By Michael Schloss, Andrew Oringer, Barry Salkin, John Sohn and Stephen Wilkes
Earlier this week, on October 31, 2023, the Department of Labor (the “Department”) rolled out its long anticipated new regulation defining who is a fiduciary who provides investment advice for a fee or other compensation under section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (“ERISA”). Concerned that the existing definition of an investment advice fiduciary from 1975 – a time before the advent of 401(k) plans when nobody had even heard of the term “IRA rollover” – no longer adequately protects retirement investors, the Obama administration in 2016 attempted a complete overhaul of the then forty-year-old rule. This overhaul was itself a reboot of an earlier attempt by the Department to revise the definition of “investment advice” in 2010 – its proposed regulation was severely criticized and withdrawn.
In 2018, after a series of lawsuits, the Obama proposal was vacated by the U.S. Court of Appeals for the Fifth Circuit in a decision that was not appealed by the Trump Administration, returning the law to the 1975 definition. The Department then proceeded to reinterpret the 1975 rule so as to attempt to expand ERISA’s reach, but has been rebuffed by a number of courts. The Wagner Law Group has discussed certain recent adverse judicial activity in a recent law alert (available by clicking here) which is an alert that generally was drafted to address certain of these judicial developments and anticipated future challenges. The new proposal may well face a similar slew of objections as those that confronted the 2016 proposal (and the later reinterpretation of the 1975 rule) from industry participants satisfied with the existing definition.
According to the Department’s Fact Sheet issued along with the proposal, the newest version of the regulation would perform as follows:
The Department is proposing that a financial services provider would be an investment advice fiduciary under federal pension law if:
- the provider provides investment advice or makes an investment recommendation to a retirement investor,
- the advice or recommendation is provided for a fee or other compensation, and
- the financial services provider makes the recommendation in the context of a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in [the investor’s] best interest[, to wit where]:
- the provider has discretion over investment decisions for the retirement investor;
- The provider makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or
- the provider states that they are acting as a fiduciary when making investment recommendations.
In addition to proposing changes in the regulation, the Department is proposing to rework two exemptions available for the management of conflicts of interest with respect to advice as well as to make conforming edits to other exemptions. One exemption (Prohibited Transaction Class Exemption (“PTE”) 2020-02) has been broadly available for advice with respect to the wide universe of investments recommended to retirement investors. A second exemption (PTE 84-24) is tailored for use by independent insurance agents (who, the Department notes repeatedly are not subject to the SEC’s Regulation Best Interest).
At first blush, the Department’s proposal attempts to be grounded in the same five-part test it promulgated in 1975 that defined an investment-advice fiduciary. Even so, the new rule, appears to make significant changes to the test including: (i) tying the “regular basis” prong to the business of the advisor and not the relationship between the advisor and the advisee; (ii) doing away with the “mutual agreement” requirement and, (iii) adding a requirement that the advisee understands that the advice is being provided in their “best interest”. Whether these changes are consistent with the Fifth Circuit’s 2018 ruling striking down the Department’s prior attempt to redefine an investment advice fiduciary remains to be seen.
As proposed, the new rule is designed to encompass recommendations that federal securities laws do not currently cover such as recommendations to purchase non-securities such as real estate, certain kinds of annuities, or commodities like gold. In addition, those rules also do not cover advice as to which investments should be included in a 401(k) menu. The Department’s proposal is designed to cover these recommendations as well. Both the Department and the White House appear to be specifically focused on “fixed index annuities” as an area of particular concern.
Along with the new regulation, the Department is also proposing amendments to a number of existing PTEs. In particular, the Department proposes to amend:
PTE 2020-02: According to the Department, the proposed amendments do not do away with any of the existing “core protections” already contained in PTE 2020-02. Rather, the amendments add additional disclosure requirements. The proposal also includes guidance for Financial Institutions and Investment Professionals complying with the Impartial Conduct Standards and implementing their policies and procedures. Importantly, the amendments do not require a contract for investment advice to IRAs (a requirement contained in the Department’s 2016 regulation). Nor do the amendments create any new causes of action or require a Financial Institution to provide enforceable warranties to Retirement Investors. Transactions that fail to satisfy the exemption, however, will be considered prohibited transactions and subject to excise tax under IRC § 4975.
Amends PTE 84-24: The proposed amendments add a new section providing exemptive relief to fiduciaries who are Independent Producers who recommend non-securities annuities or other insurance products from an unaffiliated Insurer to Retirement Investors on a commission or fee basis if certain protective conditions are met. The proposed amendment would exclude investment advice fiduciaries from the current relief in PTE 84-24 while proposing relief under a new section of the exemption with specific conditions for independent insurance agents providing investment advice.
