On April 23, 2024, The U.S. Department of Labor (“the DOL”) issued their latest changes to the definition of an ERISA Investment Advice Fiduciary (“Fiduciary”), and updated several Prohibited Transaction Exemptions (“PTEs”) including PTE 2020-02 and PTE 84-24. The insurance, broker-dealer, and investment adviser worlds often refer to these changes collectively as the “Fiduciary Rule” so that’s how we’ll refer to it in this blog post.
KEY ASPECTS:
Impact on Different Roles:
- Agents: Substantial changes to PTE 84-24 affect independent agents, particularly concerning compliance dates, impartial conduct standards, and the requirement for a fiduciary acknowledgment.
- Investment Adviser Representatives (IARs) and Registered Representatives (RRs): These professionals will need to integrate these new rules with existing SEC requirements.
- Insurance Carriers: They will need to develop new policies and supervise agents to ensure compliance.
- Legal Considerations: There’s already been a lawsuit filed against the new rule, but emphasis is onizing the importance of compliance despite potential legal challenges.
SUMMARY
Some may wonder what sort of impact the Fiduciary Rule will have on their practices. In summary, the DOL has once again amended the definition of who is a Fiduciary under ERISA. This new, broader definition will almost certainly make every Investment Adviser Representative (“IAR”), Registered Representative (“RR”), and Independent Insurance Agent (“Agent”) a Fiduciary when a client’s employee benefit plan (pension plan, 401(k), etc.) or other type of retirement savings plan (e.g., IRA) is involved.
How will this impact you? Let’s say you’re making a recommendation to a client that involves rolling over their 401k to an IRA and now you’re classified as a Fiduciary under the Fiduciary Rule. Once you’re classified as a Fiduciary, you must follow the requirements of a PTE. The most common PTEs utilized by IARs, RRs, and Agents are PTE 2020-02 and PTE 84-24. Many IARs, RRs, and Agents are already familiar with the requirements under these PTEs, but the DOL has included new, additional requirements for both PTEs in this latest update to the Fiduciary Rule.
In short, when an IAR, RR, or an Agent is working with a client’s employee benefit plan or IRA they must follow the new, more robust requirements of a PTE.
FIDUCIARY DEFINITION – EFFECTIVE SEPTEMBER 23, 2024
Now let’s explore the new definition of Fiduciary a little further. The DOL provided an Executive Summary within the Supplemental Information section when it released the Fiduciary Rule. I’ve paraphrased a portion of the Executive Summary in italics below so we can review it.
A financial services provider will be an investment advice fiduciary under federal pension law 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; or
The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both with respect to the recommendation.
The recommendation also must be provided “for a fee or other compensation, direct or indirect” as defined in the final rule.
Let’s break this down into more manageable language. Essentially, the DOL is stating that if you meet certain criteria, then you are a Fiduciary. Those criteria are:
- You make professional investment recommendations to investors on a regular basis as part of your business. This likely captures every IAR, RR, and Agent. After all, that’s what clients pay you to do – help them make decisions pertaining to their financial situation, insurance needs, and financial objectives by making recommendations that are in their best interest.
- The recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation meets the bullet points listed above. Again, the bullet points capture what IARs, RRs, and Agents do. You gather information about the client, utilize your judgment and expertise to develop a recommendation tailored to the client, and the client trusts that your recommendation is in their best interest. Alternatively, if you represent or acknowledge that you are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both with respect to the recommendation, that also satisfies this criterion.
- The recommendation is provided “for a fee or other compensation, direct or indirect” as defined in the final rule. You get paid for the valuable services that you provide to the client and that checks the box for this criterion.
I don’t think I’ve ever met an IAR, RR, or Agent who wasn’t somehow involved with clients’ 401(k)s, IRAs, or similar plans. At a minimum, professionals are often involved in rollovers, which meets the criteria for being classified as a Fiduciary under the Fiduciary Rule because even “one time advice” such as a rollover recommendation now meets the definition of a Fiduciary under the Fiduciary Rule.
If you think compliance is expensive – try non-compliance.” – Former US Deputy Attorney General Paul McNulty
EXEMPTIONS
If you meet the definition of a Fiduciary under the Fiduciary Rule, then you need to comply with a PTE. We’ll take a more in-depth look at PTE 84-24 and then briefly discuss PTE 2020-02.
PTE 84-24
There are substantial changes to this PTE and two future dates to keep in mind. Today, PTE 84-24 requires a limited disclosure, but the DOL has attempted to make compliance much more robust and more in line with the requirements of PTE 2020-02. It is important to note that the DOL has restricted the use of PTE 84-24 to independent insurance agents for use with fixed insurance products. The new requirements are listed below under the applicable compliance dates.
SEPTEMBER 23, 2024
As of this date, Agents must comply with the Impartial Conduct Standards and provide a Fiduciary Acknowledgement.
Impartial Conduct Standards
Care Obligation – provide advice that reflects 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 a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances and needs of the Retirement Investor. In other words, provide professional advice reflective of a prudent professional in the same situation.
Loyalty Obligation – The advice must not place the financial or other interests of the Independent Producer, Insurer, Affiliate, Related Entity or other party ahead of or otherwise subordinate to the Retirement Investor’s interests. In other words, you must place the client’s interests ahead of your own or anyone else’s interests.
Reasonable Compensation – You may not receive compensation, directly or indirectly, in connection with a recommended transaction that exceeds “reasonable compensation.” The DOL refers to ERISA Section 408(b)(2) for further guidance on what constitutes reasonable compensation.
