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—PTEs 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.

The split effective dates for the PTEs are as follows. The Impartial Conduct Standards and the Fiduciary Acknowledgment disclosure are effective September 23, 2024—this year. The remaining conditions in the PTEs are effective on September 23, 2025. That includes all of the remaining disclosures, the policies and procedures, and the annual retrospective review.

Clients are asking about what they need to do to get ready for this September if they are already complying with the current version of PTE 2020-02. The answer is:

• The Impartial Conduct Standards are virtually the same in both the current PTE 2020-02 and in the new one.
  • The best interest standard is now called the Care Obligation and the Loyalty Obligation, but the compliance issues remain the same.
  • The limitation on compensation—no more than a reasonable amount—is the same.
  • The prohibition on misleading statements is largely the same. The only change is that a statement can be considered misleading if it omits material facts.
• However, the fiduciary acknowledgment has changed. As a result, that disclosure will need to be updated beginning on September 23.

Under the current PTE 2020-02, the DOL’s sample disclosure language, found in the preamble to the PTE, is:

When we provide investment advice to you regarding your retirement plan account or individual retirement account, we are fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act and/or the Internal Revenue Code, as applicable, which are laws governing retirement accounts. The way we make money creates some conflicts with your interests, so we operate under a special rule that requires us to act in your best interest and not put our interest ahead of yours.

The model language for the fiduciary acknowledgment in the “new” PTE 2020-02 is somewhat different. It says:

We are making investment recommendations to you regarding your retirement plan account or individual retirement account as fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act and/or the Internal Revenue Code, as applicable, which are laws governing retirement accounts. The way we make money or otherwise are compensated creates some conflicts with your financial interests, so we operate under a special rule that requires us to act in your best interest and not put our interest ahead of yours.

If you closely compare the language, it will be apparent that the new model language is affirmative, while the old version is conditional.

The affirmative: We are making investment recommendations to you regarding your retirement plan account or individual retirement account as fiduciaries….

The conditional: When we provide investment advice to you regarding your retirement plan account or individual retirement account, we are fiduciaries….

That raises the obvious question of why?  Why was the change made?

The DOL explains in the preamble to the new 2020-02:

The Department received many comments on this requirement. Some commenters supported clarifications that the acknowledgment must make clear that the recommendation is rendered in a fiduciary capacity, though some argued that the acknowledgment should be limited to specific transactions. For example, one commenter urged the Department to provide that the fiduciary acknowledgment must be an “unconditional” acknowledgment of fiduciary status in order to effectively address artful drafting by a Financial Institution that is intended to evade actual fiduciary status. Another commenter provided examples of disclosures that Financial Institutions have in place that are misleading to Retirement Investors. Many of these misleading disclosures state that the Financial Institution has fiduciary status, but then note there are exceptions or limitations to when the Financial Institution is acting as a fiduciary, without clearly taking a position on the Financial Institution’s fiduciary status with respect to the particular recommendation. At best, this drafting may leave the Retirement Investor with many questions about when they are receiving fiduciary advice. At worst, it may leave the Retirement Investor with the mistaken impression that all recommendations it receives are provided in a fiduciary capacity when only some recommendations are subject to the protective conditions of this exemption. The Department agrees with these concerns, which provide further evidence of the need for the Final Amendment to include an unambiguous written acknowledgment requirement.

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The Department believes that the requirement, as finalized, makes it unambiguously clear that the recommendation must be acknowledged as made in a fiduciary capacity under ERISA or the Code. It would not be sufficient, for example, to have an acknowledgment provide that “Firm A acknowledges fiduciary status under ERISA with respect to the recommendation to the extent the recommendation is treated by ERISA or Department of Labor regulations as fiduciary” because that statement does not explain when a recommendation would be treated as falling under the fiduciary requirements of ERISA and the Code. (Emphasis added by me.)

In a nutshell, the DOL was concerned that the disclosure was not getting its job done, particularly when financial institutions added conditions and exceptions. So it modified the model language to be an affirmative statement that recommendations will be fiduciary advice. Some firms may worry that not all recommendations to retirement investors will necessarily be fiduciary in nature. However, the new language allows little wiggle room for adding caveats.

Concluding Thoughts

Generally speaking, my view is that when the DOL provides model language, the better approach—at least in terms of risk-free compliance—is to use the model language. That will be the expectation of DOL investigators. Any changes would likely invite scrutiny.

To the extent that a firm can identify circumstances that might not be fiduciary advice, it could be possible to modify the language to take out specific types on interactions. However, that should only be done with advice of legal counsel.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.