Category Archives: investment adviser

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 (30): The One-Time Recommendation Definition


broker-dealers, DOL, fiduciary, investment adviser
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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.

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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 (16): Permissible Compensation under PTE 2020-02


2020-02, broker-dealers, fiduciary, investment adviser, 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.

Key Takeaways

  • ERISA’s fiduciary and prohibited transaction rules require consideration of costs and compensation when fiduciary recommendations are made to “retirement investors,” that is, to private sector retirement plans, participants in those plans, and IRA owners.
  • Where the Internal Revenue Code’s prohibited transaction rules would be violated, the protection of an exemption is needed. In that case, the protections of PTEs 84-24 and 2020-02 will require that costs and compensation be considered.
  • This article focuses on limitations on compensation under PTE 2020-02. However, compensation of advisors and their firms is often an element of the costs of the services and products, and thus can also be part of the consideration of costs.
  • While the general rule in ERISA and the Code is that compensation cannot be more than a reasonable amount, the PTE has additional limitations.

ERISA’s fiduciary responsibility rules require that costs, for both investments and services, be no more than a reasonable amount. In other words, a prudent process will consider the costs of investments and services relative to the value of those investments or services to the retirement investor and relative to reasonably available alternatives. ERISA’s prohibited transaction rules, and the exemptions to the prohibitions, impose a similar limit on compensation when a fiduciary recommendation is conflicted, that is, the compensation cannot be more than a reasonable amount when compared to the value of services being offered. These rules apply to all ERISA-governed retirement plans and participant accounts in those plans (including rollover recommendations).

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The New Fiduciary Rule (6): The Fiduciary Definition of Fiduciary


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The US 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 advice to plans, participants (including rollovers), and IRAs (including transfers of IRAs).

Key Takeaways

  • The Department of Labor’s proposed regulation defining fiduciary investment and insurance/annuity advice to private sector retirement plans, participants in those plans, and IRA owners (collectively, “retirement investors”) includes three distinct definitions.
  • Those definitions are: discretionary investment management, non-discretionary investment advice, and acknowledgement of fiduciary status. In each of those cases, the person and the firm will be fiduciaries under ERISA and the Internal Revenue Code for purposes of their investment recommendations and services to retirement investors.
  • A new definition in the proposal, and one that is not likely to be controversial, is the third one….a person will be a fiduciary for investment recommendations if that person says that the person and/or the firm are acting as fiduciaries for the recommendation.

This post discusses the “fiduciary acknowledgement” definition of fiduciary investment advice in the DOL’s proposed fiduciary regulation. More specifically, the proposed regulation says that a person will be an ERISA and Code fiduciary if “The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.” (There will be future articles discussing “investment recommendations”, but for the moment, consider it to be a recommendation for a retirement investor to invest in securities, insurance or other property.)

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The New Fiduciary Rule (5): Discretionary Investment Management


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

Key Takeaways

  • The Department of Labor’s proposed regulation defining fiduciary investment and insurance advice to private sector retirement plans, participants in those plans, and IRA owners (collectively, “retirement investors”) includes three distinct definitions.
  • Those definitions are discretionary investment management, nondiscretionary investment advice, and acknowledgement of fiduciary status.
  • The least controversial definition is that, when an investment professional provides investment management, or discretionary, services to retirement investors, the investment professional will be a fiduciary under ERISA and the Internal Revenue Code.

This post discusses the “discretionary” definition of fiduciary investment advice in the DOL’s proposed fiduciary regulation.

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The SEC’s 2024 Examination Priorities: Impact on IRAs and Retirement Plans


broker-dealers, DOL, investment adviser, IRA, rollovers, SEC
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Key Takeaways

  • The SEC Division of Examinations is focused on advice to older investors and retirement investors. Advisors and their firms should review their practices for those investors.
  • Among the concerns of the Division of Examinations is whether conflicts are adequately disclosed so that investors can provide informed consent. Off-the-shelf disclosures may not have sufficient information to pass that test.
  • The starting point for making an investment recommendation or providing investment advice is to develop a profile of the investor that considers the information relevant to the investor’s needs and circumstances. The information needed for the profile for retired investors may be different than for accumulation investors. Questionnaires and other information gathering materials should be reviewed to ensure their adequacy for purposes of investors who will regularly withdraw cash for lifelong retirement income from their accounts.

