Category Archives: 2020-02

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


2020-02, 84-24, DOL, fiduciary, prohibited transaction
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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.

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


2020-02, DOL, fiduciary, investment adviser
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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.

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


2020-02, 84-24, DOL, fiduciary
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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.

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The New Fiduciary Rule (28): Coming Attractions—The Final Fiduciary Rules Are on the Horizon


2020-02, 84-24, DOL, fiduciary, investment adviser
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In November 2023, the U.S. Department of Labor released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers). On March 8, 2024, the DOL sent the final rule to the Office of Management and Budget in the White House. On April 10 the OMB completed its review of the final rules. The next step is for the rules to be published in the Federal Register.

Key Takeaways

  • The final versions of the DOL’s fiduciary regulation and the amended PTEs have been reviewed by the Office of Management and Budget (OMB) in the White House—the final step in the approval process.
  • Now that the OMB has completed its part, the DOL will start the process for publishing the final rules in the Federal Register. The publication will likely be in the next two to three weeks.
  • Sixty days after publication, the final rules will be effective.
  • However, it is not clear if they will be applicable at the same time. There may be a delayed applicability date.

In November of 2023, the DOL proposed amendments to the regulation that defines when a person becomes a fiduciary by virtue of making “investment” recommendations to “retirement investors.”

I put the apostrophes around “investment” because the term, as used in the regulation, includes a range of services and types of properties. And I did the same with “retirement investors” because it is a defined term—private sector retirement plans, participants in those plans, and IRA owners.

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The New Fiduciary Rule (26): Changes to PTE 2020-02 (1): Affecting the Advisor


2020-02, fiduciary, investment adviser, prohibited transaction, rollovers
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In November 2023, the U.S. Department of Labor released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers). On March 8, 2024, the DOL sent the final rule to the Office of Management and Budget in the White House.

Key Takeaways

  • The DOL’s proposed fiduciary regulation includes a new and expanded definition of when a person will become a fiduciary under ERISA and the Internal Revenue Code due to recommendations to retirement investors.
  • As a result, many more advisors and agents will be fiduciaries.
  • If a fiduciary recommendation to a retirement investor is conflicted, any resulting financial benefit will be prohibited under ERISA and the Code. In that case, to avoid the consequences of a prohibited transaction, it would be necessary to comply with the conditions of a prohibited transaction exemption (PTE)—most likely PTE 2020-02.
  • This article discusses the proposed changes to PTE 2020-02 that will affect individual advisors and agents. My next article will discuss the changes that affect the financial institutions.

The first, and current, version of Prohibited Transaction Exemption (PTE) 2020-02 was effective in December 2020. In November of 2023, the DOL proposed amendments to PTE 2020-02 in connection with its proposed regulation expanding the definition of fiduciary advice to retirement investors—private sector retirement plans, participants in those plans, and IRA owners.

The proposed regulation will cause many more people and firms to be fiduciaries when they make “investment” recommendations to retirement investors. (I put the apostrophes around investment because the term, as used in the regulation, includes a range of services and types of properties.)

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The New Fiduciary Rule (25): Robo Advice and Robo Conflicts


2020-02, fiduciary, prohibited transaction
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In November 2023, the U.S. Department of Labor released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers). On March 8, 2024, the DOL sent the final rule to the Office of Management and Budget in the White House.

Key Takeaways

  • The DOL’s proposals make it clear that robo advice, both “hybrid” and “pure”, can be fiduciary advice, subject to the provisions of ERISA and the Internal Revenue Code.
  • When pure robo advice (no human directly involved) or hybrid robo advice is given, if it satisfies the regulatory definition of fiduciary advice, the financial institution will be a fiduciary under ERISA (if to an ERISA plan or a participant in such a plan) and subject to ERISA’s duties of prudence and loyalty.
  • If robo advice generates a fiduciary recommendation that is conflicted, the conflicted amount (e.g., commissions, management fees) will be a prohibited transaction under ERISA and the Code, which would necessitate compliance with the conditions of a prohibited transaction exemption (PTE).
  • This article discusses robo advice under PTE 2020-02.

Under the current PTE 2020-02, the exemptive relief is not extended to “pure” robo-advisers. Instead, only “hybrid” robo-advisers can provide nondiscretionary fiduciary advice to retirement investors where the advice is conflicted (e.g., proprietary investments, revenue sharing, commissions). However, when the proposed amendments to the PTE become final and applicable, compensation resulting from conflicted nondiscretionary advice will be permitted if the conditions of the exemption are satisfied.

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The New Fiduciary Rule (23): The Final Rule Has Been Sent to the OMB


2020-02, 84-24, DOL, fiduciary, prohibited transaction
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In November 2023, the U.S. Department of Labor released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers). On March 8, 2024, the DOL sent the final rule to the Office of Management and Budget in the White House.

