On Apr. 23, DoL finalized fiduciary rules to protect retirement savers.
DoL issued final rules intended to protect the interests of retirement investors.
Final rule protects the interests by requiring those defined as investment advice fiduciaries to adhere to stringent conduct standards and mitigate conflicts of interest.
Updated definition of investment advice fiduciary under Employee retirement income security act (ERISA) to provide for when advice providers are acting in fiduciary role.
Other final rules make changes to class prohibited transaction exemptions (PTEs).
Amendments to several existing PTEs aim to ensure all retirement investors receive the same quality investment advice, regardless of the product or service at play.
Follows 2023 DoL proposal, comment request to amend fiduciary rule, see #189963.
Fiduciary Definition Overview
Final rule defines when a person renders investment advice for a fee or other compensation, directly or indirectly” for purposes of the definition of a fiduciary.
Fiduciary in Title I of ERISA; makes amendments to implementing regs at 29 CFR 2510
Such retirement investors include participants, beneficiaries in workplace retirement plans, IRA owners and beneficiaries, plan and IRA fiduciaries with authority or control.
Final rule also applies to Title II of ERISA to definition of fiduciary of plan in IRS Code.
In addition, final rule amended related existing administrative prohibited transaction class exemptions (PTEs), which are available to investment advice fiduciaries.
The amendments make the exemption conditions more uniform and protective.
Under ERISA and the Internal Revenue Code, investment advice fiduciaries must avoid conflicts of interest or comply with an exemption’s conditions to receive compensation.
The amended exemptions require investment advice fiduciaries to provide retirement investors with advice that is prudent, loyal, honest, and free from overcharges.
Changes Made to Fiduciary Definition Proposal
DoL made certain changes and clarifications in the final rule, in response to public comments on the proposal, and the testimony presented at the public hearings.
Final rule narrows the contexts in which a covered recommendation is ERISA fiduciary investment advice, and makes clear that the test for fiduciary status is objective.
Additionally, a new paragraph in regulatory text confirms that sales recommendations that do not satisfy the objective test will not be treated as fiduciary advice.
Further, the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the final rule.
Final rule clarifies the focus is on communications with persons of authority over plan investment decisions, e.g., selecting investment options for participant-directed plans.
Not on communications with financial services providers without such authority. Thus, plan and IRA investment advice fiduciaries are not deemed retirement investor.
This means asset manager not render fiduciary advice simply by recommending to a financial professional or firm that, in turn, will render advice to retirement investors.
DoL said it believes final rule, with these revisions, appropriately defines investment advice fiduciary to comport with reasonable investor expectations of trust, confidence.
Investment Advice Fiduciary Definition
Under the final rule, a person is an investment advice fiduciary if they provide a recommendation to a retirement investor in one of the specified contexts.
One is that person either directly or indirectly (e.g., through or together with affiliate) makes professional investment recommendations to investors on a regular basis.
On a regular basis as part of their business and recommendation meets set criteria.
The criteria being that it is based on review of retirement investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment.
Also may be relied upon by the retirement investor as intended to their best interest.
The other specified context is that the person represents or acknowledges that they are acting as a fiduciary pursuant to Title I or Title II of ERISA, or both Titles.
Recommendation also is provided for a fee or other compensation, direct or indirect.
This fills an important gap in advice relationships where advice is not currently treated as fiduciary advice under 1975 regulation’s approach to ERISA’s fiduciary definition.
DoL made clear that whether a recommendation has been made will be construed in a manner consistent with SEC’s framework in Regulation Best Interest, 17 CFR 240.15l-1
Accordingly, recommendation inquiry will focus on whether there is a call to action.
In response to comments, DoL narrowed the contexts that give rise to fiduciary status.
Confirming that mere sales recommendations devoid of the two covered contexts will not result in ERISA fiduciary status, for e.g., investment information or education.
PTEs, Conflicts of Interest
Final rules make amendments to implementing regulations re PTEs at 29 CFR 2550.
Rules will require trusted advice providers to follow high standards of care and loyalty.
