earlier multiple proposals had culminated in 2016 in a final rule (the “2016 Rule”), the 2016 Rule was then vacated in 2018 by the U.S. Court of Appeals for the Fifth Circuit.¹ Our March 23, 2018 OnPoint, ERISA's Fiduciary Rule - Dead Yet? Game Over? Maybe, Maybe Not . . . , chronicles this history, and our June 12, 2018 NewsFlash, ERISA's Amended Fiduciary Rule - Done, Done, on to the Next One, reports on the ultimate demise of the 2016 Rule. (An index of our other OnPoints on the topic may be found here.)

This initiative comes at the time when Regulation Best Interest (“Reg BI”) issued by the U.S. Securities and Exchange Commission (the “SEC”) has become effective. Reg BI is generally intended to apply a heightened standard of behavior for all broker-dealers with respect to all retail relationships (extending both to retirement accounts and to other accounts), and incorporates some (but intentionally not all) of the features of the now-defunct 2016 Rule. We discussed Reg BI in our June 11, 2019 OnPoint, SEC Adopts Enhanced Standard of Conduct for Broker-Dealers and Clarifies Fiduciary Duties of Investment Advisers.² There had been discussion among the regulators regarding the benefits of harmonizing Reg BI with authority under ERISA's "investment advice” rules, and SEC Chair Jay Clayton issued a contemporaneous note of support of this initiative. However, the precise manner in which Reg BI principles would integrate with the conditions of the Proposed Exemption will presumably be the subject of ongoing significant focus.

In the Release, the DOL:

• Proposed a new exemption for commission-based business models embracing fiduciary status. The DOL proposed a new exemption (the “Proposed Exemption”) from the prohibited transaction rules of ERISA and Section 4975 of the Code that would allow - subject to important conditions and...