On April 25, 2024, the Department of Labor published its final regulation defining fiduciary status for investment advice and the related exemptions—PTE 2020-02 and 84-24. 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.

For context, all financial institutions—broker-dealers, investment advisory firms, banks and insurance companies–can use PTE 2020-02 for the protection it affords. However, broker-dealers, investment advisers, and banks must use PTE 2020-02 for relief for their conflicted fiduciary recommendations. In addition, relief for insurance products that are treated as securities (e.g., variable and registered annuities) can only be found under 2020-02. Finally, if an insurance product is sold by an employee or statutory employee of an insurance company, PTE 2020-02 must be used for relief.

However, life insurance and annuity products recommended to retirement investors by “independent producers” that require only an insurance license (that is, that are not securities) can be sold under another PTE . . . 84-24. Compliance with the PTE will be needed to avoid having the commissions (and other compensation—cash and noncash) be treated as prohibited transactions—where the independent producer makes a conflicted fiduciary recommendation on and after September 23, 2024, the effective date of the DOL’s fiduciary regulation. An independent producer is a life insurance agent (i) who is not a statutory employee (of the insurer that issues the annuity or policy), and (ii) is appointed to sell the products of at least two insurance companies.

Let’s look at the final of PTE 84-24 and its effective dates.

PTE 84-24 protects independent producers from the adverse consequences of making conflicted fiduciary recommendations (that is, recommendations that, if accepted, will result in cash and/or non-cash benefits for the independent producer). The protection is that the independent producer will not need to unwind the recommended transaction, restore any losses and costs, contribute any missed earnings, return any compensation, and pay excise taxes. This is different than PTE 2020-02 where the financial institution would also be a fiduciary and would share responsibility for compliance failures. (However, under both PTE 84-24 and PTE 2020-02, a pattern of noncompliance can result in loss of eligibility to use the exemptions, which would mean that, for a period of as long as 10 years, the ability to use the exemptions would be lost, meaning that products and services could not be sold where there is a fiduciary recommendation and the source of funds is “qualified” money, e.g., rollovers, exchanges of qualified annuities.)

The reason that the protection of PTE 84-24 will be needed is that, beginning September 23, the new fiduciary definition includes one-time recommendations that are individualized, made with professional judgment, and in the best interest of the retirement investor. (That is a conversational explanation. For the details, look at my prior blog articles.) In other words, beginning September 23 the number of fiduciary recommendations by independent producers with prohibited conflicts will increase dramatically.

A prohibited conflict will arise from a fiduciary recommendation that will cause the independent producer to receive financial benefits that would not otherwise be received. Think of cash compensation, such as commissions, trails, renewals, bonuses. Also, think in terms of non-cash compensation, such as trips, conferences, tickets. (For example, one of  the statutory prohibitions is that a fiduciary agent cannot “deal with the assets of the plan in his own interest or for his own account”.) A conflicted recommendation includes a recommendation to roll over from a retirement plan to an annuity recommended by an independent producer because of the commissions that would be earned from the annuity. Similarly, a recommendation to exchange a qualified annuity would be a conflicted recommendation because of the commission earned from the annuity exchange.

Note that insurance products that do not have an investment component, e.g., term insurance, are not subject to these rules. However, annuities, whole life, universal life, and other insurance products with investment elements are.

Unlike PTE 2020-02 where the investment professional and the financial institution are co-fiduciaries (in the sense that they are both fiduciaries for compliance with the terms of the PTE), under PTE 84-24 the independent producer is a fiduciary, but the insurance company is not. However, insurance companies will have significant oversight responsibilities, including the review of each application for compliance with the new requirements. (Note, though, the oversight responsibilities will not be effective until September 23, 2025, even though the new fiduciary definition will apply to independent producers a year earlier—on September 23, 2024, just months from now.)

To obtain the protection of PTE 84-24, four categories of “conditions” must be satisfied. Those are:

• The Impartial Conduct Standards.
• Written Disclosures.
• Policies and Procedures
• Annual Retrospective Review and Report

This article covers the conditions in PTE 84-24 that are effective on September 23 of this year. Those are:

• The Impartial Conduct Standards
  • Care Obligation
  • Loyalty Obligation
  • Reasonable compensation limitation
  • No materially misleading statements (including by omission)
• The Fiduciary Acknowledgement Disclosure

These conditions are imposed on the independent producer and not on the insurance company.

Impartial Conduct Standards

Of the four Impartial Conduct Standards, the requirements for reasonable compensation and no misleading statements are the easiest to understand and comply with. As a result, this post will focus on the two obligations (although there will be a future article on the provisions related to compensation).

The Care Obligation is defined in the PTE as follows:

Advice meets the ‘‘Care Obligation’’ if, with respect to the Retirement Investor, such advice reflects the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor.

This is very close to the prudent person rule in ERISA. It is a process-driven approach measured by the hypothetical standard of a knowledgeable person—”a prudent person … familiar with such matters.”

In essence, it requires that an independent producer consider the relevant information about (i) the retirement investor (e.g., the needs and circumstances of the investor), (ii) the investor’s current situation (e.g., the investor’s current investments and strategies, including the investments, services and costs), and (iii) the potential recommendation contemplated by the independent producer. The current and potential arrangements would then be evaluated in light of the retirement investor’s profile…in a knowledgeable, careful, skillful, diligent, and prudent manner. That process would result in a recommendation that is in the best interest of the retirement investor.

The Loyalty Obligation is defined in the PTE as follows:

Advice meets the ‘‘Loyalty Obligation’’ if, with respect to the Retirement Investor, such advice does not place the financial or other interests of the Independent Producer, Insurer, or any Affiliate, Related Entity, or other party ahead of the interests of the Retirement Investor, or subordinate the Retirement Investor’s interests to those of the Independent Producer, Insurer, or any Affiliate, Related Entity, or other party.

This is similar to the SEC’s approach in Regulation Best Interest for broker-dealers. In practice, it means that an independent producer cannot place his or her interest ahead of the retirement investor’s by, e.g., recommending a higher cost and compensating annuity when an alternative would be better for the retirement investor. Another example is that an independent producer cannot recommend a rollover where the better course of action for the participant would be to leave the money in the plan.

The Fiduciary Acknowledgement

PTE 84-24 describes the disclosure of the fiduciary acknowledgement as follows:

A written acknowledgment that the Independent Producer is providing fiduciary investment advice to the Retirement Investor and is a fiduciary under Title I of ERISA, Title II of ERISA, or both with respect to the recommendation.

Fortunately, this disclosure is straight forward, although independent producers may need help from insurance companies and intermediaries to draft the disclosure.

The remaining disclosure requirements, the policies and procedures requirements, and the annual retrospective review effective dates are delayed until September 23, 2025.

Concluding Thoughts

Of the requirements that are effective this September 23, the hardest to satisfy will likely be the Care Obligation. It requires gathering the information that a knowledgeable person would know is relevant to the particular recommendation and then engaging in a thoughtful process to identify which alternatives are in the best interest of the retirement investor. The necessary information can vary depending on the nature of the recommendation—plan rollovers, annuity exchanges, and others. Insurers and intermediaries can help independent producers by developing guidelines, information sources, procedures, and documents to support the fiduciary processes and decision-making.