On April 23, 2024, the Department of Labor (the “DOL”) issued a final regulation (the “Final Rule”) that describes the circumstances under which a person will be considered a fiduciary for purposes of the Employee Retirement Income Security Act of 1974 (ERISA) and related excise tax provisions of the Internal Revenue Code as a result of providing investment advice with respect to assets of an ERISA-covered employee benefit plan (an “ERISA plan”) or individual retirement account (IRA).[1] The Final Rule expands both the types of investment recommendations that constitute investment advice as well as the circumstances under which persons providing such advice will be subject to fiduciary requirements. This is the DOL’s third attempt to revise the current regulatory definition of investment advice fiduciary, which was originally issued in 1975 (the “1975 Rule”). A proposed rule issued in 2010 was subsequently withdrawn in the face of strong opposition by the financial community, and a final rule issued in 2016 (the “2016 Rule”) was struck down two years later by a federal appeals court.

The regulatory changes reflected in the Final Rule may significantly impact brokerage firms, insurance companies, and other financial institutions that make professional investment recommendations to investors, including ERISA plans and IRAs, on a regular basis as part of their business. Because investment advice fiduciaries are subject to prohibited transaction rules under ERISA and the Internal Revenue Code that prevent them from receiving commissions and other forms of transaction-based compensation in connection with investments they recommend, firms that operate on a commission model and will be considered investment advice fiduciaries under the Final Rule may need to make operational changes in order to satisfy the conditions for relief under a DOL prohibited transaction exemption.

In addition to issuing the Final Rule, the DOL amended a number of prohibited transaction exemptions (PTEs) that have been relied on by investment advice fiduciaries in order to receive transaction-based compensation.[2] As a result of these amendments, such fiduciaries would need to satisfy the conditions for relief under one of two prohibited transaction exemptions:

• Prohibited Transaction Exemption 2020-20 (PTE 2020-02), which provides relief for U.S. regulated financial institutions and related investment professionals that receive transaction-based compensation in connection with sales and purchases of securities, annuities, and other investments; and
• Prohibited Transaction Exemption 84-24 (PTE 84-24), which as amended would allow independent insurance agents to receive reasonable compensation in connection with the sale of insurance products, such as fixed annuities, that are exempt from securities laws.  The DOL’s amendments significantly modify the scope and conditions for relief under PTE 2020-02 and PTE 84-24.   

The Final Rule and prohibited transaction exemption amendments will take effect on September 23, 2024. In addition, there is one-year phase-in period under both PTE 2020-02 and PTE 84-24 during which only certain conditions for relief will apply.

Revised definition of investment advice fiduciary

Under the 1975 Rule, a person that makes recommendations to an ERISA plan or IRA investor as to the advisability of investing in, purchasing, or selling securities or other property, and receives a fee or other compensation for such advice, will be considered a fiduciary if (1) such advice is furnished to the investor on a regular basis and (2) there is a mutual agreement, arrangement, or understanding between the adviser and the investor (or another fiduciary with respect to the investor) that the advice furnished will serve as a primary basis for investment decisions with respect to the investor’s assets and that the advice will be individualized based on the particular needs of the investor. 

The test set forth in the 1975 Rule limited fiduciary protections for ERISA plan and IRA investors in a number of ways. Because of the “regular basis” requirement, investment advice furnished on a one-time basis would not be considered fiduciary advice even if the advice related to a transaction that involved a significant portion of the investor’s assets. The “mutual agreement” requirement enabled advisers to avoid fiduciary status by including clauses disclaiming fiduciary status in customer agreements. And due to the “primary basis” requirement, it was unclear whether fiduciary protections would apply to arrangements in which an investor engaged multiple advisers to advise on different aspects of an investment transaction. The DOL further limited the reach of the 1975 Rule when it determined, in a 2005 advisory opinion, that a recommendation to take a distribution of assets from an ERISA plan did not constitute investment advice under the rule. Although the opinion was later withdrawn, subsequent efforts by the DOL to bring rollover advice within the scope of the 1975 Rule were successfully challenged in court. The Final Rule addresses each of the limitations of the 1975 Rule. 

