The DOL’s Final Investment Advice Fiduciary Rule Is Here

In its latest attempt in a fourteen-year old quest to update the circa-1975 definition of a fiduciary who renders “investment advice for a fee or other compensation, direct or indirect” (an “investment advice fiduciary”) under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), on April 25, 2024, the U.S. Department of Labor (the “Department”) released final regulations (the “Final Rule”) defining an investment advice fiduciary, as well as amendments to several prohibited transaction class exemptions (“PTE”).  This post summarizes the key provisions of the Final Rule and the amendments to the PTEs.

Current Fiduciary Definition

Under ERISA, a person is a fiduciary with respect to an employee benefit plan to the extent the person (1) exercises discretionary authority or control regarding the management or disposition of a plan or its assets, (2) renders investment advice for a fee or other direct or indirect compensation or (3) has any discretionary authority or responsibility in the administration of a plan.

In 1975, shortly after ERISA was enacted, the Department issued a regulation that created a five-part test to define the circumstances under which a person who renders “investment advice” to an employee benefit plan would be a fiduciary under ERISA.  Under the five-part test, a person who provides investment advice to a plan for a fee is a fiduciary only if the person (1) renders advice as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property (2) on a regular basis, (3) pursuant to a mutual understanding with the plan or a plan fiduciary that (4) the advice will serve as a primary basis for the plan’s investment decisions and that (5) the advice will be individualized based on the particular needs of the plan.

The Final Rule

The Final Rule replaces the current “five-part” test and significantly broadens the persons who may be a fiduciary under ERISA.  Under the Final Rule, a person is an investment advice fiduciary if they make an investment recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property to a “retirement investor” for a fee or other compensation in one of the following contexts:

• The person directly or indirectly (e.g., through or together with an affiliate) 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 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 represents or acknowledges that they are acting as a fiduciary under ERISA with respect to the recommendation.

The Final Rule closes the loophole for “one-time advice” and provides that such advice can be treated as fiduciary investment advice if the conditions of the “investment advice fiduciary” standard described above are otherwise satisfied.  Moreover, “hire me” communications and generalized information, including information about industry trends, performance history and detailed descriptions of services should not subject the investment professional to being an investment advice fiduciary.  The Department noted, however, that to the extent that any “hire me” communications or generalized information includes investment recommendations, those recommendations must be evaluated separately under the Final Rule.

The Final Rule provides that any written statements disclaiming status as a fiduciary will not control to the extent they are inconsistent with the person’s oral or other written communications, marketing materials or other interactions with the retirement investor.

What is a Recommendation?

Absent a fiduciary acknowledgment, determining whether the person made a recommendation is a threshold element in establishing the existence of fiduciary investment advice.  In the preamble, the Department noted that whether a recommendation has been made will turn on the facts and circumstances of the particular situation and whether the communication could be viewed as a “call to action”.  According to the Department, the more individually tailored the communication to a specific customer or a targeted group of customers about an investment, the greater the likelihood that the communication will be viewed as a recommendation.  Further, the Department stated that it intends that determining whether a recommendation has been made will be ‎construed consistent with the SEC’s framework in Regulation Best Interest‎.‎

The Final Rule defines the phrase “recommendation of any securities transaction or other investment ‎transaction or any ‎investment strategy involving securities or other investment property” to mean a recommendation as to

• The advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, investment strategy, or how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA;
• The management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., account types such as brokerage versus advisory) or voting of proxies appurtenant to securities; or
• Rolling over, transferring, or distributing assets from a plan or IRA, including recommendations as to whether to engage in the transaction, the amount, the form, and the destination of such a rollover, transfer, or distribution.

The Final Rule provides that advice to a retirement investor regarding a decision to roll over assets from a plan or IRA would be fiduciary investment advice, regardless of whether the assets are rolled over to an account the adviser or an affiliate manages or whether accompanied by a specific recommendation on how to invest such assets.

Who is a Retirement Investor?

The Final Rule defines a “retirement investor” as an ERISA plan, plan participant or beneficiary, IRA, IRA owner or beneficiary, and any fiduciary that exercises discretionary authority or control with respect to the management of a plan or the investment of its assets.  The Department did not include a provision that would exclude sophisticated investors from the definition of “retirement investor”.  However, in the preamble, the Department noted that it would be appropriate to consider a retirement plan investor’s financial sophistication in evaluating whether a reasonable investor in like circumstances would rely on the recommendation as intended to advance the investor’s best interest.

