Why New DOL Fiduciary Rule Is Not a 'Rehash' of 2016

What You Need to Know

Critics’ complaints that the new rule is a rehash of the 2016 rule are simply mistaken, Borzi states.
Borzi cites two main changes between the 2023 and 2016 rules.
While many believe the 5th Circuit’s ruling was wrong, Labor has done a good job of addressing its concerns, Borzi says.

As the architect of the Labor Department’s 2016 fiduciary rule, Phyllis Borzi is no stranger to controversy.

Borzi, the former head of Labor’s Employee Benefits Security Administration under President Barack Obama, faced a barrage of criticsm as she crafted the department’s 2016 rule, which was eventually struck down by the U.S. Court of Appeals for the 5th Circuit — a case that many independent legal experts, and Borzi, believe was wrongly decided.

In an interview, Borzi explained to me why she believes the current Labor officials’ job in writing the 2023 fiduciary rule “was both easier and harder” than she and others at Labor faced in crafting the 2016 rule.

Borzi also relays why critics’ complaints that the new rule is “a rehash of the 2016 rule are simply mistaken.”

Read on as Borzi discusses how the department’s 2023 rule differs from that of 2016, if she believes the new rule will face lawsuits, why the new rule fills gaps left by the Securities and Exchange Commission’s Regulation Best Interest and the National Association of Insurance Commissioners’ Model Rule, and when a final rule may be released.

THINKADVISOR: What are the biggest changes between the current fiduciary rule proposal and the one from 2016?

PHYLLIS BORZI: There really are two major changes: first, the scope of the new DOL proposal has been significantly reduced through a much narrower, better focused and targeted definition of an investment advice fiduciary and second, the new proposal provides a more workable approach to accountability for independent insurance agents.

First, in a clear response to the 5th Circuit decision, the new proposal limits fiduciary status for investment advice fiduciaries to situations in which the person providing the advice or recommendation to an “investor” (i.e., a plan, a plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary) for a fee or other direct or indirect compensation is in a relationship of trust and confidence with the investor or has explicitly accepted fiduciary status.

However, determining whether such a relationship exists is based on the expectations and understanding of the investor. And looking at the “regular basis” prong of the 1975 five-part test [determining fiduciary status] from the point of view of the investor, rather than the person making the recommendation, is consistent with the establishment of a relationship of trust and confidence.

It is far more reasonable for an investor to have greater reliance on the advice or recommendations of a person who regularly gives investment advice or makes investment recommendations than to focus, as the 1975 test did, on whether the recommendation itself was for one-time advice or not. Again, this is consistent with the notion of assuring that fiduciary status attached in connection with a relationship of trust and confidence, as the 5th Circuit said was appropriate.

This more limited and focused scope of the definition of “fiduciary” is clearly consistent with the letter and spirit of ERISA, and addresses the articulated concern of the 5th Circuit majority opinion that the 2016 proposal swept too broadly. I say this even though I, and many other independent legal experts (i.e., those who do not represent industry players) strongly believe that the 5th Circuit decision was wrong and regret the decision of the Trump Administration not to appeal that decision.

Nonetheless, the department clearly and unmistakably took the 5th Circuit decision at face value and did its best to address the concerns the majority raised. So those in the industry who claim that this proposal is simply a rehash of the 2016 are simply mistaken.

Second, the biggest concern I had about our 2016 rule was that it didn’t sufficiently address the problems we saw with oversight/accountability of independent insurance agents for their investment advice recommendations.

On the one hand, according to the information the department received from the insurance industry and its representatives, these independent agents generally were not selling only proprietary products which raise their own set of potential conflicts issues.

On the other hand, it was difficult to apply the conditions for financial institution oversight (particularly the application of the rules governing the implementation and enforcement of policies and procedures to independent agents whose recommendations might encompass the products of a variety of product producers).

So rethinking the structure and relationships between PTE 2020-02 [which covers rollover advice] and PTE 84-24 [which deals with annuities] to more clearly address these concerns makes sense and I believe the department’s approach is a good one. But like any other proposal, I hope the affected stakeholders make a good-faith effort to work with the department to refine the proposal, rather than simply oppose it.

What I heard at the recent DOL hearing on the proposal and reading some of the industry comments, didn’t sound encouraging, but I am ever the optimist that some in the industry will try to be constructive and not just obstructionists.

Do you see any trouble spots in the current proposal?

There are always going to be issues that arise where affected stakeholders want special rules.

Some of the industry witnesses at the recent [DOL] hearings complained about special rules that were included in the 2016 rule that do not appear in the current proposal, but it was both amusing and frustrating for me to hear these witnesses claim to have supported those provisions in the 2016 rule. My recollection differs.

In many cases, after we accommodated their requests and worked diligently with them to craft rules addressing their concerns, few, if any, did anything but oppose the rule and work with their congressional allies to kill it.

Do you wish Labor had handled any aspects of the new rule differently?

One issue that I wish the department had been more specific about (and which was addressed in some detail in the 2016 rule) is the distinction between investment education and investment advice.

What we learned as we engaged in substantial public education and outreach in connection with the 2016 rule is that a number of large financial institutions were claiming to be merely providing investment education when it was clear from the facts and circumstances that they were also providing investment advice.

And the claim from these financial institutions that all communications that flowed through their call centers should be exempt from fiduciary status because all were investment education was a non-starter in my estimation.

During my 45-plus year career in the employee benefits business, I have visited a number of call centers all over the country, including while I was at DOL. Those call centers included those run by third-party claims administrators/recordkeepers and by internal claims departments of my plan sponsor clients, and I have observed a mixed bag of investment advice and education being provided by those call centers.