Under the Final Rule, a person will be considered an investment advice fiduciary if:

1. such person recommends any securities transaction or other investment transaction or investment strategy to a retirement investor;
2. the recommendation is provided for a fee or other compensation; and
3. either:

A. the person, either directly or indirectly (including through or together with an affiliate) makes professional investment recommendations 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 was based on, and reflected the application of professional or expert judgment to, the investor’s particular needs or individual circumstances, and may be relied upon by the investor as intended to advance the investor’s best interest; or

B. the person represents or acknowledges that they are acting as fiduciary under ERISA or the Internal Revenue Code, or both, with respect to the recommendation.

The Final Rule dispenses with the “mutual agreement” and “primary basis” requirements found in the 1975 Rule. In addition, the rule shifts the focus of the “regular basis” requirement away from the relationship between the adviser and the retirement investor to the adviser’s business, extending fiduciary protections to one-time recommendations where each component of the fiduciary definition has been satisfied.   

In the preamble to the Final Rule, the DOL described the test under (3)(A) as an objective facts and circumstances test under which fiduciary status will be determined based on the parties’ interactions and not on whether specific representations have been made by the adviser. The DOL noted that the use of titles, credentials and marketing slogans that are indicative of a trusted adviser relationship would be a relevant consideration under this test, but would generally not be dispositive. The Final Rule provides that written disclaimers of fiduciary status are not controlling to the extent inconsistent with the adviser’s other communications and interactions with the retirement investor or with applicable state or federal law requirements. The DOL explained in the preamble that the Final Rule’s disclaimer provision extended not just to broad disclaimers of fiduciary status but also to disclaimers of specific conditions set forth in the fiduciary definition. The DOL also noted that disclaimers from a broker-dealer or investment adviser would generally be ineffective to the extent they were inconsistent with their obligations under securities laws, including fiduciary obligations under the SEC Regulation Best Interest.

Investment recommendations

The types of investment recommendations that are covered under the Final Rule include not only recommendations as to the advisability of purchasing or selling securities or other investment property, but also recommendations as to investment policies or strategies, recommendations as to the selection of other persons to provide investment advice or investment management services, and recommendations with respect to rolling over, transferring or distributing assets from an ERISA plan or IRA. The term “investment property” does not include insurance policies without an investment component.

In the preamble to the Final Rule, the DOL noted that the determination of whether a recommendation has been made would be “a threshold element in establishing the existence of fiduciary investment advice,” and that, consistent with the treatment of recommendations under the SEC Regulation Best Interest, such determination would be based on an objective inquiry that is focused on whether there has been a “call to action.”[3] Under the Final Rule, investment advice does not include the provision of investment information or education, without an investment recommendation. In addition, as explained in the preamble, a mere sales pitch that does not reflect any consideration of an investor’s particular circumstances would not be treated as fiduciary investment advice. 

Retirement investors

As defined under the Final Rule, the term “retirement investor” includes an ERISA plan, plan participant, or beneficiary, an IRA, IRA owner, or beneficiary, and any fiduciary that has discretionary authority or control with respect to the management of an ERISA plan or IRA or the investment of its assets. The term does not include an investment advice fiduciary and therefore an investment recommendation made to an investment advice fiduciary will not be considered fiduciary investment advice. The DOL declined requests to exclude financially sophisticated investors from the definition of “retirement investor.” However, the DOL did note in the preamble that it would be appropriate to consider a retirement investor’s financial sophistication in evaluating whether a reasonable investor “in like circumstances” would rely on an investment recommendation as intended to advance the investor’s best interest.

Fees for investment advice

Under the Final Rule, a person is considered to provide investment advice “for a fee or other compensation” if such person or any affiliate either (i) receives an explicit fee or compensation for the advice, from any source, or (ii) receives any other fee or compensation, from any source, in connection with or as a result of the recommended investment transaction or provision of investment advice. A fee or compensation is considered to be paid in connection with or as a result of a recommended investment transaction if the fee or compensation would not have been paid but for the recommended transaction or the provision of the advice, or if the adviser’s eligibility for the fee or compensation, or any portion thereof, is based on whole or in part on the recommended transaction or the provision of the advice. The Final Rule provides specific examples of transaction-based fees and compensation, including commissions, loads, finder’s fees, revenue sharing payments, marketing or distribution fees, mark ups or mark downs, payments for shelf space, and expense reimbursements.     

