• The Department of Labor issued a final release (the “Final Release”) which (1) finalized changes to its 1975 rule defining when institutions and individuals are providing fiduciary “investment advice” to plans that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) and/or Section 4975 of the Internal Revenue Code of 1986 (the “Code”), such as private sector retirement plans and individual retirement accounts (collectively “Plans”) and (2) makes changes to various prohibited transaction class exemptions (“PTCEs”).
• The Final Release will likely expand the situations in which market participants will be deemed to be “investment advice” fiduciaries under ERISA and/or the Code with respect to their interactions with Plans and makes changes to the requirements to comply with the PTCEs.
• While one or more financial services industry groups or firms may seek to engage in litigation to have the Final Release vacated, seek injunctive relief and/or advocate for review and disapproval under the Congressional Review Act, we note that it is unclear whether any such litigation or efforts will be successful. The changes made in the Final Release are generally effective September 23, 2024.
• Financial services firms should assess the potential impact of the Final Release in connection with their dealings with Plans.

On April 25, 2024, the Department of Labor (“DOL”) issued a release (the “Final Release”), which, among other things, finalized changes to the 1975 rule (the “1975 Rule”) defining when institutions and individuals (each a “Person”) are providing fiduciary “investment advice” to employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) and/or Section 4975 of the Internal Revenue Code of 1986 (the “Code”), such as private sector retirement plans and individual retirement accounts (“Plans”). The 1975 Rule set forth a five-part test (the “Five-Part Test”) to determine when a Person is considered a fiduciary to a Plan through the provision of investment advice (“Investment Advice”). The Final Release follows the DOL’s October 31, 2023 proposal (the “Proposal”) to change the 1975 Rule (along with important changes to several widely used prohibited transaction class exemptions (“PTCEs”)). The final changes to the 1975 Rule (the “2024 Fiduciary Rule”) and changes to the relevant PTCEs (the “Amended PTCEs”) are discussed in further detail below.

This OnPoint first highlights some initial views as to the potential practical impacts of the Final Release across specified industries. It then provides an executive summary of the 2024 Fiduciary Rule and changes to the PTCEs, with particular emphasis on PTCE 2020-02, and, to a lesser extent, PTCE 84-24. Finally, the OnPoint provides timelines for the implementation of the Final Release and the Amended PTCEs. The exhibits to this OnPoint include comparisons of the text of the 2024 Fiduciary Rule to each of the 1975 Rule and the Proposal, and similar comparisons of each of the Amended PTCEs.

It is worth noting that the 2024 Fiduciary Rule – like its multiple predecessor efforts over the past 14 years—is highly controversial. While one or more financial services industry groups or firms may seek to engage in litigation to have the Final 2024 Regulation vacated (as was done to the DOL’s fiduciary rule finalized in 2016 (the “2016 Fiduciary Rule”)), seek injunctive relief or advocate for review and disapproval under the Congressional Review Act, we note that it is unclear whether any such litigation or efforts will be successful.¹ We note in this regard, on May 2, 2024 the Federation of Americans for Consumer Choice, an insurance industry trade organization, along with several individual insurance agents and an insurance marketing organization, initiated litigation in the U.S. District Court for the Southern District of Texas seeking to enjoin the DOL from implementing, and to vacate, the 2024 Fiduciary Rule (and amended PTCE 84-24). For present purposes, however, this OnPoint proceeds on the basis that the Final Release will go into effect as scheduled.

SELECTED POTENTIAL COMMERCIAL IMPACTS.

The Final Release is voluminous, and final determinations of its potential commercial impacts will require appropriate study. Nevertheless, we offer the following initial reactions—subject to revision and clarification—as to what we believe would be the potential principal commercial impacts of the Final Release.