Key Takeaways

  • In a little over 2 months, the DOL finalized it proposed fiduciary rules—the Retirement Security Rule: Definition of an Investment Advice Fiduciary.
  • That 2-month turnaround is very fast as compared to the usual time frames, suggesting that the OMB review may also move quickly.
  • The OMB has up to 90 days to review rules, but this suggests that its review could be done in 45 days, give a week or two.
  • While we know that the final rule is at the OMB, we don’t know what it says or how it changed from the proposals. We will only know that after it is published in the Federal Register when the OMB review is completed.

The Department of Labor has sent its final versions of the fiduciary proposal to the White House’s Office of Management and Budget (OMB) for review. While the OMB’s website just refers to the “Retirement Security Rule: Definition of an Investment Fiduciary”—the name of the fiduciary regulation—it is likely that the rules sent for regulatory review included the prohibited transaction exemptions as well. The RIN (1212-AC02) for the final rule is the same one in the Regulatory Agenda that included the exemptions.

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The New Fiduciary Rule (22): Can Wholesalers Become Fiduciaries


2020-02, 84-24, DOL, fiduciary, prohibited transaction
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The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • It is, by now, well known that the expansive definition of fiduciary in the DOL’s proposed regulation will cause many more advisors and insurance agents to be fiduciaries for their recommendations to retirement investors. However, it is less known that the same rules can apply to wholesalers of securities and insurance products.
  • When a wholesaler becomes a fiduciary to a plan or an IRA, and the recommendation is made by the advisor or agent to and accepted by the IRA investor or plan fiduciary, there will likely be a prohibited transaction due to the wholesaler’s firm making money on the investment or insurance product.
  • Where a wholesaler prohibited transaction occurs, an exemption (PTE) will be needed, most likely PTE 2020-02.

When a person makes a “covered” fiduciary recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

The proposed regulation defines a “retirement investor” as a: …plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary (retirement investor). (The emphasis is mine.)

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The New Fiduciary Rule (21): Requirement to Correct Failures with PTE Conditions (Part 3)


2020-02, 84-24, DOL, fiduciary, prohibited transaction
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The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • The expansive definition of fiduciary in the DOL’s proposed regulation will cause many more advisors and insurance agents to be fiduciaries for their recommendations to retirement investors. Where the recommendations result in additional compensation for them or their firms, that compensation will be prohibited. That would be the case where, for example, a rollover recommendation results in fees or commissions from the rollover IRA.
  • Where a prohibited transaction occurs, an exemption (PTE) will be needed, e.g., PTEs 84-24 or 2020-02, in order for the advisor or agent to receive any compensation, e.g., from the rollover IRA or annuity.
  • One of the conditions for obtaining the protection of either of those PTEs is an annual retrospective review and report on compliance with the requirements of the exemptions. If a failure is found to satisfy the conditions in the exemption, for example, in the review, it must be corrected.

When a person makes a “covered” recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

A “covered” recommendation is one in which the person is a fiduciary (as defined in the proposed fiduciary recommendation) and the recommendation is about the investment of “qualified” or retirement accounts (as that is defined in the proposed regulation). Some of the covered investment recommendations include: Investing in securities, annuities or other property; rollovers; IRA transfers; withdrawals from retirement accounts; and investment strategies, policies and allocations.

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The New Fiduciary Rule (20): Requirement to Correct Failures with PTE Conditions (Part 2)


2020-02, 84-24, DOL, fiduciary, prohibited transaction
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The U.S. Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment recommendations to retirement plans, participants (including rollovers), and IRAs (including transfers).

Key Takeaways

  • The expansive definition of fiduciary in the DOL’s proposed regulation will cause many more advisors and insurance agents to be fiduciaries for their recommendations to retirement investors. Where the recommendations result in additional compensation for them or their firms, that compensation will be prohibited. That would be the case where, for example, a rollover recommendation results in fees or commissions from the rollover IRA.
  • Where a prohibited transaction occurs, an exemption (PTE) will be needed, e.g., PTEs 84-24 or 2020-02, in order for the advisor or agent to receive any compensation, e.g., from the rollover IRA or annuity.
  • One of the conditions for obtaining the protection of either of those PTEs is an annual retrospective review and report on compliance with the requirements of the exemptions. If a failure is found in the review, it must be corrected.

When a person makes a “covered” recommendation to a “retirement investor” and the recommendation, when implemented, results in the person (or his or her firm or an affiliate) receiving additional compensation, a prohibited transaction (under the Code and/or ERISA) will occur.

A “covered” recommendation is one in which the person is a fiduciary (as defined in the proposed fiduciary recommendation) and the recommendation is about the investment of “qualified” or retirement accounts (as that is defined in the proposed regulation). Some of the covered investment recommendations include:  investing in securities, annuities or other property; rollovers; IRA transfers; withdrawals from retirement accounts; and investment strategies, policies and allocations.

The proposed regulation defines a “retirement investor” as a: …plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary (retirement investor).

Continue reading The New Fiduciary Rule (20): Requirement to Correct Failures with PTE Conditions (Part 2) →

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