Application of final rule to certain communications

The DOL declined requests to carve out certain communications from the scope of the Final Rule, as it had in the 2016 Rule. In the preamble to the Final Rule, however, the DOL addressed the application of the Final Rule to the following types of communications:

• “Hire Me” Communications: The DOL noted that investment professionals could tout their own services and provide generalized information – including information on industry trends, performance history, and the quality of their services – without being deemed investment advice fiduciaries. However, to the extent “hire me” communications included investment recommendations, those recommendations would need to be evaluated separately under the Final Rule.
• Platform Provider Communications: The DOL noted that if the communications between a platform provider and a retirement investor included a covered recommendation – such as a list of investments identified as having been selected for and appropriate for the retirement investor – fiduciary status would attach if the other parts of the Final Rule were satisfied. However, the DOL confirmed that platform providers who identify investment alternatives using objective third-party criteria in order to assist a plan fiduciary in selecting and monitoring investment alternatives would not be viewed under the Final Rule as making an investment recommendation. The DOL also noted that the same analysis would apply to communications in connection with the marketing of a pooled employer plan.
• HR Communications: The DOL noted that the Final Rule’s reference to “professional” investment recommendations was intended to provide certainty that fiduciary status would not attach to ordinary communications between human resources personnel and plan participants or to other interactions between plan participants and employees of a plan sponsor who are not investment professionals.
• Call Center Communications: The DOL noted that, absent an acknowledgement of fiduciary status, call center personnel could provide investment-related information to a retirement investor that is not based on the investor’s particular needs or individual circumstances without fiduciary status attaching. 
• Swap Counterparty Disclosures: The DOL confirmed that the disclosures that swap counterparties are required to make to ERISA plans pursuant to provisions of the Dodd-Frank Act would not constitute investment recommendations under the Final Rule. However, the DOL also noted that a swap counterparty could become an investment advice fiduciary if, in addition to providing mandatory disclosures, it chose to make specific investment recommendations.

Amendments to prohibited transaction exemptions

In connection with the issuance of the Final Rule, the DOL amended several prohibited transaction exemptions to eliminate relief for investment advice fiduciaries, including:

• Prohibited Transaction Exemption 86-128, under which investment advice fiduciaries and their affiliates had been permitted to receive brokerage commissions for effecting recommended securities transactions; and
• Prohibited Transaction Exemption 77-4, under which investment advice fiduciaries and their affiliates had been permitted to receive advisory fees and certain ancillary fees from mutual funds in connection with recommended investments in such funds. 

The exemptive relief that investment advice fiduciaries need in order to receive commissions and other transaction-based compensation continues to be available under PTE 2020-02 and PTE 84-24. But these exemptions were also amended, resulting in significant changes to the scope and conditions for relief.

Prohibited Transaction Exemption 2020-02

PTE 2020-02 is the broader of the two exemptions, providing relief for investment advice fiduciaries that are “financial institutions,” including U.S. regulated investment advisers, banks, insurance companies, and broker-dealers, as well as individual “investment professionals” that are employees, independent contractors, agents, or representatives of a financial institution. The relief provided under PTE 2020-02 for the receipt of transaction-based compensation by financial institutions, related investment professionals and affiliated parties in connection with sales and purchases of investment products to and from retirement investors is subject to the following conditions:

• the financial institution and investment professional must comply with “impartial conduct standards,” under which they must satisfy a duty of care and a duty of loyalty in connection with the furnishing of investment advice and are prohibited from (i) receiving more than reasonable compensation in connection with the recommended transactions and (ii) making materially misleading statements to retirement investments about the recommended transactions;
• the financial institution and investment professional must provide the retirement investor with a written acknowledgement of their fiduciary status;
• the financial institution and investment professional must satisfy certain disclosure requirements, including providing written descriptions of the services to be provided, any material conflicts of interest and the reasons for any rollover recommendation;
• the financial institution must establish, maintain, and enforce written policies and procedures that are prudently designed to ensure that the financial institution and its investment professionals comply with the impartial conduct standards; and
• the financial institution must conduct retrospective reviews, at least annually, that are reasonably designed to detect and prevent violations of, and achieve compliance with, the impartial conduct standards and the financial institution’s written policies and procedures.