A. Broker-Dealers, Banks, Insurance Companies, Fund Complexes and Others.

• Firms Dealing with the High Net Worth Individual and Retail Plan Market.
  • Plan-to-IRA Rollover Recommendations. Firms that recommend rollovers from Plans to individual retirement accounts (“IRAs”) that do not currently rely on PTCE 2020-02 with respect to such recommendations may now need to rely on PTCE 2020-02.
  • Firms Not Adopting PTCE 2020-02. Firms that make recommendations to Plans in the retail market concerning any product or service (including but not limited to securities, commodities, fixed annuities, investment funds and managed accounts) and do not currently rely on PTCE 2020-02 may find it more difficult to avoid being classified as an Investment Advice fiduciary.
  • Advisory/Wrap Mandates Using Affiliated Mutual Funds. Firms that offer affiliated mutual funds in “wrap” or other advisory accounts to Plans in the retail market will no longer be able to rely on PTCE 77-4 in connection with any Investment Advice. PTCE 2020-02 will be the sole class exemption available for such transactions.
  • Firms Currently Relying on PTCE 2020-02 Will Need to Assess Beneficial Changes.
    • Removal of Coverage Restrictions on Principal Transactions. Principal transactions that had been excluded may now be covered, including those involving foreign issued bonds, initial offerings (including for closed-end registered funds) and foreign currency conversion. The DOL cautioned the need for “stringent compliance” and stressed that firms must “carefully address how they mitigate the inherent conflicts of interest.”
    • Specific Rollover Disclosure Not Required for IRA to IRA or Account to Account Rollovers/Transfers. Cost comparisons and rollover specific documentation requirements for IRA-to-IRA rollovers/transfers and account to account transfers (e.g., brokerage to advisory account transfers) will no longer be required.
    • Self-Correction. Reporting to the DOL on self-corrections associated with violations of PTCE 2020-02 will no longer be required. Also, there will be a 30-day correction period for disclosure errors in certain circumstances.
    • Robo-Advice. Robo-advice will be covered under PTCE 2020-02.
  • Firms Currently Relying on PTCE 2020-02 Will Need to Assess Potentially Burdensome Changes. For example:
    • New Disclosure Requirements. Amended PTCE 2020-02 requires an assertive fiduciary acknowledgment, additional disclosures such as a written statement of the “care obligation” and “loyalty obligation” standard (previously referred to as the “best interest” standard) and additional disclosures regarding the scope and terms of the Fiduciary relationship, associated fees and costs, type and scope of services, and any material facts relating to conflicts of interest.
    • Policies and Procedures. Amended PTCE 2020-02 explicitly provides that firms may not use quotas, bonuses, contests or similar actions or incentives that are intended (or that a reasonable person would conclude are likely) to result in recommendations that do not meet the “care obligation” or the “loyalty obligation”. Firms must also provide their policies and procedures to the DOL within thirty days of a request for production.
    • Retrospective Review. Amended PTCE 2020-02 requires a certification that the firm has filed or will file all excise tax returns and has paid or will pay excise taxes associated with any nonexempt prohibited transactions.
    • Expanded Disqualification Events. New eligibility requirements expand the situations in which a firm could become disqualified from relying on PTCE 2020-02 if it or an entity in its “controlled group” engage in certain crimes.
      • The expansion appears to move in the direction of recent changes to disqualifying events contained in the amendments to PTCE 84-14, also known as the “QPAM Exemption”.²
  • Special Considerations for Insurance Providers or Intermediaries under PTCE 84-24.
    • Amended PTCE 84-24 substantially limits coverage and will now only cover the provision of Investment Advice in connection with sales-related recommendations to “Independent Producers.” Insurers and their employees, career agents and any others that provide Investment Advice would need to instead rely on PTCE 2020-02 as their avenue for coverage.
    • Amended PTCE 84-24 eliminates the Proposal’s restrictions on eligible compensation, which will likely be beneficial to entities such as independent marketing organizations (“IMOs”) and field marketing organizations (“FMOs”) in the insurance business.

B. “Sell Side” Firms Dealing with the Institutional Plan Market. Investment banks, institutional broker-dealers, swaps dealers, futures commission merchants, and commercial banks will need to assess their direct and indirect interactions with Plan customers to reach a level of appropriate comfort that such interactions would not be at a material risk of being regarded as Investment Advice. It will be important to keep in mind the following for such assessments:

• The DOL expressly declined to offer a “sophisticated investor” or “institutional” exception as it did in the 2016 Fiduciary Rule
• Disclaimers of fiduciary status are not dispositive.

C. Investment Managers, Advisors and Alternative Fund Sponsors.

• Wholesaling and Model Providers. While the Proposal raised concerns that wholesalers and model providers could be regarded as Investment Advice fiduciaries with respect to the engagement in common sales and educational interactions with, and the provision of model portfolios to, intermediaries, about the potential for inadvertent Investment Advice fiduciary status, the Final Release is likely to provide greater comfort for such market participants engaging in such interactions.
• Pitching New Business to Plan Clients; Interactions with Intermediaries. Some firms may find that the language of the 2024 Fiduciary Rule could put pressure on and constrain some manager communications with Plan clients (or Plan alternative fund investors) including for pitches to new clients or existing client
• Advisory/Wrap Mandates Using Affilated Mutual Funds. Managers will no longer be able to use PTCE 77-4 for advisory mandates and will need to rely on PTCE 2020-02.
• Advisors Using Affiliated Broker-Dealers for Execution of Securities Transactions and Purchasing New Issues in Affiliated Underwritings. PTCE 2020-02 will be the sole class exemption for Investment Advice mandates. For the market participants that currently make use of exemptions when providing Investment Advice in connection with the purchase or sale of securities on an agency basis through an affiliate or certain agency cross transactions (PTCE 86-128), or for the purchase of securities in affiliated underwritings (PTCE 75-1, Part III), such exemptions will only be available for discretionary mandates.

