Final DOL Investment Advice Fiduciary Rule Casts a Broader Fiduciary Net

On April 25, 2024, the Department of Labor (DOL) published its “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” a package of finalized regulations and amendments to several advice-related prohibited transaction exemptions (PTEs), including PTE 2020-02 and 84-24, as well as others. The final rule defines when an entity or person is a fiduciary because of providing advice for a fee to a “retirement investor.” The final rule, as well as the amended PTEs, are effective September 23, 2024. Both amended PTEs 2020–02 and PTE 84–24 include a one-year transition period after their effective dates under which parties must comply only with the “Impartial Conduct Standards” and provide a written acknowledgment of fiduciary status for relief under these PTEs. Filings of lawsuits challenging the rule have begun.

The final regulations define retirement investors as retirement plans, plan sponsors, plan participants, beneficiaries, IRAs, IRA owners and beneficiaries, plan fiduciaries with discretionary authority, as well as Health Savings Accounts. Under the DOL’s final rule, a person or entity (provider) will be an investment advice fiduciary, subject to ERISA’s standard of care, loyalty and prudence if the following are true. The provider

1. Makes a professional investment recommendation to a retirement investor;

2. Receives a fee or other compensation for the recommendation, and

3. Holds itself out as a trusted adviser by

4. Specifically stating that it is acting as an ERISA fiduciary; or

5. Making the recommendation in a way that would indicate to a reasonable investor that it is acting as a trusted adviser making individualized recommendations based on the investor's best interest.

Under the DOL’s old fiduciary rules (i.e., the Five-Part Test), a person/entity was a fiduciary if they satisfied all the following requirements:

1. Renders advice to an investor as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing, or selling securities or other property;

2. On a regular basis;

3. Pursuant to a mutual agreement, arrangement, or understanding with the investor that;

4. The advice will serve as a primary basis for investment decisions; and

5. The advice is individualized based on the particular needs of the investor.

The new fiduciary advice test

• Changes the “regular basis” rule to one that simply requires the provider to be in the business of giving professional investment advice on regular basis to its clients. Therefore, someone in the “investment advice business” would satisfy this requirement even if the advice in question was a one-off (e.g., a one-time recommendation to take a distribution and/or complete a rollover).

• Focuses on the advisee’s reliance on the adviser’s recommendation (i.e., the advice need only be, “under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation is based on a review of the retirement investor’s particular needs or individual circumstances …, etc.”). And providing that disclaimers by the adviser “will not control to the extent they are inconsistent with the person’s oral or other written communications, marketing materials, applicable State or Federal law, or other interactions with the retirement investor.”

• Eliminates the old rule’s “primary basis” language, instead requiring only “that the recommendation is made under circumstances that would indicate … that the recommendation … may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.”

Under the new definition of advice fiduciary, some providers, who were not fiduciaries under the prior rules, may become one. For example, even one-time recommendations related to a rollover could be categorized as fiduciary advice. If an advice fiduciary receives compensation that creates a conflict of interest, the transaction may be prohibited and, therefore, would require the use of a PTE to proceed legally. The final rule package contains amendments to PTEs that are available for the management of conflicts of interest, two of which are PTE 2020-02 and 84-24. Both exemptions require that investment recommendations adhere to “Impartial Conduct Standards” explained next.

Amended PTE 2020-02

PTE 2020-02 allows a broad array of investment advice fiduciaries to receive compensation that would otherwise be prohibited if they comply with the following conditions.

• The provider meets the “Impartial Conduct Standards,” which means 1) providing advice in the retirement investor’s best interest, 2) charging only reasonable compensation, and 3) making no materially misleading statements.

• With respect to rollovers, prior to the rollover, the provider produces documentation of the reasons a recommended rollover is in the retirement investor’s best interest.

• The affiliated financial institution acknowledges fiduciary status and describes the services it provides and material conflicts of interest.

• The affiliated financial institution adopts policies to ensure compliance with the Impartial Conduct Standards and conducts a “retrospective review” of compliance, certified by a senior executive officer.

Amended PTE 84-24

PTE 84-24 is tailored for use by independent insurance agents who recommend annuities issued by more than one insurance company. The DOL added a new section to PTE 84-24 to provide relief for independent insurance agents providing fiduciary advice, subject to conditions like those in PTE 2020-02.

However, unlike PTE 2020-02, the insurance company selling its products through the independent agent is not required to provide a fiduciary acknowledgment and is not treated as a fiduciary merely because it exercised oversight responsibilities over independent agents. Instead, the independent insurance agent is required to acknowledge its fiduciary status, and the insurance company is required to exercise supervisory authority over the independent agent about an agent's recommendation of the insurance company's own products.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. The material presented was created by RPAG. Securities, investment advisory, and financial planning services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC (www.sipc.com). Supervisory Office: 16 Campus Blvd, Newtown Square, PA 19073. Cadence Financial Management, LLC is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies. ACR# 6743430 07/24