On April 25, 2024, the Department of Labor published its final regulation on defining fiduciary status for investment advice, and the related exemptions, in the Federal Register. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective on September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

Let’s look at the primary definition of non-discretionary fiduciary advice in the proposed regulation and compare it to the definition in the final regulation. This is the first step in complying with the new rules, since compliance with the PTEs will only be need for fiduciary recommendations that involve conflicts of interest.

The Proposed Definition

The proposed regulation defined a fiduciary recommendation as:

…a person renders ‘‘investment advice’’ with respect to moneys or other property of a plan or IRA if the person makes a recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property (as defined in paragraph (f)(10) of this section) to the plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary (retirement investor), and the person satisfies paragraphs (c)(1)(i), (ii), or (iii) of this section.

The most significant definition of non-discretionary fiduciary status is in (c)(1)(ii), so let’s focus on that one.

In order for a recommendation to result in fiduciary status under the proposal, the requirement would have been that an investment recommendation was made to a retirement investor, and the “person” making the recommendation:

• either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of their business and
• the recommendation is provided under circumstances indicating that the recommendation
  • is based on the particular needs or individual circumstances of the retirement investor and
  • may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.

Stated conversationally, an advisor or agent would have needed to  be in the business of making investment recommendations, and the circumstances would indicate that the recommendation is personalized and that the retirement investor would be entitled to rely on the recommendation as being in his or her best interest.

The New Definition

Now let’s look at the final regulation. The expanded definition of fiduciary advice in the new regulation is that a person is a fiduciary if the person:

• either directly or indirectly (e.g., through or together with any 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.

Stated conversationally, effective September 23 the definition is that to be a fiduciary an advisor or agent must make an investment¹ recommendation to a retirement investor for which the advisor or agent will receive compensation and the advisor or agent:

• is in the business of making investment recommendations (which includes recommendations of insurance and annuities), and
• the circumstances surrounding the recommendation would be viewed objectively by a reasonable person as indicating that the recommendation:
  • is individualized,
  • reflects professional judgment, and
  • may be relied upon as being in the retirement investor’s best interest.

Comparison

A quick comparison reveals that the most significant change is in the additional requirement that the recommendation must reflect the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances.

The DOL discusses the new language as distinguishing from pure salesmanship. One such explanation is:

For example, a salesperson’s recommendation to purchase a particular investment or pursue a particular investment strategy is not investment advice if the person does not represent or acknowledge that they are acting as a fiduciary under ERISA Title I or Title II with respect to the recommendation and if the circumstances would not 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.

The preamble also discusses that new requirement as being consistent with a fiduciary relationship, that is, a relationship of “trust and confidence:”

The final rule also does not base fiduciary status on firms’ or financial professionals’ status under other laws, as some commenters have asserted. Instead, the final rule is focused on defining those circumstances in which the retirement investor has a reasonable expectation that the recommendation reflects a professional or expert judgment offered on their behalf and in their interest. In the circumstances specified, a retirement investor would be entitled to treat their relationship with the person making the recommendation as one of trust and confidence.

The preamble also provides some, but not much, information about what would reasonably be indicative of “professional or expert judgment:”

For purposes of evaluating paragraph (c)(1)(i) in the final rule, the Department intends that the use of titles, credentials, and marketing slogans will be a relevant consideration but will not generally be determinative. A person holding themselves out, for example as an adviser, would contribute to a reasonable investor’s belief that they are receiving professional or expert advisory services and that the person’s recommendations reflect 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.

In effect, the DOL is saying that it will be a facts-and-circumstances test, but it appears that the DOL will focus on the presentation by the agent and the advisor. My knee-jerk reaction is that the more the advisor or agent touts experience, credentials, etc., as opposed to the sale of product, the more likely a recommendation will be fiduciary advice. And it may not take that much for a reasonable person to conclude that an advisor is applying professional judgment to the recommendation.

Concluding Thoughts

The added language about professional and expert judgment does narrow the definition of fiduciary advice. However, I suspect that most advisors and agents like to tout their skills, experience and judgment. In that case, they are at risk of becoming fiduciaries for their advice….but not until September 23.