EXECUTIVE SUMMARY OF CHANGES.

A. Changes to the Fiduciary Rule.

The 2024 Fiduciary Rule will likely expand the situations in which market participants will be deemed to be Investment Advice fiduciaries with respect to their interactions with Plans. We expect that this will be pronounced in the retail market. In addition to picking up one-time Investment Advice associated with Plan-to-IRA rollovers—a feature of the DOL’s 2020 “Final Interpretation” that has faced judicial challenge—the 2024 Fiduciary Rule will likely sweep into its ambit many ordinary course conversations that may have traditionally been regarded as “sales” or “education.”³

Instead of a Five-Part Test which was designed to delineate between sales and education on the one hand, and ongoing tailored investment advice which the parties agreed would be relied upon as a primary basis for the Plan’s investment decision on the other, the 2024 Fiduciary Rule focuses on capturing those persons who make investment recommendation where it is reasonable to presume that the recommendation comes from a relationship of trust and confidence. Under the 2024 Fiduciary Rule, a person will be treated as rendering Investment Advice where it makes an investment recommendation (a facts and circumstances “call to action”) to a “retirement investor” and where: (a) the person either makes professional investment recommendations to investors on a regular basis as part of its business and the recommendation is provided under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation (i) is based on a review of the retirement investor’s particular needs or individual circumstances, (ii) reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances and (iii) may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest; or (b) the person making the recommendation represents or acknowledges that it is acting as a fiduciary under Title I of ERISA and/or Title II of ERISA.

A “retirement investor” for these purposes is a Plan, Plan participant or beneficiary, IRA, IRA owner or beneficiary or a Plan fiduciary within the meaning of ERISA Section 3(21)(A)(i) (a person exercising discretionary authority or control over the management of a Plan or its assets) or ERISA Section 3(21)(A)(iii) (a person having discretionary authority or responsibility in the administration of a Plan). A “retirement investor” does not include a person who is a Plan fiduciary solely by rendering Investment Advice.

In addition, some selected high-level observations include:

• Objective Standard. The DOL indicates that the 2024 Fiduciary Rule changes the Proposal’s subjective standard (i.e., a recommendation is “made under circumstances indicating…”) into an objective standard (i.e., a recommendation “provided under circumstances that would indicate to a reasonable investor in like circumstances . . .). Nevertheless, important components of the Five-Part Test (e.g., the “regular basis,” “primary basis” and “mutual understanding” prongs) are removed.
• Disclaimers. The text of the 2024 Fiduciary Rule provides that written statements disclaiming fiduciary status “will not control to the extent they are inconsistent with the person’s oral or other written communications”.
• No Institutional Exception. Unlike the 2016 Fiduciary Rule, there is no formal “institutional exception” or “sellers’ carve out.”

B. Changes to PTCE 2020-02

PTCE 2020-02 is amended to:

• Remove restrictions on principal transactions and include robo-advice.
• Remove requirements for cost comparisons or documentation concerning IRA-to-IRA rollovers/transfers or account to account transfers.
• Remove the requirement for reporting self-correction for violations of PTCE 2020-02.
• Include new disclosure requirements, including a new “fiduciary” acknowledgment requirement that requires an assertive stance.
• Include a new 30-day correction provision for certain disclosure errors.
• Place greater emphasis on quotas, bonuses, and performance differentials.
• Require provision of PTCE 2020-02 policies and procedures to the DOL within thirty days of request.
• Mandate that the retrospective review include a certification that all excise tax returns have been filed or will be filed and all excise taxes have been paid with respect to nonexempt prohibited transactions.
• Broaden 10-year ineligibility requirements to include criminal convictions that, unlike current PTCE 2020-02 are not necessarily tied to the provision of Investment Advice, but which, in contrast to the Proposal, include “controlled group”
  entities instead of the Proposal’s broader “Affiliates” or the inclusion of non-prosecution agreements and deferred prosecution agreements (which are disqualifying events in recent amendments made to PTCE 84-14).

