On April 23, the U.S. Department of Labor (DOL) published the “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” which makes changes to the definition of “ fiduciary” for purposes of the Employee Retirement Income Security Act of 1974, as amended (ERISA). This is DOL’s fourth attempt in recent years, after much political volleying, to expand fiduciary duties to nearly all transactions involving retirement investments. This final rule broadens the definition of “fiduciary” and amends several prohibited transaction exemptions with respect to investment advice. This rule will add new compliance considerations to credit union service organizations offering investment products
The rule has moved quickly through the rulemaking process. The Biden administration originally published a proposed rule on Oct. 31, 2023, and held a two-day-long public hearing on the proposal before the public comment period ended. DOL received more than 19,000 comment letters in addition to public testimony about the proposal. DOL sent the final rule to the Office of Information and Regulatory Affairs (OIRA) for review on March 8, and the Office of Information and Regulatory Affairs (OIRA) cleared the final rule a little more than a month later on April 10. The expedited timeline was a surprise for many, especially as OIRA abruptly canceled meetings with industry stakeholders that were scheduled for the following week.
Attempts to revise the fiduciary rule have faced strong resistance over the last decade. The Obama administration first published a proposed fiduciary rule in 2010, but that proposal was eventually abandoned due to investment industry pressure. Then, the Obama administration finalized a new fiduciary rule in 2016, only to have the Fifth Circuit Court of Appeals overturn the rule in 2018, finding that the DOL overstepped its authority. The Trump administration published a new definition of fiduciary in late 2020 (PTE 2020-02) that increased the responsibilities of fiduciaries. The Biden administration did not reverse the 2020 guidance, but it issued additional guidance in 2021 that expanded the circumstances when rollover recommendations would trigger fiduciary status for the financial advisor. The rollover portion of the 2021 guidance was vacated by a federal court in Florida in 2023.
The new rule has been viewed by some as a more modest proposal compared to previous attempts, but it is expected to face challenges in the courts and in Congress as a result of its broad impacts on certain industries. See below for our summary of the key provisions of the final rule and next steps.
Changes to the Definition of Fiduciary Advice
The Employee Retirement Income Security Act (ERISA) currently employs a five-part test to determine if a person is acting as an “investment advice fiduciary.” Under the test, a person is an investment advice fiduciary if: (1) they provide investment advice for a fee, (2) on a regular basis, (3) pursuant to a mutual understanding, (4) that the advice will serve as a primary basis for investment decisions, and (5) that the advice is individualized.
Under the new rule, a person would be considered an investment advice fiduciary if they provide investment advice or make an investment recommendation to a retirement investor for a fee or other compensation in one of the following contexts:
- The person either directly or indirectly makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation:
- Is based on a review of the retirement investor’s particular needs or individual circumstances,
- Reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and
- May be relied upon by the retirement investor as intended to advance the retirement investor’s best interest; or
- The person has acknowledged that they are acting as a fiduciary in providing the investment recommendations.
For purposes of the final rule, a retirement investor includes a plan, plan participants and beneficiaries, IRAs, IRA owners and beneficiaries, and plan fiduciaries that have discretionary authority.
Notably, the final rule does not include a provision from the draft version that would have extended fiduciary duty status to individuals who have discretion over assets. The final rule also eliminates the “mutual understanding” and “primary basis” language from the five-part test. And, it contains clarifications that certain types of communications, such as investment education or providing investment information, do not constitute fiduciary investment advice.
Modifications to PTE 2020-02
Prohibited Transaction Exemption (PTE) 2020-02, titled “Improving Investment Advice for Workers & Retirees,” allows investment advice fiduciaries to be compensated for advice that would otherwise be prohibited, on the condition that the exemptions are met. Revisions are described as imposing standards that are “consistent with the requirements of the SEC’s Regulation Best Interest and the fiduciary obligations of investment advisors under the Advisers Act.” Types of covered transactions include making IRA rollover recommendations that would increase compensation for the advisor and selling a wide range of investment products. The final rule amends PTE 2020-02 to include specific disclosure requirements for costs, fees and compensation the institution receives from the retirement client and other sources as well as broadens its criminal disqualification provisions to align more closely with similar QPAM provisions. As revised, PTE 2020-02 may be used by non-bank custodians for HSA accounts, pooled plans and robo-advisers.
