Tag Archives: PTE

The New Fiduciary Rule (40): Rollovers and the Insurance License Issue


2020-02, 84-24, DOL, fiduciary, prohibited transaction, rollovers
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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.
  • A “one-time” rollover recommendation is a fiduciary act under the new rules.
  • The definition of investment advice in the regulation includes recommendations about “securities or other investment properly” which includes life insurance with an investment component and annuities.
  • Under both PTE 84-24 and PTE 2020-02, a compliant rollover recommendation generally requires the consideration of the investments, services and expenses in the retirement plan.
  • As a result, the question has been raised about whether an insurance-licensed only insurance agent can legally “consider” a plan’s investments, as is required by the PTEs.

The Department of Labor’s final regulation defining fiduciary status for investment advice to retirement investors will be effective this September 23. Where a fiduciary recommendation results in additional compensation for the fiduciary, that conflicted compensation is prohibited under ERISA, the Internal Revenue Code, or both. As a result, the relief provided by an exemption from the prohibited transaction rules will be needed.

Parts of the two applicable exemptions, Prohibited Transaction Exemptions (PTEs) 2020-02 and 84-24 will also be effective on September 23, 2024, 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.

Both PTEs require that, to obtain their relief, the Care Obligation—which is part of the Impartial Conduct Standards– must be satisfied. The requirements for satisfying the Care Obligation for recommendations to rollover from an ERISA retirement plan to an IRA (individual retirement account or individual retirement annuity) are virtually identical. Here’s what PTE 84-24 says in the context of independent insurance agents (called “independent producers” by the DOL):

Rollover disclosure. Before engaging in or recommending that a Retirement Investor engage in a rollover from a Plan that is covered by Title I of ERISA or making a recommendation to a Plan participant or beneficiary as to the post-rollover investment of assets currently held in a Plan that is covered by Title I of ERISA, the Independent Producer must consider and document the bases for its recommendation to engage in the rollover, and must provide that documentation to both the Retirement Investor and to the Insurer. Relevant factors to consider must include to the extent applicable, but in any event are not limited to: 

  1. the alternatives to a rollover, including leaving the money in the Plan, if applicable; 
  2. the fees and expenses associated with the Plan and the recommended investment; 
  3. whether an employer or other party pays for some or all of the Plan’s administrative expenses; and 
  4. the different levels of fiduciary protection, services, and investments available. (The emphasis is mine.)

The reference to considering the available investments has caused some observers to question whether an agent who is only licensed to sell non-securities insurance products can legally perform that task. That question was asked of the DOL in comments to the proposed exemption, and answered by the DOL in the preamble to the final PTE:

Another commenter characterized the condition as potentially requiring Independent Producers to violate the law, because as described by the commenter Federal securities laws prohibit individuals from recommending or providing detailed information or advice about securities unless they have a securities license. Thus, according to the commenter, Independent Producers who do not have a securities license (as most do not) would be forced to either break the law to comply with this condition or undertake the expense and burden of obtaining the appropriate securities licenses.

The Department of Labor responded in the preamble and disagreed with the commenter’s description of what was required for the “consideration:”

The Department disagrees with this characterization of the exemption condition. While Independent Producers are required to consider alternatives to the rollover from the Title I Plan into an annuity, they are not required to recommend or provide detailed information or advice about securities. Nothing in the exemption requires or suggests that Independent Producers are obligated to make advice recommendations as to investment products they are not qualified or legally permitted to recommend. The Department notes that nothing in the exemption or the Impartial Conduct Standards prohibits investment advice by “insurance-only” agents or requires such insurance specialists to render advice with respect to other categories of assets outside their specialty or expertise. There may be circumstances when the best advice an Independent Producer can give an investor is to bring in or work with another Investment Professional who can make a recommendation that is consistent with the Impartial Conduct Standards. A rollover recommendation should not be based solely on the Retirement Investor’s existing investment allocation without any consideration of other investment options in the Retirement Investor’s Title I Plan. The Independent Producer must carefully consider the options available to the investor, including options other than the Retirement Investor’s existing Plan investments, before recommending that the participant roll assets out of the Title I Plan. (The emphasis is mine.)

I don’t claim to have expertise on securities licensing/registration requirements or limits. However, this does raise the issue of how far can an agent go in the consideration of the securities (e.g., mutual funds) in a retirement plan generally and in a participant’s account specifically. If these rules are upheld by the courts, insurance companies and intermediaries (perhaps with additional guidance from the DOL) will need to educate independent producers on how to “consider” “the different… investments available” to the participant.