No Materially Misleading Statements – Statements concerning the recommendation and other relevant matters must not be materially misleading at the time they are made. This also includes the omission of information that is needed to prevent the statement from being misleading.
Fiduciary Acknowledgement – A written acknowledgment that the Independent Producer is providing fiduciary investment advice to the Retirement Investor under ERISA and the Code or both with respect to the recommendation. The DOL provided model language for this written acknowledgement.
SEPTEMBER 23, 2025
Beginning on this date, Agents must continue to comply with the Impartial Conduct Standards and provide the Fiduciary Acknowledgement described above. In addition, Agents must provide these additional disclosures.
- Written Statement of the Care and Loyalty Obligations – A written description of these two obligations.
- Statement of Material Facts – A statement of the material facts concerning the scope and terms of the Agent’s relationship with the Retirement Investor, including:
- the material fees and costs applicable to the investor’s transactions, holdings and accounts;
- a notice of the investor’s right to request additional information concerning cash compensation (if requested by the Retirement Investor, a reasonable estimate of the Agent’s cash compensation which may be stated as a range of amounts or percentages, and a statement describing whether the compensation will be provided as a one-time payment or multiple payments, and their amounts and frequency, must be provided); and
- a description of the type and scope of services the Independent Producer will provide, including any material limitations on the recommendations that may be made, the products that the Agent is licensed and authorized to sell, any limits on the range of recommended insurance products, and identifying the specific insurers and insurance products available for recommendation to the Retirement Investor.
- Conflict of Interest – A statement of all material conflicts associated with the recommendation (defined as an interest that might incline an Agent – consciously or unconsciously – to make a recommendation that is not disinterested).
- Basis for Recommendation – Prior to the sale the Agent must document the basis for the recommendation and provide copies of that documentation to both the Retirement Investor and the insurance carrier. If the recommended transaction involves a rollover from an ERISA plan or the investment of assets following their distribution from an ERISA plan, relevant factors include:
-
- alternatives to a rollover, including leaving assets in the plan;
- fees and expenses associated with the plan versus those of the recommended investment;
- whether an employer or other party is bearing some or all of the plan’s administrative expenses; and
- differing levels of fiduciary protection, services and available investments.
AGENT IMPACT
Agents may already be familiar with PTE 84-24. The new Fiduciary Rule has substantial revisions that will place additional burdens on Agents. It is important for Agents to seek competent resources for guidance on the new compliance requirements. Agents who are also licensed as RRs or IARs should consult with their broker-dealers and/or RIAs for guidance on when to utilize PTE 84-24 vs. PTE 2020-02.
INSURANCE CARRIERS
Insurance carriers will also have new responsibilities to develop policies and procedures, conduct an annual retrospective review, and supervise Agents to ensure they are complying with the Impartial Conduct Standards and the disclosure requirements.
PTE 2020-02
This PTE is generally utilized by broker-dealers, RIAs, and their representatives and has a few changes included in the new Fiduciary Rule. Included among the changes are an expanded availability of PTE 2020-02 for exemptive relief and new disclosure requirements including for compensation and conflicts of interest.
IAR IMPACT
IARs may already be familiar with PTE 2020-02. The DOL has stated that RIAs and IARs who are already complying with the SEC’s requirements should readily be able to adapt to the new requirements under the Fiduciary Rule. As a result, IARs are encouraged to discuss the new requirements with their RIA.
RR IMPACT
RRs may already be familiar with PTE 2020-02. The DOL has stated that broker-dealers and RRs who are already complying with the SEC’s requirements should readily be able to adapt to the new requirements under the Fiduciary Rule. As a result, RRs are encouraged to discuss the new requirements with their broker-dealer.
FUTURE CONSIDERATIONS
The first lawsuit has already been filed against the DOL regarding the Fiduciary Rule. However, it is not recommended that anyone foregoes compliance with the new Fiduciary Rule based on the hope that it will be vacated by a court. Court decisions cannot be accurately predicted and failing to comply with the new Fiduciary Rule requirements could lead to severe consequences. It is also important to remember that it took two years for the last DOL Fiduciary Rule to be vacated by the Fifth Circuit Court of Appeals. Even if the DOL loses another court case, it could be well after the new Fiduciary Rule requirements go into effect.
IMPORTANT NOTE
The DOL Fiduciary Rule does not replace or supersede the current Best Interest standards required by state insurance regulators. These are 2 separate and distinct regulations that insurance producers and advisors must follow. The Best Interest requirement is part of state regulations regarding all annuity sales. The DOL Fiduciary Rule is a federal regulation that applies to transactions involving funds held in an ERISA plans, such as a 401k, and IRA.
FINAL THOUGHTS
The DOL’s new Fiduciary Rule will make many IARs, RRs, and Agents into a Fiduciary under ERISA. The greatest impact will be felt by Agents and insurance carriers who wish to utilize PTE 84-24 for qualifying transactions. It is important for Agents to seek competent guidance pertaining to the Fiduciary Rule so they can properly protect their practices.
Maureen James – Co-owner/Principal at Summit Compliance Group, LLC
This blog is for informational purposes only. It provides a brief overview of the new DOL Fiduciary Rule and does not list all requirements within the Rule, nor does it provide a complete description of the requirements that are listed herein. Neither DMI Marketing nor Summit Compliance Group, LLC provide legal advice. You should seek legal advice from your attorney. You are solely responsible for compliance with any federal, state, or local laws and regulations.