Amendments to PTE 84-24
The final rule also makes changes to the prohibited transaction exemption (PTE) 84-24, which provides relief for certain transactions relating to the purchase, with plan assets, of investment company securities or insurance or annuity contracts, and the payment of associated sales commissions to insurance agents or brokers, pension consultants or investment company principal underwriters that are parties in interest with respect to such plan. Currently, PTE 84-24 allows fiduciaries to receive commissions when retirement plans or IRAs enter into certain insurance transactions. The final rule limits the exemption under PTE 84-24 to be available only for a transaction including independent insurance agents offering products from two or more insurers, excluding agents that are overseen by a single insurance company. The amended PTE 84-24 also requires rollover disclosures only for recommendations to roll over from a Title I plan, such as a 401(k) plan, to an IRA. IRA to IRA rollovers are not included in the final rule. Additionally, DOL removed the terms “Mutual Fund Commission” and “Insurance Sales Commission” from the exemption, reverting to using the term “sales commission.” As a result of this and other revisions, the types of compensation available to independent insurance agents under the exemption have been expanded to cover “reasonable compensation,” whether cash or noncash from a wide variety of sources.
Amendments to Other PTEs
The final rule modifies PTEs 75-1, 77-4, 80-83, 83-1 and 86-128 to eliminate relief for certain fiduciary investment advice transactions from the covered transactions under each of these exemptions.[1] Entities previously relying on those exemptions will be required to meet the conditions of PTE 2020-02 or PTE 84-24 to receive relief. For example, the amended PTE 75-1 will prohibit broker-dealers from relying on the exemption for investment advice. The proposed amendments to PTE 75–1, PTE 80–83 and PTE 2020–02 could impact banks and credit unions that engage in certain classes of transactions with employee benefit plans and IRAs.
Impact on Financial Institutions
In the final rule, the DOL acknowledges that some banks and credit unions may need to change their procedures to comply with certain aspects of the regulation. This includes one-time rollovers to IRAs. The DOL notes that, in the proposal for PTE 2020-02, it considered requiring a rollover disclosure for all rollovers but instead limited the disclosure to rollovers from plans to IRAs in the final exemption. There are several activities that financial institution employees engage in related to IRA rollovers that may now have new compliance considerations, or which may now be covered by this rule. This rule will add new compliance considerations to credit union service organizations offering investment products
Next Steps
By finalizing the rule on April 23, the DOL narrowly avoided the late May or June cutoff date that would allow for a Congressional Review Act (CRA) challenge in the next Congress. The timing of the final rule’s release prevents former President Donald Trump from signing a CRA resolution into law in 2025, should he win the White House in November. However, a future Trump administration or other administrations could direct DOL to retract or amend the rule through the Administrative Procedures Act.
The final rule and amendments are effective 150 days after the date of publication in the Federal Register (that is, Sept. 22, 2024). Both amended PTE 2020-02 and PTE 84-24 include a one-year transition period after the effective date. Legal challenges to the proposed changes are almost certain, especially with regard to the definition of fiduciary advice. Any legal determination is likely to be prolonged, as challenges to the Obama administration fiduciary rule lasted nearly two years.
To discuss the final rule in more detail and gain an understanding of its impact on your organization, please contact one of the authors of this alert.
[1] In general, PTE 75–1 provides an exemption for broker-dealers, reporting dealers, and banks to engage in certain classes of transactions with employee benefit plans and IRAs; PTE 77–4 provides relief for a plan’s or IRA’s purchase or sale of open-end investment company shares where the investment adviser for the open-end investment company is also a fiduciary to the plan or IRA; PTE 80–83 provides relief for a fiduciary causing a plan or IRA to purchase a security when the proceeds of the securities issuance may be used by the issuer to retire or reduce indebtedness to the fiduciary or an affiliate; PTE 83–1 provides relief for the sale of certificates in an initial issuance of certificates by the sponsor of a mortgage pool to a plan or IRA when the sponsor, trustee, or insurer of the mortgage pool is a fiduciary with respect to the plan or IRA assets invested in such certificates; and PTE 86–128 provides an exemption for certain types of fiduciaries to use their authority to cause a plan or IRA to pay a fee to the fiduciary, or its affiliate, for effecting or executing securities transactions as agent for the plan.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING NEW REULES CONCERNING FIDUCIARY RESPONSABILTIES. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.