In one sense, there could be general considerations, such as liquidity, volatility, possible growth, and so on, that I would imagine could be done without a securities license. That could then be compared to the guaranteed income, and other features, of an annuity and a recommendation in the best interest of the participant could be made based on his or her needs and circumstances. The key is that the recommendation be personalized to the particular participant and the participant’s circumstances.

One part of the preamble language has been difficult for practitioners to interpret. It is the language: “There may be circumstances when the best advice an Independent Producer can give an investor is to bring in or work with another Investment Professional who can make a recommendation that is consistent with the Impartial Conduct Standards.” Some observers are concerned that the language might mean that an insurance producer should bring in a securities-licensed professional to help with the analysis. If it does mean that, it may be unrealistic. On the other hand, if it instead suggests that a best interest recommendation could, in some cases, be that part of the rollover could prudently be invested in an annuity and the remaining part could prudently be invested in a securities-based IRA (e.g., to provide some guaranteed income and some liquidity) that could be viewed as more possible.

Concluding Thoughts

As I advise clients, including insurance companies, on compliance with the new rules, and as the rules are applied to real world scenarios, there are questions without answers…or, perhaps better put, there are questions that the rules don’t directly address and therefore reasonable answers have to be developed. One example of that is the process for recommending guaranteed income products (e.g., individual retirement annuities) where the source of funds is in mutual funds and collective investment trusts in retirement plans. Hopefully, the DOL will provide helpful guidance in the future. However, that is unlikely until the current litigation against the rules is resolved.

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The New Fiduciary Rule (35): The Education Exception


fiduciary, prohibited transaction, rollovers
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Key Takeaways

  • The DOL’s final regulation defining non-discretionary fiduciary advice will be effective on September 23 of this year.
  • If a conflicted fiduciary recommendation is made, the requirements (called “conditions”) of PTEs 2020-02 and 84-24 will need to be satisfied in order to retain any compensation resulting from the recommendation.
  • However, absent a fiduciary recommendation, the relief afforded by the exemptions will not be needed.
  • There are three ways to engage with retirement investors without making a recommendation. Those are: “hire me”, education and unsolicited. This article discusses the educational approach.

The Department of Labor’s (DOL) final regulation defining fiduciary status for investment advice to retirement investors is effective on September 23, 2024. The related exemptions—PTE 2020-02 and 84-24—are partially effective on the same date. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”—private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including transfer and exchange recommendations).

However, the relief provided by the PTEs is not needed unless a conflicted fiduciary recommendation is made. In the preamble to the fiduciary regulation, the DOL described a recommendation as follows:

Whether a person has made a ‘‘recommendation’’ is a threshold element in establishing the existence of fiduciary investment advice. For purposes of the final rule, whether a recommendation has been made will turn on the facts and circumstances of the particular situation, including whether the communication reasonably could be viewed as a ‘‘call to action.
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The Department intends that whether a recommendation has been made will be construed in a manner consistent with the SEC’s framework in Regulation Best Interest.

But not every communication with retirement investors is a recommendation. There are three notable exceptions, two of which are discussed in the preamble to the regulation: education and “hire me.”

“Hire me” was discussed in my last post Fiduciary Rule 34.This article discusses the DOL’s position on investment and retirement education.

As background, the DOL has long held that investment education, if properly done, is not a recommendation and therefore does not cause the provider to be a fiduciary. The “bible” in terms of DOL guidance is Interpretive Bulletin (IB) 96-1.

In the preamble to the new final rule, the DOL definitively said:

  • Similarly, the rule makes clear that mere investment information or education, without an investment recommendation, is not treated as fiduciary advice.
  • The Department agrees that it is important that retirement investors continue to have access to information about the options available to them regarding rolling over, transferring or distributing retirement assets and that these discussions can be purely educational.
  • Paragraph (c)(1)(iii) also makes clear that the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the final rule.

That was further confirmed in the regulation itself:

  • Similarly, the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of this rule.

However, it is not enough to just label a communication as education. As you might imagine, the information must be truly educational. My belief is that one test is whether the information is materially complete and unbiased. But let’s see what the DOL said in the preamble:

In general, for purposes of the final rule, the line between an investment recommendation and investment education or information will depend on whether there is a call to action. Thus, many of the types of information cited by commenters as important to retirement investors could be provided under the final rule without the imposition of fiduciary status. For example, like the SEC in Regulation Best Interest, the Department believes that ‘‘a general conversation about retirement planning, such as providing a company’s retirement plan options’’ to a retirement investor, would not rise to the level of a recommendation.

