On April 25, 2024, the Department of Labor published its final regulation on fiduciary advice, and the related exemptions, in the Federal Register. The regulation defines fiduciary investment advice and the exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective 150 days after publication, which is September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

The DOL’s final regulation 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, products, and other 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. Another important defined term is “investment professionals”; it includes representatives of broker-dealers, investment advisers, banks and insurance companies. In turn, those entities are called “financial institutions”.

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. The most important definition is the one for non-discretionary recommendations. A person will be 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.

If that definition is satisfied, a one-time recommendation will result in fiduciary status. If the recommendation is made to an ERISA-governed plan or to a participant in an ERISA-governed plan, the advisor or insurance agent will be required to satisfy ERISA’s prudent man rule and duty of loyalty. The failure to do so would be a fiduciary breach, which is actionable under ERISA. On the other hand, if a fiduciary recommendation is made to an IRA owner, the standard of care (absent a prohibited conflict of interest) will be based on the registration of the person making the recommendation, e.g., Reg BI for broker-dealers, State insurance laws or regulations for insurance agents, and so on.

That provision will be fully effective on September 23, 2024.

If, on or after September 23, a fiduciary recommendation is made to a private sector retirement plan or to a participant in a plan, or to an IRA owner, and the recommendation involves a conflict of interest, e.g., additional compensation to the advisor, agent or their firms, that conflict of interest is prohibited under ERISA and/or the Internal Revenue Code. (Retirement plans and participant accounts in those plans are under both ERISA and the Code, while individual IRAs, including qualified annuities, are governed only by the Code.)

In order to retain compensation that results from conflicted fiduciary recommendations, investment professionals (e.g., advisors and agents) and financial institutions will need to satisfy the conditions of either PTE 2020-02 or 84-24. Those exemptions and their conditions will be discussed in later articles.

For the moment, though, let’s focus on the compliance dates. Much like the fiduciary regulation, the exemptions will be effective on September 23. However, the need to comply with some of the conditions is further delayed. Beginning on September 23, advisors and insurance agents will only need to satisfy the Impartial Conduct Standards and the requirement to provide the retirement investors with an acknowledgement of fiduciary status. The remaining requirements are delayed until a year later. That includes, for example, the other disclosure requirements, the policies and procedures, and the annual retrospective review.

For those who haven’t followed the development of these rules closely, the Impartial Conduct Standards are:

• A Care Obligation and a Loyalty Obligation. The Care Obligation is, in essence, the prudent process required by ERISA. The Loyalty Obligation requires that the advisor or agent not place his or her interest ahead of the retirement investor’s. In the proposal, these duties were called the Best Interest Standard. It’s the same package with a different label. However, the label matters since this change better aligns the labels with those in Regulation Best Interest which governs the conduct of broker-dealers.
• A limit on compensation to reasonable amounts. While this may seem like a new requirement to some parts of the regulated community, both ERISA and the Code have imposed this requirement on all service providers to plans and IRAs for decades.
• Where applicable, the best execution standard similar to the requirements for broker-dealers and investment advisers must be satisfied.
• Statements related to a recommendation cannot be materially misleading. Again, this may not be a practical issue, since all of the regulators, in one form or another, prohibit misleading statements.

Concluding thoughts

Of the requirements that will apply beginning September 23, the fiduciary acknowledgement should be the easiest. The DOL provided sample language for that disclosure.

On the other hand, compliance with the Impartial Conduct Standards could be more difficult. As a result, the focus should be on education and assistance to help advisors and agents comply with the Impartial Conduct Standards and particularly with the Care Obligation. The Care Obligation imposes a high standard on advisors and agents. While this may be a slight overstatement, a good approach is to consider whether an independent and knowledgeable person would objectively conclude that the advice was in the best interest of the retirement investor.

September 23 is just around the corner. Now is the time to start the work for helping advisors and agents be in compliance by that date.

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 84-2.