On April 25, 2024, the U.S. Department of Labor (DOL) released regulations redefining who is an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (Code), along with amendments to prohibited transaction exemptions (PTEs) available to investment advice fiduciaries. The regulations and amended PTEs are intended to protect retirement investors by requiring trusted advice providers to follow high standards of care and loyalty when they make investment recommendations.

This is the last Warner eAlert covering the final fiduciary rule. In our first eAlert, we summarized the final regulation defining “fiduciary investment advice.” In the second eAlert, we covered changes made to PTE 2020‑02 (Amended PTE 2020-02). In this eAlert, we will summarize older but still commonly used PTEs amended as part of the final fiduciary rulemaking, PTEs 84-24, 75-1, 77-4, 80-83, 83-1 and 86-128 (the first two digits indicate the year issued).

Background
ERISA and the Code include broad statutory prohibited transactions that categorically forbid plan fiduciaries from engaging in transactions involving conflicts of interest deemed likely to injure the retirement plan, plan participants and/or tax-qualified account holders (IRAs, Archer MSAs, HSAs and Coverdell education savings accounts). ERISA gives the DOL broad administrative authority to issue prohibited transaction exemptions tailored to specific circumstances. The DOL also has broad statutory authority to interpret the “fiduciary” definition and related prohibited transaction provisions of ERISA and the Code, subject to generally applicable administrative rulemaking standards and procedures.

Amended PTE 84-24: Insurance Agents and Pension Consultants
While Amended PTE 2020-02 is available for almost any fiduciary provider, the conditions in Amended PTE 84-24 are an alternative that allows independent insurance producers who work with multiple insurance companies to receive commissions from an insurance company with respect to the sale of non-security annuities to retirement investors. These changes impose significant new supervisory obligations on insurance companies that will greatly impact their product distribution models. These mandated changes will require considerable lead-time and resources for implementation.

PTE 84-24 is not available to insurance agents who are employees of an insurance company, commonly referred to as captive agents. Insurance companies and their captive agents instead must comply with Amended PTE 2020‑02, just as banks, broker-dealers, investment advisers, mutual fund companies and similarly situated financial institutions rely on Amended PTE 2020-02 with respect to recommendations of their proprietary products.

Applicability Date. Amended PTE 84-24 applies to transactions resulting from investment advice provided on or after September 23, 2024 (Applicability Date). For transactions completed before the Applicability Date, the prior version of PTE 84-24 will remain available for all independent producers and insurers that currently rely on the exemption. Amended PTE 84-24 will not apply to any transactions that occurred before the Applicability Date. Helpfully, there is a phase-in period.

Phase-in Period. To provide sufficient time to fully comply with the revised conditions, Amended PTE 84‑24 includes a one-year phase-in period beginning September 23, 2024. During this one-year period, independent producers may receive reasonable compensation if they comply with the Impartial Conduct Standards and the fiduciary acknowledgment requirements, both of which are discussed below. This one‑year phase-in period is the same as allowed under Amended PTE 2020‑02.

Independent Producer. Key terms are defined in Amended PTE 84-24. An “independent producer” means a person or entity licensed under the laws of a state to sell, solicit or negotiate insurance contracts, including annuities, and that sells to a retirement investor the products of multiple insurance companies and (1) is not an employee of an insurance company or (2) is a statutory employee of an insurance company but has no financial interest in the covered transaction.

Retirement Investors. Another key term, “retirement investor,” is broadly defined to mean a plan, plan participant or beneficiary, IRA, IRA owner or beneficiary, plan fiduciary and IRA fiduciary. (Note: The term “IRA” includes Archer MSAs, HSAs and Coverdell education savings accounts.)

Relief Provided. Existing PTE 84-24 provides exemptive relief for covered transactions, which include receipt of commissions and purchase of an insurance or annuity contract with plan/IRA assets. Amended PTE 84-24 no longer provides relief for transaction-based sales and compensation resulting from investment advice provided to retirement investors. However, relief remains available under those provisions for “non‑advice” transactions (i.e., sales to customers that are not retirement investors).

Independent producers will be permitted to engage in the following transactions, including as part of a rollover (plan‑to-IRA and IRA-to-IRA), resulting from nondiscretionary investment advice provided to retirement investors:

• The receipt, directly or indirectly, of reasonable compensation.
• The sale of a non-security annuity contract or other insurance product that does not meet the definition of “security” under federal securities laws.

