Tag Archives: exemption

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


84-24, DOL, fiduciary
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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.
  • 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.

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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 (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 (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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The New Fiduciary Rule (17): Permissible Compensation under PTE 84-24


84-24, 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.

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 84-24.
  • 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 investments, insurance products and services, be no more than a reasonable amount. In other words, a prudent process will consider the costs of products and services relative to their value 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).

The Code has prohibited transaction provisions with similar limitations on compensation, that is, compensation cannot exceed a reasonable amount relative to the services provided. The Code limits apply to both tax-qualified retirement plans and IRAs (including individual retirement annuities). However, the Code does not have a standard of care for recommendations to IRA owners. Instead, the applicable standard of care is imposed by other laws and regulations (for example, the best interest standard for insurance agents in NAIC model rule 275).

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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 (15): Reasonable Costs and Reasonable Compensation


fiduciary, IRA, prohibited transaction, rollovers
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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 are violated, the protection of an exemption will be needed. In that case, the protections of PTEs 84-24 and 2020-02 will require that costs and compensation be considered.
    • The consideration is that the costs and/or compensation cannot be more than a reasonable amount.
    • However, the determination of what is reasonable is largely left to industry practices—that is, what would the costs for a product or service, or the compensation of an advisor or agent, be in a transparent and competitive market.

The ERISA fiduciary responsibility rules require that plan 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. The ERISA prohibited transaction rules impose a similar limit on compensation where there is a fiduciary recommendation that results in a conflict of interest, that is, the compensation cannot be more than a reasonable amount when compared to the value of services being offered (and, in most cases, that would be the compensation paid for those services in a transparent and competitive marketplace). These rules apply to all ERISA-governed retirement plans and participant accounts in those plans.

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