The New Fiduciary Rule (36): Confusion about Annual Retrospective Reviews

Key Takeaways

  • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23 one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the protection afforded by a prohibited transaction exemption will be needed.
  • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
  • The PTE that may be used in all cases, and must be used in most cases, is PTE 2020-02. However, independent insurance agents may use PTE 84-24.

The Department of Labor has issued its final regulation defining fiduciary status for investment advice to retirement investors and the related exemptions for prohibited conflicts—PTE 2020-02 and 84-24. The exemptions provide relief from prohibited compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including recommendations of transfers and exchanges). The fiduciary regulation will be effective on September 23, 2024. Parts of the PTEs will be effective on that date, but other parts will not be effective until a year later—September 23, 2025.

Unfortunately, that “split” of the effective dates has created a considerable amount of confusion about what needs to be done and when it needs to be done.

Continue reading The New Fiduciary Rule (36): Confusion about Annual Retrospective Reviews

Share

The New Fiduciary Rule (35): The Education Exception

Key Takeaways

  • The DOL’s final regulation defining non-discretionary fiduciary advice will be effective on September 23 of this year.
  • If a conflicted fiduciary recommendation is made, the requirements (called “conditions”) of PTEs 2020-02 and 84-24 will need to be satisfied in order to retain any compensation resulting from the recommendation.
  • However, absent a fiduciary recommendation, the relief afforded by the exemptions will not be needed.
  • There are three ways to engage with retirement investors without making a recommendation. Those are: “hire me”, education and unsolicited. This article discusses the educational approach.

The Department of Labor’s (DOL) final regulation defining fiduciary status for investment advice to retirement investors is effective on September 23, 2024. The related exemptions—PTE 2020-02 and 84-24—are partially effective on the same date. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”—private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including transfer and exchange recommendations).

However, the relief provided by the PTEs is not needed unless a conflicted fiduciary recommendation is made. In the preamble to the fiduciary regulation, the DOL described a recommendation as follows:

Whether a person has made a ‘‘recommendation’’ is a threshold element in establishing the existence of fiduciary investment advice. For purposes of the final rule, whether a recommendation has been made will turn on the facts and circumstances of the particular situation, including whether the communication reasonably could be viewed as a ‘‘call to action.
*****
The Department intends that whether a recommendation has been made will be construed in a manner consistent with the SEC’s framework in Regulation Best Interest.

But not every communication with retirement investors is a recommendation. There are three notable exceptions, two of which are discussed in the preamble to the regulation: education and “hire me.”

“Hire me” was discussed in my last post Fiduciary Rule 34.This article discusses the DOL’s position on investment and retirement education.

As background, the DOL has long held that investment education, if properly done, is not a recommendation and therefore does not cause the provider to be a fiduciary. The “bible” in terms of DOL guidance is Interpretive Bulletin (IB) 96-1.

In the preamble to the new final rule, the DOL definitively said:

  • Similarly, the rule makes clear that mere investment information or education, without an investment recommendation, is not treated as fiduciary advice.
  • The Department agrees that it is important that retirement investors continue to have access to information about the options available to them regarding rolling over, transferring or distributing retirement assets and that these discussions can be purely educational.
  • Paragraph (c)(1)(iii) also makes clear that the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the final rule.

That was further confirmed in the regulation itself:

  • Similarly, the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of this rule.

However, it is not enough to just label a communication as education. As you might imagine, the information must be truly educational. My belief is that one test is whether the information is materially complete and unbiased. But let’s see what the DOL said in the preamble:

In general, for purposes of the final rule, the line between an investment recommendation and investment education or information will depend on whether there is a call to action. Thus, many of the types of information cited by commenters as important to retirement investors could be provided under the final rule without the imposition of fiduciary status. For example, like the SEC in Regulation Best Interest, the Department believes that ‘‘a general conversation about retirement planning, such as providing a company’s retirement plan options’’ to a retirement investor, would not rise to the level of a recommendation.

The preamble continues:

In this regard, the Department confirms that providing educational information and materials such as those described in IB 96–1 will not result in the provision of fiduciary investment advice as defined in the final rule absent a recommendation, regardless of the type of retirement investor to whom it is provided. Information on the benefits of plan participation and on the terms or operation of the plan, as described in the first category of investment education in the IB, clearly could include information relating to plan distributions and distribution options. Additionally, an analysis of the plan information category of investment education applied in the context of IRAs would allow such a plan sponsor or service provider to also provide a wide range non-fiduciary information about IRAs, such as tax benefits associated with rollovers into IRAs.

So, investment and retirement plan information and education will also work, if properly done, for IRA investing and planning and for rollover education.

