How the states are trying to revive the DOL fiduciary rule

Wealth Management Magazine just ran a story on how the states are attempting to revive the DOL Fiduciary Rule in their own image. As part of my interview, I say: “To me, there’s no question that the Department of Labor fiduciary rule is a bit of the ideal paradigm in terms of governance (for these states).” This is true, but the DOL rule appears to also be a litmus test for some of the states in evaluating Regulation Best Interest (Reg BI) and their own rules. As some states try to channel the DOL Fiduciary Rule, Jay Clayton and Alex Acosta are, by all, accounts, coordinating on a June unveiling of the SEC Standards of Conduct package with a  proposed DOL exemption and some guidance (i.e., not a new rule on when one becomes an investment advice fiduciary under section 3(21) of ERISA) to follow.

Another Reprise: Look for DOL guidance late summer/fall that complements a final SEC standards of conduct rulemaking package, particularly Reg BI

Reprise: Is a final Reg BI “imminent”?

Report: Reg BI likely coming out this month

Is Reg BI stronger than an adviser’s fiduciary duties?

SEC Commissioner
Hester M. Peirce

InvestmentNews reported that SEC Commission Hester Pierce stated at a recent conference, “When you lay it side-to-side against the fiduciary standard, I think one could argue that it’s a stronger standard because it does require mitigation or elimination of conflicts in a way the fiduciary standard does not.” This is in reference to certain provisions within proposed Regulation Best Interest that disallow disclosure as a proper method for addressing certain conflicts of interest. We will wait to see if the final Reg BI will better define the type of conflicts that cannot be disclosed away.

George Michael Gerstein to Compliance Reporter: Reg BI is a world unto itself and unlikely to be changed due to NV and NJ fiduciary proposals

OMB comes back into focus with Reg BI

Jackson thinks a strong enough Reg BI might allay the states

Bill Mandia and George Michael Gerstein discuss the race for fiduciary regulation at the federal and state levels

A More Consistent PROPosal – SEC Permits Puerto Rico-Only Plans to Invest in Collective Trust Funds, Aligning the SEC Relief Granted With Past IRS Guidance

The Securities and Exchange Commission’s (“SEC”) staff has granted no-action relief stating that it will not recommend enforcement action if Puerto Rico-only plans (“PROPs”) participate in collective trust funds.1 The SEC staff has issued relatively few no-action letters with respect to collective trust funds in recent years, even as collective trust funds have become an increasingly popular vehicle.

A collective trust fund is a pooled investment vehicle for employee benefit plans. Unlike mutual funds and exchange-traded funds, a collective trust fund is regulated by bank regulators, not the SEC. These vehicles provide product design flexibility while typically offering substantially lower expenses than mutual funds, in no small part because of the regulatory and related expenses that they avoid. As a result, the popularity of collective trust funds has increased substantially in recent years. Collective trust funds are excluded from the definition of an investment company under the Investment Company Act of 1940 (the “1940 Act”) so long as they are maintained by a bank and their participants are limited to employee benefit plans that meet the requirements for qualification under Section 401 of the Internal Revenue Code (“Code”), as well as governmental plans and church plans.

A PROP does not meet the requirements for qualification under Section 401 of the Code. The relief granted by the SEC staff in this letter effectively allows PROPs to participate in collective trust funds without the trust having to register under the 1940 Act, in reliance upon the exception for collective trust funds in Section 3(c)(11) of the 1940 Act.2 The relief also makes it unnecessary to register the beneficial interests of the collective trust funds under the Securities Act of 1933 (the “1933 Act”) and the Securities Exchange Act of 1934 (the “1934 Act”) in reliance upon exemptions under Sections 3(a)(2)3 and 12(g)(2)(H)4 of those Acts, respectively.

The no-action relief was requested by the John Hancock Stable Value Fund Collective Investment Trust (the “Trust”), a collective trust fund that seeks to invest in, among other things, other collective trust funds (the “Underlying Trusts”). Neither the Trust nor the Underlying Trusts intend to register with the SEC. To maintain its “unregulated” status, the Trust requires that any plan investing in it must be qualified pursuant to Section 401 of the Code.