The DOL’s amendments to PTE 2020-20 include expanded relief for transactions where the financial institution acts as principal, purchasing, or selling for its own account. As originally granted, the exemption limited relief to riskless principal transactions and certain covered principal transactions. As amended, PTE 2020-20 provides relief for all purchases and sales of investment products, regardless of whether they are effected on a principal or agency basis. Exemptive relief has also been extended to transactions resulting from fiduciary investment advice furnished pursuant to robo-advice arrangements.

The amendments also expand the circumstances under which a financial institution or investment professional would become ineligible to rely on PTE 2020-20. As originally granted, a financial institution or investment professional would become ineligible to rely on PTE 2020-20 for a period of ten years following the conviction of the financial institution (or a controlled group affiliate) or the investment professional for a crime described in Section 411 of ERISA and arising out of the financial institution’s or investment professional’s provision of investment advice to retirement investors. As amended, PTE 2020-20 provides for ineligibility following the conviction of the financial institution (or any controlled group affiliate) or investment professional for any one of a much longer list of disqualifying U.S. crimes, or following conviction in a foreign court for a substantially equivalent foreign crime. Ineligibility would also result from a finding or determination, set forth in a final judgment or court-approved settlement in a criminal or civil court proceeding brought by the DOL or another federal or state regulator, that the financial institution (or any controlled group affiliate) or investment professional has:

• engaged in a systematic pattern or practice of conduct that violates the conditions of the exemption;
• intentionally engaged in conduct that violates the conditions of the exemption;
• engaged in a systematic pattern or practice of failing to correct or report non-exempt prohibited transactions involving investment advice or failing to pay resulting prohibited transaction excise taxes; or
• provided materially misleading information to the DOL or other federal or state regulators in connection with the conditions of the exemption.

The amended exemption includes a revised transition period provision under which a financial institution or investment professional that becomes ineligible may continue to rely on PTE 2020-02 for a period of up to twelve months. The transition period is designed to provide additional time for financial institutions and investment professions to plan for the loss of exemptive relief, develop alternative approaches to complying with the prohibited transaction rules under ERISA and the Internal Revenue Code, and to apply to the DOL for an individual prohibited transaction exemption.  

Other noteworthy changes to PTE 2020-02 include:

• revising the fiduciary acknowledgement requirement to clarify that financial institutions and investment professionals must clearly and unconditionally acknowledge that they are acting as fiduciaries under ERISA, the Internal Revenue Code, or both, with respect to their investment recommendations;
• revising the disclosure requirements to more closely track disclosure requirements under the SEC Regulation Best Interest;
• narrowing the rollover disclosure requirement so that it only applies to recommendations to roll over assets held in an ERISA plan;
• adding provisions that allow for the correction of good faith errors or omissions in required disclosures
• requiring financial institutions to furnish copies of their written compliance policies and procedures to the DOL within 30 days following a request;
• revising the retrospective review requirement to address reporting and payment of excise taxes resulting from non-exempt prohibited transactions identified in the review; and
• providing targeted exemptive relief for financial institutions that provide fiduciary investment advice in connection with responding to a request for proposal to provide investment management services to an ERISA plan.

Prohibited Transaction Exemption 84-24

The DOL’s amendments to PTE 84-24 significantly limit the relief available for investment advice fiduciaries. As originally granted, PTE 84-24 provided exemptive relief that enabled insurance agents, brokers or pension consultants that were deemed investment advice fiduciaries to receive sales commissions from an insurance company in connection with the sale of annuity contracts to purchasers using assets of ERISA plan or IRA. The exemption also provided relief that enabled principal underwriters of registered investment companies that were deemed investment advice fiduciaries to receive sales commissions in connection with the sale of investment company-issued securities to purchasers using assets of an ERISA plan or IRA. As amended, relief is available only for investment advice fiduciaries that are “independent producers” and only for the receipt of compensation in connection with the sale to retirement investors of annuity contracts or other insurance products that are not considered securities under Federal securities laws, which would include fixed annuities but not variable annuities or certain indexed annuities. While the compensation that an independent producer may receive is no longer limited to sales commissions, all compensation received by the independent producer must be reasonable. The term “independent producer” is defined in the amended exemption as a person or entity that is licensed under state law to sell, solicit, or negotiate insurance contracts, including annuities, and which sells to retirement investors products of multiple insurance companies, provided such person either (i) is not employed by an insurance company or (ii) is a statutory employee of an insurance company that has no financial interest in the covered transaction.