Exemption Conditions – Independent Producers. Amended PTE 84-24’s new conditions are imposed on both the independent producer and the insurance company. The exemption is subject to specified conditions that are similar to the conditions included in Amended PTE 2020-02, but it has been tailored to address the specific conflicts that can arise when independent producers receive transaction-based commissions and other compensation resulting from investment advice recommending annuities to retirement investors. The independent producer must satisfy all of the following conditions:

• Be authorized to sell annuities from two or more unrelated insurers.
• Adhere to the following “Impartial Conduct Standards”:
  • Provide advice and exercise sound judgment in the same way that knowledgeable and impartial professionals would in similar circumstances (Care Obligation).
  • Never place their own interests ahead of the retirement investor’s interests or subordinate the retirement investor’s interests to their own (Loyalty Obligation).
  • Charge no more than reasonable compensation.
  • Avoid making misleading statements (written or oral) about the recommended transaction and other relevant matters.
• Acknowledge their fiduciary status in writing to the retirement investor.
• Provide a written statement of the Care Obligation and Loyalty Obligation to the retirement investor.
• Disclose all material facts relating to the scope and terms of the relationship to the retirement investor, including:
  • All material fees and costs.
  • Notice of the retirement investor’s right to request additional information regarding cash compensation.
  • Upon request of the retirement investor, a reasonable estimate of the cash compensation to be received (which may be stated as a range of amounts or percentages), and whether the cash compensation will be provided through a one-time payment or through multiple payments (e.g., trail commissions), including the frequency and amount of the payments (which also may be stated as a range of amounts or percentages).
  • The type and scope of services, including any limitations on the recommendations (such as products the independent producer is licensed and authorized to sell, any limits on the range of insurance products recommended and identity of the specific insurers and insured products available).
• Disclose all material conflicts of interest to the retirement investor.
• Consider and document the basis for the determination to recommend the annuity to the retirement investor and provide the documentation to both the retirement investor and the insurer.
• Consider and document the basis for rollover recommendations (plan-to-IRA and IRA-to-IRA) and provide the documentation to both the retirement investor and the insurer.

Exemption Conditions – Insurer. Insurance companies will be significantly impacted by Amended PTE 84-24’s new supervisory obligations. The insurer must adopt policies and procedures for its review of each independent producer’s recommendation before an annuity is issued to a retirement investor. These policies and procedures must be prudently designed to ensure compliance with the DOL’s Impartial Conduct Standards and other exemption conditions. These policies and procedures must:

• Mitigate conflicts of interest to the extent that a reasonable person reviewing them as a whole would conclude they do not create an incentive for the independent producer to place their interests, or those of the insurer or any affiliate, ahead of the interests of the retirement investor. For example, conflicts created by compensation breakpoints, incentive-based bonuses and sales‑based rewards must be eliminated or mitigated.
• Include a prudent process for determining whether to authorize an independent producer to sell (or continue to sell) the insurer’s annuity contracts to retirement investors and for taking action to protect retirement investors from independent producers who fail to adhere to the Impartial Conduct Standards, or who lack the necessary education, training or skill. A prudent process would include a review of customer complaints, disciplinary history and regulatory actions concerning the independent producer, as well as a review of the independent producer’s training, education and conduct with respect to the insurer’s own products.
• Document the basis for its initial determination that it can rely on the independent producer to adhere to the Impartial Conduct Standards and review this determination at least annually.

The insurer also must conduct an annual retrospective compliance review with written reports given to both the insurer’s senior management and to each independent producer during the review period. The review must include each independent producer’s rollover recommendations and required rollover disclosures in each transaction. Insurers, however, may rely on a sampling of each independent producer’s transactions to conduct their retrospective reviews as long as any sampling is designed to identify potential violations, problems and deficiencies that need to be addressed.

The insurer’s report to each independent producer must describe the review methodology and its results with respect to that producer’s retirement investor transactions. The review must identify any prohibited transactions that did not qualify for Amended PTE 84-24’s exemptive relief and instruct the independent producer to:

• Correct the prohibited transactions.
• Report the transactions to the IRS on Form 5330.
• Pay the resulting excise taxes.
• Provide the insurer with a copy of the filed Form 5330 within 30 days after the form is due (including extensions).