Section 1022(i)(1) of ERISA provides that, for purposes of Section 501(a) of the Code, any trust forming part of a pension, profit-sharing or stock bonus plan all of the participants of which are residents of Puerto Rico is treated as an organization described under Section 401(a) of the Code and is therefore generally exempt from income taxation, provided that the trust 1) forms part of a pension, profit-sharing or stock bonus plan and 2) is exempt from income tax under the laws of Puerto Rico. Therefore, under ERISA, a PROP would be treated as an organization described in Section 401(a) of the Code, but the caveat is that it would still not legally be qualified under Section 401(a).

The Trust, like most collective trust funds, is taxed as a group trust under Revenue Ruling 81-100. Under Revenue Ruling 81-100, as amended, retirement plans, including retirement plans qualified under Section 401(a) of the Code, can pool their assets for investment purposes in tax-exempt group trusts so long as certain requirements are satisfied. The Trust at issue in this scenario received a determination letter from the IRS that the Trust is an 81-100 group trust. Under Revenue Ruling 2014-24, the IRS later ruled that PROPs may invest in 81-100 group trusts such as a collective trust fund without jeopardizing the fund’s tax-exempt status.5 This ruling acknowledged that PROPs are not legally qualified retirement plans under Section 401(a) of the Code.

However, even though PROPs were allowed by the IRS to invest in 81-100 group trusts such as the Trust at issue as a result of this ruling, this did not allow them to invest in collective trust funds that are not required to register with the SEC. Because PROPs are not legally qualified under Section 401 of the Code, the acceptance of such investments by the Trust implicated registration by the Trust and its beneficial interests under the federal securities laws absent no-action relief.

In the request for no-action relief for the Trust, it was argued that PROPs were “substantial[ly] equivalen[t]” to those qualified plans under Section 401(a) of the Code, and that to allow PROPs to invest in collective trust funds without jeopardizing their “unregulated” status from the federal securities laws would “foster consistency among the [federal] securities laws, ERISA and the Code, with the benefit of furthering the objectives behind the IRS’s Revenue Ruling . . . and those underlying [Section] 1022(i)(1) of ERISA, as expressed in its legislative history.” The Trust represented in its request letter that, if the SEC provided no-action assurance, it would maintain the following conditions: any PROPs that invest in the Trust would meet the tax exemption requirements under the Puerto Rico Code; the Trust, any PROP and any Underlying Trusts would be subject to the provisions of Title I of ERISA; the Trust and any Underlying Trusts, but for the acceptance of PROP assets, would qualify for the exception and exemptions from the federal securities laws; and the Trust and any Underlying Trusts would, at all times, remain in compliance with the terms of Revenue Ruling 81-100.

In response, the SEC staff stated that it would not recommend enforcement action to the Commission if PROPs participate in the Trust (and, by extension, the Underlying Trusts) without registration of the Trust or the Underlying Trusts under the 1940 Act, the 1933 Act or the 1934 Act. The staff was careful to state in a footnote that this no-action assurance applies solely to the eligibility of PROPs, and does not apply to any other category of tax-favored retirement plans or other asset class permitted to invest in 81-100 group trusts. However, the openness of the staff to the no-action request may bode well for collective trust fund sponsors that are interested in accepting other participants that do not meet the letter of the requirements of the securities laws, when a good case can be made that no-action relief is appropriate.


1 John Hancock Stable Value Fund, SEC No-Action Letter (March 25, 2019), .

2 Section 3(c) of the 1940 Act excepts various entities from the definition of “investment company” provided by Section 3(a) of the 1940 Act. Specifically, Section 3(c)(11) excepts from the definition “any employee’s stock bonus, pension, or profit-sharing trust which meets the requirements for qualification under section 401 of the Internal Revenue Code of 1986. . . or any collective trust fund maintained by a bank consisting solely of assets of one or more of such trusts, government plans, or church plans . . . .”

3 Section 3(a) of the 1933 Act provides various exemptions from registering an offering of a security with the SEC, including an exemption in Section 3(a)(2) for interests or participations in a collective trust fund maintained by a bank. Among other requirements for this exemption, for interests or participations issued in connection with a stock bonus, pension or profit-sharing plan, the plan must meet the requirements for qualification under Section 401 of the Code.

4 Section 12(g)(2) of the 1934 Act exempts certain classes of securities from registration with the SEC. Section 12(g)(2)(H) specifically exempts “any interest or participation in any collective trust funds maintained by a bank . . . which interest or participation is issued in connection with (i) a stock-bonus, pension, or profit-sharing plan which meets the requirements for qualification under section 401 of the [Code] . . . .”

5 Rev. Rul. 2014-24, 2014-2 C.B. 5.