In November 2023, the U.S. Department of Labor released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers). On March 8, 2024, the DOL sent the final rule to the Office of Management and Budget in the White House. On April 10 the OMB completed its review of the final rules. The next step is for the rules to be published in the Federal Register.
Key Takeaways
- The final versions of the DOL’s fiduciary regulation and the amended PTEs have been reviewed by the Office of Management and Budget (OMB) in the White House—the final step in the approval process.
- Now that the OMB has completed its part, the DOL will start the process for publishing the final rules in the Federal Register. The publication will likely be in the next two to three weeks.
- Sixty days after publication, the final rules will be effective.
- However, it is not clear if they will be applicable at the same time. There may be a delayed applicability date.
In November of 2023, the DOL proposed amendments to the regulation that defines when a person becomes a fiduciary by virtue of making “investment” recommendations to “retirement investors.”
I put the apostrophes around “investment” because the term, as used in the regulation, includes a range of services and types of properties. And I did the same with “retirement investors” because it is a defined term—private sector retirement plans, participants in those plans, and IRA owners.
The expanded definition of fiduciary advice in the regulation will cause many more people and firms to be fiduciaries when they make investment recommendations to retirement investors. When a fiduciary investment recommendation is conflicted (that is, if the recommendation is accepted and implemented, it will financially benefit the advisor or the firm), any resulting compensation for the firm or the advisor is prohibited—literally prohibited. However, if there is an available exemption—a Prohibited Transaction Exemption (PTE), and if the conditions of the exemption are satisfied, the transaction can proceed and the compensation (or other financial benefit) can be retained.
The fiduciary package includes two amended PTEs, 2020-02 and 84-24 that cover most recommendations to retirement investors. (The package also includes amendments to other PTEs, but they are limited in scope and purpose.) The OMB’s review of the final versions of the fiduciary regulation and the two PTEs has been completed.
The drafting of the final rules and he OMB’s review of the fiduciary “package” has proceeded exceptionally fast… as compared to the usual timing for the drafting and vetting of rules. The OMB received the final rules on March 8. It has up to 90 days to review and approve rules…that is, to put them through the review process of compliance with a variety of requirements. And it commonly takes 60 to 90 days to do that. If the OMB took 90 days this time, the rules wouldn’t be released until early June. But instead the OMB’s review was completed on April 10.
The next step is for the final rules to be published in the Federal Register. Sixty days after publication the rules will be effective. That means that the rules will be effective at the end of June or in early July.
However, the rules won’t necessarily be “applicable” on the same date that they are “effective.” Just FYI, “effective” means that the rules are final and on the books. “Applicable” means that compliance will be required on that date.
While it’s not known when the rules will be applicable, a good bet is that there will be a period after they are final and effective before people have to comply with their conditions. A good possibility is that the applicability date will be January 1, 2025. In that way, the private sector will need to be in compliance before the next administration is sworn in. That reduces, but does not eliminate, the risk of the rules being overturned by a change in the White House.
Concluding Thoughts
If the final rules are published in the Federal Register in or about the first week in May, that leaves just seven months before they will be applicable…in my hypothetical timeline. While it is possible that broker-dealers, investment advisers, and banks and trust companies can get into compliance by January 1, 2025—because they are probably already in compliance with the current PTE 2020-02, it will be difficult for independent insurance agents—and the insurers who sell through them—to come into compliance that quickly. They should start now, based on the proposals. Otherwise, the second half of 2024 will be more difficult than it needs to be.
