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A Primer on the SEC's Regulation Best Interest for Plan Fiduciaries

June 28, 2019

On June 5, 2019, the Securities and Exchange Commission (“SEC”) adopted a final version of the Regulation Best Interest (“Reg BI”), finalizing its approach to policing conflicts of interest in the retail investment marketplace.  Reg BI adopts a best-interest standard to account recommendations made by broker-dealers, including rollovers from retirement plans into individual retirement accounts.  Brokers will have to have a “reasonable basis to believe that the IRA or IRA rollover is in the best interest of the retail customer at the time of the recommendation and does not place the financial or other interest of the broker-dealer ahead of the interest of the retail customer.”

This new standard is significantly less strict than fiduciary rules that apply under ERISA to investment advice or other fiduciary actions with respect to an employer plan.  It comes one year after the US Court of Appeals for the Fifth Circuit struck down the Department of Labor’s rule extending those fiduciary rules to broker-dealers in certain circumstances.  In response to the Department of Labor rules, some plan service providers, including Fidelity, had pledged to apply fiduciary standards to one-time rollover advice, but, when the DOL rule was struck down, Fidelity reversed its position.  Fidelity and other providers have said they are still evaluating how they will respond to Reg BI.

It is important to note that Reg BI does not directly apply to plan administrators, who are already held to a fiduciary standard for decisions like selecting plan investments.  It may, however, impact plan service providers who are not acting in a fiduciary capacity, such as when they give certain rollover advice to plan participants.  Because ERISA imposes an ongoing duty on plan fiduciaries to monitor service providers, plan administrators (like plan administrators) should understand how their providers will comply with Reg BI, and how it will impact discussions with plan participants.  Reg BI includes a transition period until June 30, 2020, and plan fiduciaries should discuss this rule with their service providers as that date nears.

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