PTE 84-24, as amended, would provide relief only to Independent Producers who sell annuities of two or more unrelated Insurers. Independent Producers who sell or recommend investment products other than annuities, such as mutual funds, stocks and bonds, and certificates of deposit will be required to rely on PTE 2020-02 when receiving fees or other compensation in connection with investment recommendations related to those products. The amended PTE 84-24 would provide relief from the prohibited transaction rules only for the receipt of fully disclosed commissions or fees in connection with annuity recommendations or other insurance.
According to the Department, the conditions of PTE 84-24 are similar to the conditions contained in PTE 2020-02 but are tailored to protect Retirement Investors from the specific conflicts that can arise for Independent Producers who are compensated through commissions when providing investment advice to Retirement Investors regarding the purchase of an annuity. The Department also is proposing to add a new eligibility provision in Section VIII for investment advice transactions and amend the current recordkeeping condition in Section V(e) with a new recordkeeping provision in Section IX that is similar to the recordkeeping provision in PTE 2020-02.
Although the Department is proposing a pathway for insurance companies to oversee the conduct of Independent Producers under the proposed amendment to PTE 84- 24 without assuming fiduciary status, the Department notes that it remains concerned that, without fiduciary status, insurance companies may not take their supervisory obligations as seriously as they should. According to the Department, for that reason, the proposed amendment does not provide relief for the Insurer, and it strictly limits the scope of relief to the Independent Producer’s receipt of fully disclosed commissions. An Insurer must rely on PTE 2020-02 for relief if it is itself an investment advice fiduciary because it provides investment advice within the meaning of ERISA section 3(21)(A)(ii) and section 4975(e)(3)(B) of the Internal Revenue Code of 1986 (the “Code”) and the regulations issued thereunder.
In addition, the Department is proposing that an Insurer’s systematic failures to comply with the proposed exemption’s conditions could result in an Independent Producer’s inability to rely on the amended exemption for relief with respect to recommendations of that Insurer’s products. In such a situation, the Independent Producer would still be able to receive compensation in connection with fiduciary investment advice related to the products of other Insurers, as long as those other Insurers complied with all conditions of amended PTE 84-24
PTEs 75-1, 77-4, 80-83, 83-1, and 86-128: According to the Department, the proposed amendments to these exemptions would remove fiduciary investment advice as defined in the proposed regulation, from the covered transactions in each exemption and make certain other administrative changes. The purpose of these amendments appears to be to foreclose alternatives to compliance and otherwise coordinate with newly amended PTE 2020-02. Among other changes, PTEs 75-1 Parts III & IV, 77-4, 80-83, 83-1, and 86-128 are being amended to include the following statement: “Exception. No relief from the restrictions of ERISA section 406(b) and the taxes imposed by Code section 4975(a) and (b) by reason of Code sections 4975(c)(1)(E) and (F) is available for fiduciaries providing investment advice within the meaning of ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B) and regulations thereunder.”
Once the proposal is published in the Federal Register, a 60-day period will commence for public comments with regard to the proposed regulation as well as with regard to the proposed amendments to each of the prohibited transaction exemptions. In addition, the proposal notes that the Department anticipates holding public hearings approximately 45 days from the date its proposals make it into the Federal Register.
It should be noted that the proposed regulation and amendments to the class exemptions are just that – proposed. In the coming months we should expect robust debate and discussion within the retirement industry and significant levels of substantive comments submitted to the Department. Some commenters will be supportive, and others will not. The road to a final version (without counting the impact of litigation which may be filed) will likely take some time. But now, the Department has shown its hand on various issues and started the ball rolling. The retirement industry can think about “what if” the Department’s positions become permanent, how are they likely to be amended (if at all) before they are finalized and how the Department’s proposal impacts each industry participant’s particular service and/or product platform.
 See 29 CFR 2510.3–21(c)(1). The 1975 rule included a “five part test” an investment advice fiduciary that generally encompassed those who: “(1) Render advice…or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property; (2) On a regular basis; (3) Pursuant to a mutual agreement . . . with the plan or a plan fiduciary; (4) Serve[s] as a primary basis for investment decisions with respect to plan assets; and (5) advice is individualized . . . based on the particular needs of the plan.”
 Chamber of Commerce of U.S. v. U.S. Dept. of Labor, 885 F.3d 360 (5th Cir. 2018).
 See The Retirement Security Rule – Strengthening Protections for Americans Saving for Retirement | CEA | The White House stating that, with regard to fixed index annuities, “the amount lost to conflicted investment advice could be as high as $5 billion annually.”