The preamble continues:

In this regard, the Department confirms that providing educational information and materials such as those described in IB 96–1 will not result in the provision of fiduciary investment advice as defined in the final rule absent a recommendation, regardless of the type of retirement investor to whom it is provided. Information on the benefits of plan participation and on the terms or operation of the plan, as described in the first category of investment education in the IB, clearly could include information relating to plan distributions and distribution options. Additionally, an analysis of the plan information category of investment education applied in the context of IRAs would allow such a plan sponsor or service provider to also provide a wide range non-fiduciary information about IRAs, such as tax benefits associated with rollovers into IRAs.

So, investment and retirement plan information and education will also work, if properly done, for IRA investing and planning and for rollover education.

The preamble goes on to say:

Likewise, the Department confirms that furnishing the categories of investment-related information and materials described in the ‘‘Investment Education’’ provision in the 2016 Final Rule would not result in the provision of fiduciary investment advice under the final rule. The provision in the 2016 Final Rule included, for example, information on ‘‘[g]eneral methods and strategies for managing assets in retirement (e.g., systemic withdrawal payments, annuitization, guaranteed minimum withdrawal benefits).’’

Keep in mind that the DOL is talking about education which, by definition, is somewhat generic and not individualized. The more individualized the communication, the greater the risk that it could be a recommendation subject to the fiduciary and prohibited transaction rules.

The DOL admonishes:

The Department emphasizes that the inquiry in this respect will focus on whether there is a call to action. Thus, the Department cautions providers against steering retirement investors towards certain courses of action under the guise of education. The SEC similarly stated in Regulation Best Interest that while certain descriptive information about employer sponsored plans would be treated as education, rather than as a recommendation, broker-dealers should ‘‘ensure that communications by their associated persons intended as ‘education’ do not cross the line into ‘recommendations.’ ”

As I said earlier, a key to knowing where the line is between education and recommendation is the individualization of the information. The more individualized the communication, the more likely it is a recommendation.

Concluding Thoughts

Yes, “education” still works as an alternative to a fiduciary recommendation. But it must be neutral education and information.

As FINRA pointed out in Regulatory Notice 13-45 (and I believe that the DOL would concur):

Some firms and their associated persons provide educational information to plan participants concerning their retirement choices. Firms that permit educational information only should adopt measures reasonably designed to ensure that the firm and its associated persons do not make recommendations for purposes of Rule 2111 to plan participants. These measures should include training concerning what statements may trigger application of Rule 2111, and consideration of the compensation arrangements that could cause an associated person to make a recommendation. To the extent that a firm prohibits recommendations to plan participants, supervisory personnel of the firm should reasonably monitor the communications to ensure that the prohibition is not compromised.   

To avoid the potential of “education” becoming recommendations, firms should have training and supervision (and hopefully supporting documentation) for the education that they will be delivering.

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The New Fiduciary Rule (34): The “Hire Me” Exception


fiduciary, investment adviser, prohibited transaction
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Key Takeaways

  • The DOL’s final regulation defining non-discretionary fiduciary advice will be effective on September 23 of this year.
  • If a conflicted fiduciary recommendation is made, the requirements (called “conditions”) of PTEs 2020-02 and 84-24 will need to be satisfied in order to retain any compensation resulting from the recommendation.
  • However, absent a fiduciary recommendation, the relief afforded by the exemptions will not be needed.
  • There are three ways to engage with retirement investors without making a recommendation. Those are: “hire me”, education and unsolicited. This article discusses the “hire me” approach.

The Department of Labor’s (DOL) final regulation defining fiduciary status for investment advice to retirement investors is effective on September 23, 2024. The related exemptions—PTE 2020-02 and 84-24—are partially effective on the same date. The exemptions provide relief from prohibited conflicts and compensation resulting from fiduciary recommendations to “retirement investors”–private sector retirement plans, participants in those plans (including rollover recommendations), and IRAs (including transfer and exchange recommendations).

However, the relief provided by the PTEs is not needed unless a conflicted fiduciary recommendation is made. In the preamble to the fiduciary regulation, the DOL described a recommendation as follows:

Continue reading The New Fiduciary Rule (34): The “Hire Me” Exception →

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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.

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

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The New Fiduciary Rule (31):The DOL’s Final Fiduciary Definition Compared to the Proposal


DOL, fiduciary
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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 a full year later…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.

Let’s look at the primary definition of non-discretionary fiduciary advice in the proposed regulation and compare it to the definition in the final regulation. This is the first step in complying with the new rules, since compliance with the PTEs will only be need for fiduciary recommendations that involve conflicts of interest.

Continue reading The New Fiduciary Rule (31):The DOL’s Final Fiduciary Definition Compared to the Proposal →

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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.

Continue reading The New Fiduciary Rule (30): The One-Time Recommendation Definition →

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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.

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

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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.

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

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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.)

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

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


2020-02, fiduciary, prohibited transaction
, , , , ,

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.

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

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