The preamble goes on to say:

Likewise, the Department confirms that furnishing the categories of investment-related information and materials described in the ‘‘Investment Education’’ provision in the 2016 Final Rule would not result in the provision of fiduciary investment advice under the final rule. The provision in the 2016 Final Rule included, for example, information on ‘‘[g]eneral methods and strategies for managing assets in retirement (e.g., systemic withdrawal payments, annuitization, guaranteed minimum withdrawal benefits).’’

Keep in mind that the DOL is talking about education which, by definition, is somewhat generic and not individualized. The more individualized the communication, the greater the risk that it could be a recommendation subject to the fiduciary and prohibited transaction rules.

The DOL admonishes:

The Department emphasizes that the inquiry in this respect will focus on whether there is a call to action. Thus, the Department cautions providers against steering retirement investors towards certain courses of action under the guise of education. The SEC similarly stated in Regulation Best Interest that while certain descriptive information about employer sponsored plans would be treated as education, rather than as a recommendation, broker-dealers should ‘‘ensure that communications by their associated persons intended as ‘education’ do not cross the line into ‘recommendations.’ ”

As I said earlier, a key to knowing where the line is between education and recommendation is the individualization of the information. The more individualized the communication, the more likely it is a recommendation.

Concluding Thoughts

Yes, “education” still works as an alternative to a fiduciary recommendation. But it must be neutral education and information.

As FINRA pointed out in Regulatory Notice 13-45 (and I believe that the DOL would concur):

Some firms and their associated persons provide educational information to plan participants concerning their retirement choices. Firms that permit educational information only should adopt measures reasonably designed to ensure that the firm and its associated persons do not make recommendations for purposes of Rule 2111 to plan participants. These measures should include training concerning what statements may trigger application of Rule 2111, and consideration of the compensation arrangements that could cause an associated person to make a recommendation. To the extent that a firm prohibits recommendations to plan participants, supervisory personnel of the firm should reasonably monitor the communications to ensure that the prohibition is not compromised.   

To avoid the potential of “education” becoming recommendations, firms should have training and supervision (and hopefully supporting documentation) for the education that they will be delivering.

Share

The New Fiduciary Rule (34): The “Hire Me” Exception

Key Takeaways

  • The DOL’s final regulation defining non-discretionary fiduciary advice will be effective on September 23 of this year.
  • If a conflicted fiduciary recommendation is made, the requirements (called “conditions”) of PTEs 2020-02 and 84-24 will need to be satisfied in order to retain any compensation resulting from the recommendation.
  • However, absent a fiduciary recommendation, the relief afforded by the exemptions will not be needed.
  • There are three ways to engage with retirement investors without making a recommendation. Those are: “hire me”, education and unsolicited. This article discusses the “hire me” approach.

The Department of Labor’s (DOL) final regulation defining fiduciary status for investment advice to retirement investors is effective on September 23, 2024. The related exemptions—PTE 2020-02 and 84-24—are partially effective on the same date. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including transfer and exchange recommendations).

However, the relief provided by the PTEs is not needed unless a conflicted fiduciary recommendation is made. In the preamble to the fiduciary regulation, the DOL described a recommendation as follows:

Continue reading The New Fiduciary Rule (34): The “Hire Me” Exception

Share

ERISA Moments Ep. 25: The Fiduciary Rules and the Impact on Advisors and Insurance Agents

Take a quick dive into the exciting world of ERISA with Faegre Drinker benefits and executive compensation attorneys Fred Reish and Brad Campbell. In this quick-hit series of updates, Fred and Brad offer a high-level view of current trends and recent ERISA developments.

See the newest episode, The Fiduciary Rules and the Impact on Advisors and Insurance Agents, on the Spotlight on Benefits blog.

Share

The New Fiduciary Rule (33): The DOL’s Final PTE 84-24

Key Takeaways

  • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23, one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the investment professional and financial institution will need the protection afforded by a PTE.
  • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
  • While PTE 2020-02 can be used for banks, investment advisers, broker-dealers, and insurance companies (“financial institutions”), there is an alternative exemption, PTE 84-24, that can be used by independent insurance agents who recommend annuities and life insurance policies that only require an insurance license (“independent producers”).
  • This article covers the final PTE 84-24 and its effective dates, with a focus on compliance issues for September 23 of this year.

On April 25, 2024, the Department of Labor published its final regulation defining fiduciary status for investment advice and the related exemptions—PTE 2020-02 and 84-24. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective on September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

For context, all financial institutions—broker-dealers, investment advisory firms, banks and insurance companies–can use PTE 2020-02 for the protection it affords. However, broker-dealers, investment advisers, and banks must use PTE 2020-02 for relief for their conflicted fiduciary recommendations. In addition, relief for insurance products that are treated as securities (e.g., variable and registered annuities) can only be found under 2020-02. Finally, if an insurance product is sold by an employee or statutory employee of an insurance company, PTE 2020-02 must be used for relief.

