On April 23, 2024, the U.S. Department of Labor (DOL) announced final amendments to the regulations under Section 3(21) of the Employee Retirement Income Security Act of 1974 (ERISA) that define “investment advice fiduciary.” did. Exemptions for Certain Related Prohibited Transaction Classes (collectively, the Final Regulations).
The DOL’s proposed amendments, released in fall 2023, received thousands of comments in addition to a live public hearing in December 2024. (For additional information regarding the proposal, see the November 7, 2023 Client Alert “DOL Proposes Proposed Amendments to the Definition of Investment Advice Fiduciaries”)
The final rule remains controversial and is expected to be the subject of various legal challenges. These are the latest in more than a decade of efforts by the DOL to expand the scope of activities and relationships that make individuals fiduciaries under ERISA and Section 4975 of the Internal Revenue Code (Code).
The final rule applies strict fiduciary standards under ERISA to more parties with respect to ERISA-covered plans, and the final rule applies strict fiduciary standards under ERISA and Section 4975 of the Act, including the receipt of compensation for providing such advice, to more parties. Prohibited transaction rules will apply.
Current 5-part test
As with the proposal, the final rule changes the five-part test currently in place to determine who is a fiduciary for investment advice.
The current test provides that a person is a fiduciary if he or she: (1) advises on the value of, or invests in, or purchases securities or other property; or make recommendations as to the advisability of a sale (2) on a regular basis, and (3) based on a mutual agreement, arrangement, or understanding with the plan or plan fiduciary. (4) Advice serves as the primary basis for investment decisions regarding plan assets. (5) Advice will be individualized based on the specific needs of the plan.
New final regulatory standard
The final rule makes several changes to the proposed definition of investment advice fiduciary. The final rule provides that investment advice is required under Title I and Title II of ERISA when providing investment advice or making investment recommendations to “retirement investors” (plans, plan fiduciaries, plan participants, or beneficiaries, IRAs). It is stipulated that he will become a person. , IRA owner or beneficiary, or IRA trustee) who directly or indirectly receives a fee or other compensation, and:
- Directly or indirectly (for example, through or in collaboration with our affiliates) regularly make professional investment recommendations to investors as part of our business. Its recommendations are:
- It is made under circumstances that would indicate to a reasonably similarly situated investor that the recommendation is based on consideration of the retirement investor’s particular needs or individual circumstances.
- reflects the application of professional or professional judgment to the specific needs and individual circumstances of retirement investors;
- May be relied upon by Retirement Investors for the purpose of promoting Retirement Investors’ best interests.or
- With respect to the Recommendation, you represent or acknowledge that you are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both.
Unlike the current test, and consistent with the proposal, the final rule would eliminate the existing Delete the requirement. The main basis for investment decisions for retirement investors.
Instead, as with proposals, the final rule focuses on whether an advisor is a person who regularly makes investment recommendations to investors as part of their business (In other words, investment professionals). They provide that retirement investors have a reasonable expectation that their advisor is in a position of “trust and confidence” and is working in the investor’s best interests based on the investor’s particular circumstances. We have made some changes to the proposal with the aim of clarifying whether
As in the proposal, the final rule notes that one-time advice may be fiduciary in nature and does not include certain excluded transactions involving “sophisticated investors.” I am. However, the final rule indicates that non-recommendation “hire me” (sales pitch) type communications are generally not investment advice and exclude communications with other investment advice fiduciaries.
Definition of “recommended”
Consistent with proposals, the final rule provides that a “recommendation” is one that, based on its content, context, and language, could reasonably be considered to involve or suggest retirement investors, based on the applicable facts and circumstances. refers to communication. Avoid taking certain actions.
The more personalized a communication is, the more likely it is to be seen as a recommendation. The final rule defines the scope of the phrase “recommendation of securities or other investment transactions or investment strategies involving securities or other investment property” to include recommendations regarding:
- the adequacy of acquiring, holding, disposing (or exchanging) securities or other investment property, investment strategies, or securities after the securities or other investment property is rolled over, transferred, or distributed from or to the plan; or any other way to invest in investment property Ira.
- Management of securities or other investment property. In particular, we provide recommendations regarding investment policies or strategies, the composition of portfolios, the selection of others to provide investment advice or investment management services, and the selection of investment account arrangements (for examplesecurities trading vs. advisory account types) or proxy voting rights attached to securities.
- Rollover, transfer, or distribution of assets from a plan or IRA. This includes recommendations regarding whether to participate in a transaction and the amount, form, and destination of any such rollover, transfer, or distribution.
The DOL says it aims to align the definition of “recommendation” with guidance adopted by the Securities and Exchange Commission (SEC) and other government agencies.
Similar to the proposal, the final rule provides that advice to plan participants regarding decisions to roll over assets from the plan, regardless of whether the assets are rolled over to an account managed by the advisor or an affiliate, generally It stipulates that the advice shall be the advice of the person concerned. Or whether the rollover advice includes details on how to invest such assets.
The preamble to the final rule continues to indicate that providing general investment or educational material without a recommendation is not itself investment advice.
Amendments to Prohibited Transaction Class Exemptions
The final rule generally includes certain related prohibited transaction class exemptions (PTCEs) (75-1, 77-4, 80-83, 83- 1, and 86-128). (as opposed to discretionary behavior).
Investment advice fiduciaries will generally need to rely on PTCE 2020-02 or, in some cases, 84-24 (with respect to “independent producers” discussed below), as amended under the final regulations. Otherwise, it will be prohibited because of such status.
PTCE 2020-02 Permits financial institutions and investment professionals to act as fiduciaries and pay various types of variable compensation that are normally prohibited, provided that certain requirements are met, including:
- Acknowledge your position as a trustee in writing.
- Disclose Services and Material Conflicts of Interest.
- Adhere to certain standards of fair conduct.
- We employ carefully designed policies and procedures to ensure compliance with fair standards of conduct.
- Reduce conflicts of interest.
Among other requirements, the reason for the rollover recommendation must be specifically documented and disclosed to explain that the recommendation is in the retirement investor’s best interest. Financial institutions are required to conduct retrospective compliance reviews annually.
The final rule generally exempts major transactions, provided they meet the exemption requirements. (The proposal provided for narrower types of major transactions.) It also revised certain disclosure and review requirements.
PTCE 84-24 This allows the fiduciary to receive compensation when plans and IRAs conduct certain insurance and mutual fund transactions recommended by the fiduciary (or its affiliates) and certain related transactions.
The final rule on PTCE 84-24 covers coverage for “independent producers” (those who sell insurance products from two or more unrelated insurance companies) who sell annuities or other insurance products that are not regulated by the SEC. is. The Independent Producer recognizes fiduciary status and meets certain disclosure requirements and standards of conduct similar to her PTCE 2022-2.
Although different from the proposal, the final PTCE 84-24 does not limit coverage to insurance sales commissions. Insurers selling insurance contracts must establish appropriate policies and procedures and meet other standards similar to PTCE 2002-2, but are not required to grant fiduciary status and are subject to such oversight. A person cannot be treated as a fiduciary solely by virtue of his or her activities. .
effective date
The final rule will become effective on September 23, 2024 (150 days after publication of the rule in the Federal Register). Both amendments to PTCE 2002-02 and 84-24 will also take effect on the same day.
However, the exemption generally applies initially if the investment professional or financial institution (independent producer under 84-24) complies with the impartial conduct rules and recognizes its fiduciary status. The obligation to comply with the modified exemption will be phased in as follows:
Other requirements of the exemption do not apply until September 2025 (one year after publication of the regulation in the Federal Register).
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