While not directly stated in Amended PTE 84-24, it certainly is implied that any independent producer who fails to make any required corrections identified by an insurer should be removed as an authorized independent producer for that insurer’s products.

A consolidated written report covering the review of all independent producers’ transactions must be provided to a senior executive officer of the insurer. The senior executive officer must certify, annually, that:

• They have reviewed the report.
• The insurer has provided the required information on any prohibited transactions to the independent producer and has received the certification that the independent producer filed the Form 5300 timely.
• The insurer has established written policies and procedures.
• The insurer has a process in place to modify such policies and procedures.

The insurer must retain the written report, certification and supporting data for six years and provide such documentation to the DOL within 30 days of request.

Self-correction. A prohibited transaction will not occur due to a violation of Amended PTE 84-24 if these conditions are met:

• Either the independent producer has refunded any charge to the retirement investor, or the insurer has rescinded a mis-sold annuity, cancelled the contract and waived surrender charges.
• The correction occurs no later than 90 days after the independent producer learned of the violation or reasonably should have learned of the violation.
• The independent producer notifies the person(s) at the insurer responsible for conducting the retrospective review during the applicable review cycle and the violation and correction is specifically in the written report of the retrospective review.

Ineligibility. An insurer or independent producer is ineligible to rely on the relief provided by Amended PTE 84-24 if any of the following apply, and they have been:

• Criminally convicted by a U.S. federal or state court of certain felonies.
• Criminally convicted by a foreign court for equivalent crimes (excluding convictions that occur in foreign countries included on the Department of Commerce’s list of “foreign adversaries”).
• Found in a final judgment or court-approved settlement in a U.S. federal or civil court proceeding brought by the DOL, Department of Treasury, IRS, Department of Justice, state insurance regulator or state attorney general to have violated one or more of Amended PTE 84-24’s conditions.

An insurer or independent producer ineligible to rely on Amended PTE 84-24 may rely on an existing statutory or different class prohibited transaction exemption if one is available and all of its conditions have been satisfied, or they may request an individual prohibited transaction exemption from the DOL.

Exclusions. An independent producer, insurer or any affiliate who is a named fiduciary or plan administrator of an ERISA‑covered plan may not rely on Amended PTE 84-24 to provide investment advice to that ERISA-covered plan or its participants, unless the named fiduciary, plan administrator or their affiliate (1) is expressly authorized to do so by an independent fiduciary and (2) does not receive, and is not projected to receive, within its current federal income tax year, compensation or other consideration from the insurer, independent producer or an affiliate in excess of 2% of the fiduciary’s annual revenues based on its prior tax year.

No Investment Discretion. Exemptive relief under Amended PTE 84-24 is only available when an independent producer is providing nondiscretionary investment advice to the retirement investor, and that investor must make the investment decision. An independent producer providing discretionary advice as investment manager responsible for making the account’s investment decisions cannot rely on Amended PTE 84-24.

Recordkeeping. The independent producer must keep, for a period of six years following the covered transaction, records demonstrating compliance with Amended PTE 84-24 and make such records available to the extent permitted by law to any authorized employee of the DOL, Treasury Department or IRS.

Even though the DOL disclaims it is creating any private right of action against an insurer or independent producer for violating the conditions of these PTEs, these records will be subject to discovery in any civil litigation case filed against the insurer.

Amended PTEs 75-1 (Securities Transactions), 77-4 (Open-End Mutual Funds), 80‑83 (Reduction of Indebtedness), 83‑1 (Mortgage Pool Investment Trusts) and 86‑128 (Agency Transactions Directed by Fiduciaries)
The amendments to PTEs 75-1, 77-4, 80-83, 83-1 and 86-128 (collectively, the Mass Amendment) remove relief in those exemptions for the receipt of transaction-based compensation resulting from nondiscretionary investment advice provided to retirement investors. This means that when providing nondiscretionary investment advice to retirement investors, fiduciaries instead must rely on Amended PTE 2020-02 (or Amended PTE 84-24, if applicable) to receive otherwise prohibited compensation. As a result, these exemptions remain available only for recommendations made to investors who are not retirement investors.

The Mass Amendment is effective September 23, 2024.