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.
- My last article discussed the proposed changes to PTE 2020-02 that will affect individual advisors and agents. This article discusses 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 products.)
When an investment recommendation is conflicted (that is, if the recommendation is accepted and implemented, it will financially benefit the advisor or the firm), the financial benefit is prohibited—literally prohibited. However, if there is an available exemption, and if the conditions of the exemption are satisfied, the transaction can proceed and the financial benefit can be retained.
PTE 2020-02, in both its current form and in the proposed amended version, provides relief to broker-dealers, investment advisers, insurance companies, and banks, and to the individuals who act on their behalf. While those individuals could be advisors or agents of any of those types of firms, this article uses “advisors” for ease of reading.
The proposed 2020-02 has changes from the current version. Some primarily affect the individual advisors (called “investment professionals” by the DOL) while others primarily affect the firms (called “financial institutions”). Both the investment professionals and the financial institutions are fiduciaries for purposes of satisfying the requirements of the exemption.
This article discusses the most significant changes that primarily affect financial institutions. My last post, Fiduciary Rule 26, covered the changes that will affect investment professionals.
Continue reading The New Fiduciary Rule (27): Changes to PTE 2020-02 (2): Affecting Financial Institutions →
