On April 23, 2024, the US Department of Labor (DOL) issued a final rule (the Final Rule) expanding the definition of an “investment advice fiduciary” with respect to employee benefit plans and IRAs for purposes of determining who is a “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (ERISA). The Final Rule imposes ERISA’s fiduciary protections on many types of investment advisory relationships that were exempted under the DOL’s previous regulatory definition of “investment advice fiduciary,” which has been the standard since 1975. In the DOL’s view, the Final Rule better ensures that retirement investors’ reasonable expectations are honored when they receive advice from financial professionals who hold themselves out as trusted advice providers, by requiring that such advisors adhere to stringent conduct standards and mitigate their conflicts of interest.
Timeline, practical considerations and next steps
The Final Rule is scheduled to become effective on September 23, 2024, along with changes to related prohibited transaction exemptions (PTEs), except for PTE 2020-02 and PTE 84-24, for which there will be an additional one year transition period where exemptive relief will require a written acknowledgement of fiduciary status and compliance with impartial conduct standards. It is widely anticipated that the Final Rule will be subject to litigation challenging its enforceability.
Although the fate of the Final Rule remains unclear, financial institutions and professionals are advised to begin reviewing their current processes and policies and consider what changes are necessary to comply with the Final Rule. In addition, parties that rely on PTE 2020-02 and the QPAM Exemption should review the revised requirements of those exemptions in detail to ensure the relief offered by those PTEs will be available for their businesses, and, if not, consider whether another exemption is available or if an individual exemption needs to be solicited.
In particular, under the Final Rule, a one-time recommendation to a retirement investor could now fall within the scope of ERISA’s fiduciary protections, as more fully detailed below. The Final Rule also does not include a safe harbor for recommendations provided to sophisticated parties. Therefore, fund managers should carefully review and consider their marketing materials and communications, as activities that were previously considered routine (such as sending a fund’s offering memorandum and governing documents to a retirement investor) could fall within the scope of the Final Rule depending on the context. However, the simple act of providing the documents should not generally amount to a “recommendation” without more.
Further, while disclaimers regarding fiduciary status will not control where inconsistent with other interactions with a retirement investor, they will still be useful to include in a fund’s offering documents. Fund managers will need to ensure communications outside of the offering documents do not conflict with any intent not to provide individual investment advice.
If you have any questions regarding the Final Rule, please reach out to your Norton Rose Fulbright team.
Background
Prior to the Final Rule, the determination of whether a person was an “investment advice fiduciary” was based a five-part test promulgated in 1975 that was satisfied if such person (1) rendered advice to a plan as to the value of securities or other property or made 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, arrangement or understanding with the plan or plan fiduciary in which (4) the advice served as a primary basis for investment decisions with respect to such plan assets and (5) the advice was individualized based on the particular needs of the plan.
By the 2010s, the DOL expressed concern that elements of the five-part test had become outdated as a result of the transition from defined benefit plans to individual account plans and changes in the types of investment advice that are provided to retirement investors (particularly in the context of rolling over, transfer or distributing assets from an employee benefit plan or IRA). This concern culminated in the DOL’s adoption of a rule in 2016 (the 2016 Rule) that expanded the types of investment advice that were subject to ERISA’s fiduciary standards. The 2016 Rule was vacated by a decision of the US Court of Appeals for the Fifth Circuit in 2018.
While the Final Rule is consistent in spirit with the 2016 Rule, the specific requirements of the Final Rule differ from the 2016 Rule. The Final Rule follows a proposed rule (the Proposed Rule), including proposed amendments to the PTEs, that was released by the DOL on October 31, 2023, and for which public hearings were held in December 2023.
Summary of Final Rule
Under the Final Rule, a person is an “investment advice fiduciary” if the person makes a recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property to a “retirement investor” (a plan, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary) for a fee or other compensation, direct or indirect, in one of the following contexts:
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The person either directly or indirectly (through or together with any affiliate) makes professional investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation:
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is based on review of the retirement investor’s particular needs or individual circumstances,
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reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and
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may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest; or
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The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title II of ERISA or both with respect to the recommendation.
The Final Rule provides that written statements by a person disclaiming status as a fiduciary, or disclaiming the conditions set forth in the bullets above, will not control to the extent they are inconsistent with the person’s oral or other written communications, marketing materials, applicable State or Federal law or other interactions with the retirement investor.
It is noteworthy that, absent a fiduciary acknowledgement, the Final Rule is necessarily context-specific, with a particular focus on whether the facts and circumstances surrounding a recommendation would indicate to a reasonable investor that the recommendation is individualized to the retirement investor’s personal situation and intended to be in the investor’s best interests.
In addition, the Final Rule explicitly closes the prior loophole for one-time advice, such that a person will be a fiduciary with respect to a recommendation to roll over assets from a workplace retirement plan to an IRA if the elements of the “investment advice fiduciary” standard described above are satisfied.
Changes from the Proposed Rule
In response to public comment, as compared to the Proposed Rule, the Final Rule:
- narrows the contexts in which a covered recommendation will constitute ERISA fiduciary investment advice and clarifies that the test for fiduciary status is objective;
- confirms that sales recommendations that do not satisfy the objective test will not be treated as fiduciary advice, and that the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the Final Rule; and
- clarifies that the Final Rule is focused on communications with persons with authority over plan investment decisions (including selecting investment options for participant-directed plans), rather than communications with financial services providers who do not have such authority, and therefore excludes plan and IRA investment advice fiduciaries from the definition of a “retirement investor.”
Amendments to prohibited transaction exemptions
Concurrently with the Final Rule, the DOL issued proposed amendments to PTEs 2020-02, 84-24 (the QPAM Exemption), 75-1, 77-4, 80-83, 83-1 and 86-128, that generally permit investment advice fiduciaries to receive compensation and engage in certain transactions that would otherwise be prohibited, subject to certain conditions.
In particular, among other revisions, the scope of PTE 2020-02 was narrowed to expand the exemption’s disqualification provisions (similar to recent amendments to the QPAM Exemption) and prohibit conditional fiduciary acknowledgements. Similarly, the QPAM Exemption was narrowed to only cover “independent producers” and recommendations with respect to non-securities products.