In addition to limiting the relief available to investment advice fiduciaries, the DOL’s amendments to PTE 84-24 impose significant new conditions on that relief. As originally granted, PTE 84-24 contained comparatively few conditions for relief. But as amended, PTE 84-24 incorporates most of the conditions for relief found in PTE 2020-02, including requirements that the independent producer comply with impartial conduct standards in connection with the provision of investment advice, acknowledge its fiduciary status in writing and provide certain written disclosures to retirement investors, and provisions rendering independent producers ineligible to rely on the exemption as a result of criminal convictions or other misconduct. For independent producers, a key difference between PTE 84-24 and PTE 2020-02 is that under PTE 84-24, an independent producer is required to inform retirement investors of their right to request additional information regarding cash compensation. If a retirement investor makes this request, the independent producer must provide a reasonable estimate of the cash compensation it will receive and describe whether the cash compensation will be provided through a one-time payment or multiple payments. 

An insurance company whose products are recommended and sold by independent producers in reliance on PTE 84-24 is required to establish, maintain and enforce written policies and procedures for the review of each recommendation that are prudently designed to ensure compliance with the impartial conduct standards. In the preamble to the amended PTE 84-24, the DOL noted that insurance companies could satisfy the policies and procedures requirement by “creating oversight and compliance systems through contracts with insurance intermediaries,” including independent marketing organizations, field marketing organizations and brokerage general agencies.[4] Insurance companies are also required to conduct retrospective reviews, at least annually, of each independent producer that are reasonably designed to detect and prevent violations of, and achieve compliance with, the impartial conduct standards and the insurer’s written policies and procedures. However, the amended exemption provides that an insurance company is not required to supervise an independent producer’s recommendations of other insurer’s products. 

Unlike under PTE 2020-02, an insurance company is not required to acknowledge its fiduciary status in writing or otherwise assume fiduciary responsibility for the recommendations of its products by independent procedures. For this reason, the DOL declined to extend the relief afforded to independent producers under PTE 84-24 to the insurance companies whose products were being sold. The amended exemption states that an insurance company will not necessarily become a fiduciary merely by complying with the exemption’s conditions. But in the preamble to the amended exemption, the DOL cautioned that insurance companies selling products through independent producers could still become investment advice fiduciaries through other actions they take. In such event, the DOL noted that an insurance company would need to rely on PTE 2020-02 for exemptive relief.

The amendments to PTE 2020-02 and PTE 84-24 are effective as of September 23, 2024, and will apply to investment advice furnished on or after that date. However, both amended exemptions provide for a one-year phase-in period during which the only conditions that need to be satisfied are the conditions relating to compliance with impartial conduct standards and written acknowledgement of fiduciary status.

Key Takeaways

Financial institutions and investment professionals that have been able to avoid fiduciary status under the 1975 Rule when making investment recommendations to retirement investors may find it far more difficult to do so under the Final Rule. Even with the delayed effective date for the Final Rule, financial institutions that operate on a commission model and will now be deemed investment advice fiduciaries will have limited time to build compliance structures needed to ensure that they and their related investment professionals can meet the conditions for relief under a prohibited transaction exemption. Although there are similarities between the impartial conduct standards imposed under PTE 2020-02 and PTE 84-24 and the conduct standards imposed under the SEC Regulation Best Interest and state insurance laws based on the National Association of Insurance Commissioner’s annuity suitability “best interest” model regulation, compliance structures developed for those regimes may need to be revised to address requirements specific to the impartial conduct standards. In addition, financial institutions currently relying on PTE 2020-02 or PTE 84-24 will also face significant challenges in responding to the changes made by the DOL’s amendments. Further complicating matters is the ever present risk of litigation. As noted above, the 2016 Rule was successfully challenged in court, and legal challenges to the Final Rule appear all but certain.