The PTE Amendments

In connection with the release of the Final Rule, the Department also issued amendments to certain related PTEs (PTE 75-1, PTE 77-4, PTE 80-83, PTE 83-1, and PTE 86-128) to remove relief for the receipt of compensation for the ‎provision of fiduciary investment advice.  Any person who provides fiduciary investment advice to a retirement investor must now rely on PTE 2020-02 (or PTE 84-24, if applicable), both of which were amended as well, to receive commissions or other transaction-based compensation.

PTE 2020-02

PTE 2020-02 is available for financial institutions, including banks, RIAs, insurance companies and broker-dealers and the investment professionals who work for them to receive reasonable compensation for recommending a broad range of investment products to retirement investors, including insurance and annuity products, provided they satisfy certain requirements, including:

• Compliance with “impartial conduct standards” under which they must satisfy a duty of care and loyalty;
• Provide a written acknowledgement of their fiduciary status;
• Provide a written description of their services and disclose any material conflicts of interest;
• Specifically document the rollover recommendation and provide an explanation of how the recommendation is in the retirement investor’s best interest;
• Adopt and enforce written policies and procedures to ensure compliance with the impartial conduct standards; and
• Conduct annual retrospective compliance reviews.

The final PTE 2020-02 amendment broadens the PTE to cover more transactions and requirements as follows:

• expands the exemption’s scope to include recommendations of any ‎investment product, ‎regardless of whether the product is sold on a ‎principal or agency basis;‎
• adds non-bank HSA trustees and custodians to ‎the definition of ‎Financial Institution with respect to HSAs;‎
• revises the disclosure requirements to more ‎closely track other ‎regulators’ disclosure requirements with respect to ‎the provision of investment ‎advice;‎
• limits 10-year disqualification to serious misconduct that has been ‎determined in a ‎court proceeding;‎ and
• provides new streamlined exemption provisions for Financial Institutions ‎that give ‎fiduciary advice in connection with a Request for Proposal ‎‎(“RFP”) to provide ‎investment management services as an ERISA ‎section 3(38) investment manager.

PTE 84-24

The final PTE 84-24 amendment narrows the relief available for investment advice fiduciaries who are insurance agents and brokers.  As originally granted, PTE 84-24 provided exemptive relief for insurance agents or insurance brokers who were deemed investment advice fiduciaries to receive sales commissions from an insurance company when plans and IRAs purchased recommended insurance and annuity contracts.

As amended, PTE 84-24 is now only available for investment advice fiduciaries who are “Independent Producers”, which is defined as a person or entity that is licensed under State laws to sell, solicit or negotiate insurance contracts of multiple unaffiliated insurance companies but are not an employee of an insurance company, and only for the receipt of compensation associated with recommendations of  annuities or other insurance products that do not meet the definition of “Securities” under Federal securities laws.

The final PTE 84-24 amendment covers the receipt of all “reasonable compensation”, and not just sales commissions, from any and all sources, subject to compliance with the PTE’s impartial conduct standard and other applicable conditions.

The final PTE 84-24 amendment incorporates most of the conditions for relief found in PTE 2020-02, including requirements that the Independent Producer comply with impartial conduct standards in connection with the provision of the investment advice, acknowledge its fiduciary status in writing and provide certain written disclosures to retirement investors.  A notable difference between PTE 2020-02 and PTE 84-24 is that under amended PTE 84-24, an Independent Producer must also provide a notice describing the retirement investor’s right to request additional information regarding cash compensation.

Another key difference is that, unlike Independent Producers, the insurers they work for are generally not required to acknowledge in writing that they are fiduciaries providing investment advice to ‎the ‎retirement investor.  However, in order for Independent Producers to rely on PTE 84-24 with respect to its sales of an insurer’s products, the insurer is required to establish, maintain, and enforce written policies and procedures for the ‎review of each recommendation before an ‎annuity is issued to a retirement investor pursuant to an Independent Producer’s recommendation that are prudently designed to ensure compliance with the impartial conduct standards.  The insurer also must conduct a retrospective review of each Independent Producer, at least annually, that is designed to detect and prevent violations of, and achieve compliance with, the conditions of the impartial conduct standards and the insurer’s written policies and procedures.  Crucially, the amended PTE provides that insurers are not required to police Independent Producers’ recommendations of competitors’ products.

Effective Date

The Final Rule and the amendments to the PTEs are effective September 23, 2024 and will apply to investment advice provided on or after that date.  Both amended PTE 2020–02 and amended PTE 84–24 include a one-year transition period after their effective dates under which the exemptive relief will be available if the investment advice fiduciary complies with the impartial conduct standards and provides a written acknowledgment of fiduciary status.

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