The SEC Division of Examinations recently released its 2024 Examination Priorities (2024-exam-priorities.pdf (sec.gov)). While the Priorities cover a range issues, this article focuses on the Priorities that could impact advice and recommendations by investment advisers and dual registrants (both referred to as advisors in this article)  to  retirement investors. “Retirement Investors” is DOL terminology for investors in retirement plans and IRAs. My interchangeable use of SEC and DOL language is justified by their shared interest in protecting people who are saving and investing for retirement and who are investing and spending in retirement.

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Best Interest Standard of Care for Advisors #100: Liabilities and Opportunities


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, rollovers
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Key Takeaways

The DOL’s expanded definition of fiduciary advice is explained in the preamble to PTE 2020-02.

When conflicted fiduciary advice is given to retirement investors, that is, retirement plans, participants (including rollovers), and IRA owners (including transfers of IRAs), it results in prohibited transactions under the Internal Revenue Code and ERISA. The prohibited transaction is the compensation earned as a result of the fiduciary recommendation, e.g., the fees or commissions from a rollover IRA.

The PTE provides relief for the prohibitions resulting from conflicted non-discretionary recommendations. However, the relief is conditional, that is, it is only available if all of the PTE’s conditions are satisfied.

The compliance deadline was February 1, 2021 for most of the PTE’s conditions and July 1 for the one remaining condition–the requirement to provide retirement investors in writing with the “specific reasons” why a rollover recommendation is in their best interest.

As a result, the documentation and processes for compliance with PTE 2020-02’s conditions should now be completed. So, this is a good time to consider the liability issues and the opportunities created by the PTE.

Background

The DOL’s prohibited transaction exemption (PTE) 2020-02,  Improving Investment Advice for Workers & Retirees, allows investment advisers, broker-dealers, banks, and insurance companies (“financial institu­tions”), and their representatives (“investment professionals”) to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to ERISA retirement plans, participants (including rollover recommendations), and IRA owners (all of whom are referred to as “retirement investors”). In addition, in the preamble to the PTE the DOL announced an expanded definition of fiduciary advice, meaning that many more financial institutions and investment professionals are fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.

Since a significantly increased number of recommendations to retirement investors will be fiduciary recommendations under the expanded fiduciary interpretation, and since many, if not most, of those recommendations will involve conflicts of interest, financial institutions and investment professionals will need to satisfy the “conditions” (or requirements) in the PTE. The 4 categories of those conditions are: (1) the Impartial Conduct Standards (including the best interest standard of care); (2) disclosures (including the “specific reasons”), (3) policies and procedures (include mitigation of conflicts), and (4) the annual retrospective review and report.

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Best Interest Standard of Care for Advisors #99: The PTE 2020-02 Requirement for An Annual Retrospective Review


2020-02, best interest, broker-dealers, DOL, fiduciary, investment adviser, IRA, rollovers
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Key Takeaways

The DOL’s expanded definition of fiduciary advice is explained in the preamble to PTE 2020-02.

When conflicted fiduciary advice is given to retirement investors (that is, retirement plans, participants (including rollovers), and IRA owners (including transfers of IRAs), it results in prohibited transactions under the Internal Revenue Code and ERISA. The PTE provides relief for conflicted non-discretionary recommendations. However, the relief is only available if all of the PTE’s conditions are satisfied.

While much attention has been given to the conduct, disclosure and policies “conditions” for obtaining the relief provided by PTE 2020-02, there hasn’t been much discussion of the PTE’s “condition” that requires an annual retrospective review and report. This article discusses that requirement.

Background

The DOL’s prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees), allows investment advisers, broker-dealers, banks, and insurance companies (“financial institu­tions”), and their representatives (“investment professionals”), to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to ERISA retirement plans, participants (including rollover recommendations), and IRA owners (all of whom are referred to as “retirement investors”). In addition, in the preamble to the PTE the DOL announced an expanded definition of fiduciary advice, meaning that many more financial institutions and investment professionals are fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.

For example, a rollover recommendation will ordinarily be nondiscretionary fiduciary advice and result in a financial conflict of interest (i.e., the compensation earned from the rollover IRA) that is a prohibited transaction under both ERISA and the Internal Revenue Code. But, since the recommendation is nondiscretionary, PTE 2020-02 provides relief, but only if all of its conditions are met.

Continue reading Best Interest Standard of Care for Advisors #99: The PTE 2020-02 Requirement for An Annual Retrospective Review →

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