Our Take: financial services regulatory update – April 26, 2024

• What happened? On April 23rd, the Department of Labor (DOL) finalized a new Retirement Security Rule to update the definition of an “investment advice fiduciary” under the Employee Retirement Income Security Act (ERISA). The DOL had previously enacted a fiduciary rule in 2016 that was vacated in 2018.
• What advice is covered? The rule seeks to fill gaps in the SEC’s Regulation Best Interest, which sets conduct standards for advice concerning securities and funds, by extending fiduciary requirements to 401k rollovers, commodities, fixed index annuities, and qualified plan investment menu design. It does not cover the provision of information, education or sales pitches without a specific recommendation.
• Who must comply with the rule? The new rule replaces the current five-part test and instead defines a person as an investment advice fiduciary if they make a recommendation to a retirement investor for a fee and:
  • Directly or indirectly provide investment advice to investors that is a) indicated to reflect “the application of professional or expert judgment” on the retirement investor’s individual needs or circumstances and b) may be relied upon to advance the investor’s best interest; or
  • Represent or acknowledge that they are acting as a fiduciary under ERISA with respect to the recommendation.

The investment advice fiduciary would then be subject to ERISA fiduciary requirements, including acting prudently, diversifying the assets of the plan to minimize the risk of large losses, acting solely in the interest of the plan participants and beneficiaries, avoiding investments with excessive fees, and refraining from prohibited transactions.

• What else was updated? In connection with this rulemaking, the DOL amended prohibited transaction exemption (PTE) 2020-02, which was finalized after the 2016 rule was vacated, to make certain clarifications and updated PTE 84-24 to allow insurance agents making annuity sales to receive commissions as long as they comply with fiduciary standards.
• What’s next? The requirement for investment advisers to acknowledge their fiduciary status and follow impartial conduct standards takes effect on September 23rd. There is a one-year transition period for full compliance with the conditions of the various PTEs which will go into effect in September 2025.

Our Take

The DOL fiduciary rule is back. This is now the third Administration to take a pass at updating the now 50-year-old ERISA requirements. Like the two previous iterations, this rule brings into scope one-time 401k rollover recommendations, but it goes further than PTE 2020-02 by broadening the definition of an investment advice fiduciary. Although advisers have likely been preparing for some version of these changes for the last eight years, they will need to ensure that their disclosures, operations, policies and procedures comply with the latest requirements. In particular, they will need to fully understand 401k rollover alternatives and document their determination that a particular recommendation is in the investor’s best interest. This will be a more substantial lift for firms or individuals that will be brought into scope by this rule, like insurance agents, as they will now need to meet a fiduciary standard for any advice they provide to retirement investors.

But for how long? With the industry now feeling empowered to move its rulemaking protests from comment letters to court, it is not a question of if but when this rule will face legal action. This may in turn result in a stay of the rule that would push back its effective dates. The looming election could then repeat the story of the last two fiduciary rule attempts - finalized in the last year of one Administration only to be revised by the next.

These notable developments hit our radar recently:

• CFTC issues final rule on swap confirmations. On April 23rd, the Commodity Futures Trading Commission (CFTC) approved final rules to amend its swap execution facility (SEF) regulations related to uncleared swap confirmations to address issues which have been addressed in CFTC staff no-action letters, including the most recent CFTC No Action Letter No. 17-17, as well as associated conforming and technical changes. In particular, the final rules amend CFTC Regulation 37.6(b) to enable SEFs to incorporate terms of underlying, previously negotiated agreements between the counterparties by reference in an uncleared swap confirmation without being required to obtain the underlying, previously negotiated agreements. The rule becomes final 30 days after being published in the federal register.
• CFTC issues extension of the comment period for its NPR on DCMs and SEFs. On April 22nd, the CFTC issued an extension of the comment period for its notice of proposed rulemaking entitled "Requirements for Designated Contract Markets and Swap Execution Facilities Regarding Governance and the Mitigation of Conflicts of Interest Impacting Market Regulation Functions." Comments are now due May 13, 2024.
• Regulators extend comment period on Capital One-Discover merger. On April 24th, the Fed and OCC announced it will extend its comment period of the proposed through May 31, 2024.
• Basel Committee on Banking Supervision issues revised Core Principles. On April 25th, the Bank for International Settlements (BIS)’s Basel Committee on Banking Supervision issued revised Core Principles which include lessons learned on how to better mitigate financial risks, strengthen the macroprudential aspects of supervision, promote operational resilience and reinforce corporate governance and risk management. The revised Core Principles standard is effective immediately.