C. Changes to PTCE 84-24

In sum, the changes to PTCE 84-24:

• Substantially limit the availability of insurance providers to sell products and services when the individual or institution acts as an Investment Advice fiduciary unless the provider is an “Independent Producer”, thus effectively requiring compliance under PTCE 2020-02 for Investment Advice for all other market participants Depart from some of the limitations imposed by the Proposal associated with permissible compensation associated with the sale of such products by Independent Producers.

D. Changes to Other Exemptions.

• PTCE 77-4. PTCE 77-4 provides relief with respect to a Plan fiduciary’s decision to cause a Plan to invest in affiliated open-end U.S. registered mutual funds, subject to its conditions. The Final Release eliminates the ability to utilize PTCE 77-4 in Investment Advice relationships (but would retain PTCE 77-4 for discretionary mandates). PTCE 2020-02 would be the primary exemption in such cases.
• PTCE 86-128. PTCE 86-128 provides relief for commissions paid in respect of agency transaction in securities with or through an affiliated broker-dealer of the fiduciary, and also provides other relief for agency cross transactions where the non-Plan party to the transaction is not under the management or advisement of the fiduciary or any affiliate. The Final Release similarly restricts the use of PTCE 86-128 for discretionary mandates and leaves PTCE 2020-02 as the primary pathway of exemptive relief in such cases.
• PTCE 75-1. The Proposal would have eliminated coverage for mutual fund purchases between fiduciaries and Plans (including IRAs) under PTCE 75-1, “Part II (2)”. The Final Release did not adopt such changes to PTCE 75-1 “Part II(2)”. The Final Release does amend Part III (certain purchases of initial issuances in which the fiduciary or an affiliate is involved in the issuance’s placement or underwriting) and Part IV (certain select market-making transactions) of PTCE 75-1, to eliminate coverage for Investment Advice (but not investment management) relationships. The Final Release also makes changes to Part V of PTCE 75-1 to permit an Investment Advice fiduciary to receive reasonable compensation if it extends credit to Plans to avoid a failed securities transaction if it meets certain requirements.

E. Effective Date, Potential for Challenges and Conclusions.

• The changes made in the Final Release are effective September 23, 2024, which is 150 days after publication.
  • As of September 23, 2024, the new definition of fiduciary investment advice will apply, and fiduciaries will have to satisfy the impartial conduct standards and the fiduciary acknowledgment requirement in order to qualify for relief under the PTCEs.
  • The remaining conditions in PTCE 84-24 and PTCE 2020-02 are subject to a one-year phase in period, so compliance with those conditions would not be required until September 23, 2025.
  • The changes to PTCEs 77-4, 86-128 and 75-1 are effective September 23, 2024.

The Final Release is voluminous, and as with other DOL efforts on the same subject over the past 13 years, potentially broad. This OnPoint only highlights a number of initial reactions as to market impacts. If the past is any guide to the present, it would not be surprising that an effort of this magnitude would have a number of important—but as of yet—unforeseen impacts to financial services providers and Plans alike.

The exhibits to this OnPoint of comparisons of the text of the 2024 Fiduciary Rule to each of the 1975 Rule and the Proposal, and similar comparisons of each of the Amended PTCEs can be found in the appendix below.

Appendix

1975 Fiduciary Rule and 2024 Final Rule
2023 Proposed Fiduciary Rule and 2024 Final Rule
PTE 75-1 (Current) and PTE 75-1 (2024)
PTE 75-1 (Proposed) and PTE 75-1 (2024)
PTE 77-4 (Current) and PTE 77-4 (2024)
PTE 77-4 (Proposed) and PTE 77-4 (2024)
PTE 80-83 (Current) and PTE 80-83 (Final)
PTE 80-83 (Proposed) and PTE 80-83 (Final)
PTE 83-1 (Current) and PTE 83-1 (Final)
PTE 83-1 (Proposed) and PTE 83-1 (Final)
PTE 84-24 (Current) and PTE 84-24 (2024)
PTE 84-24 (Proposed) and PTE 84-24 (2024)
PTE 86-128 (Current) and PTE 86-128 (2024)
PTE 86-128 (Proposed) and PTE 86-128 (2024)
PTE 2020-02 (Current) and PTE 2020-02 (2024)
PTE 2020-02 (Proposed) and PTE 2020-02 (2024)

1. We also note that the Final Release also includes severability provisions which may or may not come into play.
2. 89 FR 32302 (April 25, 2024).
3. Am. Sec. Ass'n v. United States Dep't of Labor, 8:22-cv-330-VMC-CPT (M.D. Fla. Feb. 13, 2023).