Investment Advisory Trustee Redefined by the US Department of Labor


The new escrow rule restores the previous 1975 ordinance and its five-part test defining investment advice, which was amended by the 2016 escrow rule. Currently, a financial institution or investment professional as defined in ERISA Section 3 (21) (A) (ii) is an investment advisory trustee provided that it is “… in relation to funds or other ownership of such a plan …”

According to the ministry’s five-part test, for any advice to qualify as “investment advice”, a financial institution or investment professional who is not a trustee under any other provision of the law must:

  1. advise the plan on the value of any securities or other asset or make recommendations regarding the advisability of investing in securities or other assets, buying or selling them,
  2. Regularly,
  3. Under any mutual agreement, arrangement, or understanding with the Plan, the Plan Trustee, or the IRA Owner that
  4. The advice serves as the primary basis for making investment decisions regarding plan or IRA assets, and that
  5. Counseling is individualized based on the specific needs of the plan or IRA.

Pursuant to 29 CFR § 2509.96 (d), DOL provides examples of investment-related information and materials that are not “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 discretion over a plan covered by ERISA.

The five-part test does not need to be used 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 would propose a new exemption for trustees in investment advice.

In a July 7, 2020 notice from the Federal Register, the DOL proposed exemption would “allow investment advisory trustees under both ERISA and the Code to receive compensation, including as a result of the advice, assets from a plan to an IRA Transfer and engage in major transactions that would otherwise violate ERISA Prohibited Transactions and the Code. “

“The exception would apply to registered investment advisors, brokers, banks, insurance companies and their employees, agents and agents who are investment advisory trustees. The exception would include safeguard terms designed to protect the interests of plans, participants, and beneficiaries. and IRA owners. “

Fiduciary Litigation Background

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

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

The lawsuits filed by the three groups of companies, which were later merged into one case, alleged the following:

(a) the incompatibility of the rule with the applicable statutes,
(b) regulate DOL’s excess, services and providers outside of its powers,
(c) the imposition of legally unapproved contractual terms by DOL to enforce the new regulations,
(d) violations of the First Amendment and
(e) the arbitrary and arbitrary treatment of variable and fixed indexed pensions, as a rule.

The US Court of Appeals for the Fifth Circuit (No. 17-10238) upheld these objections, overturning the District Court’s judgment that dismissed the challenges.

The DOL guidelines of June 2020 on the term “investment advice trustee” are a reaction to the 2018 ruling by the appellate court.

In March 2018, we wrote an article entitled “Court Address ERISA Fiduciary Duties,” which discussed two court rulings addressing fiduciary requirements under the Employee Retirement Income Security Act of 1974 (“ERISA”). The US Department of Labor announced that it would no longer enforce the 2016 escrow rule. At this point, the future of the escrow rule remained uncertain.


Source by Mark Johnson, Ph.D., J.D.