Continue reading The New Fiduciary Rule (33): The DOL’s Final PTE 84-24

Share

The New Fiduciary Rule (32): The DOL’s Final PTE 2020-02

Key Takeaways

  • The DOL’s fiduciary regulation will be effective on September 23 of this year. As a result, beginning on September 23 one-time recommendations to retirement investors can be fiduciary advice and, where the advice is conflicted, the investment professional and financial institution will need the protection afforded by a PTE.
  • While some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 also become effective on September 23, others will not be effective until a full year later…September 23, 2025.
  • The PTE that must be used for all investment professionals and financial institutions—other than for independent insurance agents—is PTE 2020-02.
  • As a result, financial institutions need to be working on implementing the first part of the PTE’s requirements…so that compliant practices and disclosures are in place by September 23—just months from now.

On April 25, 2024, the Department of Labor published its final regulation defining fiduciary status for investment advice and the related exemptions—PTE 2020-02 and 84-24. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective on September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

Let’s look at the final of PTE 2020-02 and its effective dates.

Continue reading The New Fiduciary Rule (32): The DOL’s Final PTE 2020-02

Share

The New Fiduciary Rule (31):The DOL’s Final Fiduciary Definition Compared to the Proposal

Key Takeaways

  • The DOL’s fiduciary regulation and the amended Prohibited Transaction Exemptions (PTEs) 2020-02 and 84-24 will be effective on September 23 of this year.
  • However, some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 will not be effective until a full year later…September 23, 2025.
  • As a result, broker-dealers, investment advisers, banks, and insurance companies need to begin the work on compliance with the new fiduciary definition and parts of the PTEs…so that compliant practices and disclosures are in place by September 23—just months from now.

On April 25, 2024, the Department of Labor published its final regulation on defining fiduciary status for investment advice, and the related exemptions, in the Federal Register. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective on September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

Let’s look at the primary definition of non-discretionary fiduciary advice in the proposed regulation and compare it to the definition in the final regulation. This is the first step in complying with the new rules, since compliance with the PTEs will only be need for fiduciary recommendations that involve conflicts of interest.

Continue reading The New Fiduciary Rule (31):The DOL’s Final Fiduciary Definition Compared to the Proposal

Share

ERISA Moments Ep. 24: The Final Fiduciary Regulation and Exemptions Explained

Take a quick dive into the exciting world of ERISA with Faegre Drinker benefits and executive compensation attorneys Fred Reish and Brad Campbell. In this quick-hit series of updates, Fred and Brad offer a high-level view of current trends and recent ERISA developments.

See the newest episode, The Final Fiduciary Regulation and Exemptions Explained, on the Spotlight on Benefits blog.

Share

The New Fiduciary Rule (30): The One-Time Recommendation Definition

Key Takeaways

  • The DOL’s fiduciary regulation and the amended Prohibited Transaction Exemptions (PTEs) 2020-02 and 84-24 will be effective on September 23 of this year.
  • However, some of the requirements (called “conditions”) of PTEs 2020-02 and 84-24 will not be effective until September 23, 2025.
  • As a result, broker-dealers, investment advisers, banks and insurance companies need to begin the work on compliance with the new fiduciary definition and parts of the PTEs…so that compliant practices and disclosures are in place by September 23—just months from now.

On April 25, 2024, the Department of Labor published its final regulation on defining fiduciary status for investment advice, and the related exemptions, in the Federal Register. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective on September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

Continue reading The New Fiduciary Rule (30): The One-Time Recommendation Definition

Share

The New Fiduciary Rule (29): The Final Rules Have Arrived

Key Takeaways

  • The final versions of the DOL’s fiduciary regulation and the amended PTEs have been published in the Federal Register.
  • The regulation and exemptions will be effective and applicable on September 23 of this year.
  • However, some of the requirements (called “conditions”) of Prohibited Transaction Exemptions (PTEs) 2020-02 and 84-24 will not be effective until September 23, 2025.
  • As a result, broker-dealers, investment advisers, banks and insurance companies need to begin the work on compliance…so that compliant practices and disclosures are in place by September 23—just months from now.

On April 25, 2024, the Department of Labor published its final regulation on fiduciary advice, and the related exemptions, in the Federal Register. The regulation defines fiduciary investment advice and the exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to private sector retirement plans, participants (including rollovers), and IRAs (including transfers and exchanges). The fiduciary regulation and exemptions will be effective 150 days after publication, which is September 23, 2024, although compliance with some of the conditions in the exemptions will be further delayed.

Continue reading The New Fiduciary Rule (29): The Final Rules Have Arrived

Share