On April 23, 2024, the U.S. Department of Labor (DOL) issued a final rule, amending the definition of an investment advice fiduciary for purposes of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, as well as related amendments to prohibited transaction exemptions (PTEs) available to fiduciaries under ERISA (collectively, the Final Regulations). The Final Regulations generally take effect on September 23, 2024, with a one-year transition period for certain conditions in the PTEs. The Final Regulations broaden who qualifies as an investment advice fiduciary and are designed to align ERISA’s fiduciary protections with reasonable retirement investor expectations of trust and confidence.
The DOL previously attempted to redefine an investment advice fiduciary in a 2016 rulemaking, which was ultimately invalidated by the U.S. Court of Appeals for the Fifth Circuit in 2018 as beyond the DOL’s authority, finding that it was overbroad and applied to relationships that lacked “trust and confidence.” The Final Regulations are similarly not without controversy. On May 2, 2024, an insurance industry trade organization, along with five other insurance industry plaintiffs, filed suit in the U.S. District Court for the Eastern District of Texas, challenging the Final Regulations on similar grounds.
The Final Regulations amend the DOL’s 1975 regulation that sets forth a five-part test for determining who is an investment advice fiduciary. Under the prior five-part test, a person is a fiduciary if they: (1) render advice as to the value of securities or other property, or make 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 agreement, arrangement, or understanding with the plan or a plan fiduciary that (4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that (5) the advice will be individualized based on the particular needs of the plan. Citing changes in the retirement plan landscape since 1975, notably the shift from defined benefit plans to participant-directed defined contribution/individual account plans, the DOL adopted a revised definition of fiduciary that focuses more broadly on recommendations made by a person who “makes professional investment recommendations to investors on a regular basis as part of their business” under circumstances in which a reasonable retirement investor would believe that the person occupies a position of trust and confidence. The Final Regulations generally provide that a financial services provider is a fiduciary if: (1) the provider makes an investment recommendation to a retirement investor; (2) the recommendation is provided for a fee or other compensation; and (3) the financial services provider holds itself out (in ways specified in the Final Regulations) as a trusted adviser.
Under the revised definition, an investment advice fiduciary is no longer limited to persons who provide advice on a regular basis pursuant to a mutual agreement that the advice will serve as the primary basis for the retirement investor’s investment decision. Significantly, these changes now extend fiduciary status to “one-time” advice, including advice related to rollover transactions. Given the removal of the mutual agreement requirement, the Final Regulations clarify that fiduciary status would not apply to providers marketing their own services (so-called “hire me” communications), absent an investment recommendation. In addition, the DOL declined to include in the Final Regulations a carve-out for recommendations to certain sophisticated advice recipients, such as plan sponsors acting as plan fiduciaries or independent financial services providers who are themselves plan or individual retirement account fiduciaries.
The Final Regulations are available as follows: final rule, PTE 2020-02 amendment, PTE 84-24 amendment and additional PTE amendments. A related fact sheet is available here, and the DOL's news release is available here.
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