The Department of Labor’s final definition of “investment advice” fiduciary regulation makes many more individuals fiduciaries under both the Employee Retirement Income Security Act and the Internal Revenue Code. Where for decades there was a five-part test that made a distinction between sales activity and ongoing, individualized investment advice that was relied upon by an investor as a primary basis for investment, it now tries to cover all persons who interact with an investor and make a recommendation for an investment in a way that a reasonable investor might think they are acting as a fiduciary. The regulation now encompasses both individual retirement accounts and single rollover transactions.
The effective date of the DOL fiduciary regulation is September 23, 2024. However, there is a yearlong phase-in-period in which covered individuals can receive compensation for sales from third parties, by complying with the impartial conduct standards and making a written acknowledgment that they are acting as a fiduciary under ERISA or the Internal Revenue Code.
The ERISA and Internal Revenue Code prohibited transaction rules are complicated. Once you are a fiduciary, you have even more prohibitions on your interactions with plans and accounts. The new regulation defining an investment advice fiduciary is very dense. The test is now based more on facts and circumstances than objective criteria and tries to align with whether a reasonable investor would think you were acting as a fiduciary. Consequently, there are a lot of questions about who might be a fiduciary, and the obligations that then follow.
Notably, where someone is acting as an investment advice fiduciary, they will need a prohibited transaction exemption (PTE) to collect related third-party commission payments. Without a PTE, there could be adverse tax consequences, including penalties to the provider and the account.
To help you understand the new fiduciary rule, Carlton Fields’ ERISA and financial services attorneys have created an Investment Advice Fiduciary Toolkit. The toolkit includes a decision matrix to help individuals self-assess whether their actions make them an investment advice fiduciary under ERISA or the Internal Revenue Code, as well as high-level checklists for the two most relevant PTEs to help you understand what compliance might look like with these exemptions.