They will have to meet a professional standard of care when making recommendations
Must never put their financial interests ahead of the retirement investor's.
Avoid misleading statements about conflicts of interest, fees, and investments.
They must charge no more than what is reasonable for their services; and give the retirement investor basic information about the adviser's conflicts of interest.
Addressed Exemption PTE 2020-02 which allows fiduciary to receive compensation for advice that would otherwise be prohibited by law, if fiduciary meets exemption criteria.
Also Exemption PTE 84-24, allows fiduciaries get compensation that would otherwise be prohibited when plans, IRAs enter into certain insurance, mutual fund transactions.
Two administrative exemptions available for management of conflicts of interest.
Both require investment recommendations adhere to impartial conduct standards.
The amendments remove fiduciary investment advice transactions from the covered transactions in each exemption and make other administrative modifications.
So, all fiduciaries will be held to same conduct standards in administrative exemptions.
They must rely on PTE 2020-02 or PTE 84-24 re compensation otherwise prohibited.
PTE 2020-02, PTE 84-24
DoL's amendment to PTE 2020-02 makes clarifying changes that build on the existing exemption conditions to provide more certainty for fiduciary investment advice.
PTE 2020-02, as finalized, specifically provides an exemption from the prohibited transaction rules for pure robo-advice relationships, unlike in prior rulemaking.
As for PTE 84-24, it is tailored to special challenges of overseeing recommendations by independent insurance agents re annuities issued by more than 1 insurance company.
Under the amendment, a new section is added to PTE 84-24 to provide relief for independent insurance agents receiving compensation otherwise prohibited for investment advice transactions, subject to conditions like those in PTE 2020-02.
However, unlike PTE 2020-02, the insurance company selling its products through the independent agent will not be required to provide a fiduciary acknowledgment.
It is also not a fiduciary merely for overseeing responsibilities over independent agents
Instead, the independent insurance agent must acknowledge its fiduciary status.
While insurance company must exercise supervisory authority over the independent agent with regard to agent's recommendation of insurance company's own products.
Therefore, PTE 84-24 does not require insurance companies to assume fiduciary status with respect to independent insurance agents, an important concern of insurers.
The other provisions of PTE 84-24 remain available for transactions not involve advice.
Neither PTE 2020-02 nor PTE 84-24, as amended, require financial institutions to disclose all their compensation arrangements with third parties on a public website.
State Insurance Laws
Many States have adopted updated conduct standards for insurance agents and companies recommending annuities based on NAIC model regulation updated in 2020.
This reflects a recognition of need for more protective standards for investment advice.
DoL final rule and exemptions, however, impose broader and more stringent standards of conduct and conflict mitigation than the NAIC model regulation.
These higher standards appropriately reflect ERISA's focus on conflicts of interest.
State of New York did not adopt the updated NAIC model regulation but rather implements an insurance regulation that aligns more closely with the DoL rule.
Insurance producers must act prudently in making a recommendation and must not allow compensation or other incentives to influence their recommendations.
Effectiveness
The final rules will be published on Apr. 25, 2024 in the federal register.
Final rules will become effective 150 days after publication, i.e., Sep. 22, 2024.
Amended PTE 2020-02 and amended PTE 84-24 include a one-year transition period.
NAIC, SIFMA Comments
NAIC and SIFMA issued statements in response the new fiduciary rule, noting concerns
NAIC said concerned about potential impact on certain life insurance, annuity products.
These product are an option for retirees to manage their risk of outliving their saving.
SIFMA will be reviewing conflict-related text for material flaws raised in comments.
Apr. 2024 White House Retirement Rule
On Apr. 23, 2024, White House reported on new DoL rule to enhance retirement security, aims to ensure that retirement professionals act on behalf of saver's interest.
Apr. 25, 2024 DoL Final Rule Fed Reg
On Apr. 25, 2024, DoL published final retirement security rule, effective Sep. 23, 2024.
Apr. 25, 2024 DoL Final PTEs Fed Reg
On Apr. 25, 2024, DoL published amended PTE 2020-02, 84-24, in the federal register.
