November 2023 Compliance Article

Proposed Fiduciary Changes

The U.S. Department of Labor (DOL) released a proposed rule that redefines who is an investment advice fiduciary. The DOL also released several proposed amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries. Below is a broad summary of the proposed changes.

Background

The Employee Retirement Income Security Act (ERISA) imposes certain requirements on fiduciaries of retirement plans and individual retirement accounts (IRAs). Under ERISA, fiduciaries have a duty to be prudent and loyal to individuals and beneficiaries as well as avoid conflicts of interest unless they comply with certain conditions outlined within a prohibited transaction exemption (PTE).

In 1975, the DOL provided a five-part test to determine whether a financial representative was providing fiduciary investment advice. Under the five-part test, a person is considered a fiduciary if the investment advice is:

Providing the value of investing in securities or other property or makes recommendations regarding the purchase or sale of securities or other property,
Given on a regular basis,
Pursuant to a mutual agreement or understanding,
The primary basis for the investment decision, and
Individualized to the needs of the plan.

If fiduciary advice is provided, any compensation paid to a financial representative, or their organization, as a result of the advice is a prohibited transaction. In order to receive compensation, the financial representative needs to comply with the applicable PTE.

Investment Advice Fiduciary Defined

The proposed rule redefines an investment advice fiduciary as someone who provides investment advice or makes an investment recommendation to a retirement investor. A retirement investor includes a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA fiduciary. The advice or recommendation is provided for a fee or other direct or indirect compensation, and the person provides the advice or makes the recommendation in one of the following contexts:

The person has discretionary authority or control with respect to purchasing or selling securities or other investment property for the retirement investor;
The person makes investment recommendations on a regular basis as part of their business and the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon as a basis for investment decisions that are in the retirement investor's best interest; or
The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.

Fiduciary status is determined on a transactional basis. Written statements that disclaim that an individual is not a fiduciary will not apply if it is inconsistent with the person's oral communications, marketing, or other interactions with the retirement investor.

Entities can continue to offer a menu of investment options to fiduciaries for selection by participant-directed plans that are not customized or tailored to the retirement investor and would not be considered a recommendation.

PTE Amendments

The DOL is proposing amendments to several existing PTE's. These changes are highlighted below:

PTE 2020-02

Additional required disclosures:
- Written statement of the Best Interest standard of care owed by the investment professional and financial institution to the retirement investor.
- Inform the retirement investor of their right, free of charge, to obtain additional fee information that is reasonably designed to illustrate the costs of the transactions and the significance and severity of conflicts of interests.
- Comments are requested around whether there should be additional web disclosure requirements.
Conflicts of Interest: Policies and procedures updated to exclude offering incentives that might displace the retirement investor's best interests. Quotas, appraisals, bonuses, and contests are a few examples that would not be permitted.
Expanded availability to use this exemption for:
- Robo advice
- Pooled Plan Providers (PPP) providing investment advice to Pooled Employer Plans (PEP); however, a PPP's decision to hire an affiliated or related party party as an advice provider is excluded.

PTE 84-24

The DOL is proposing changes to the availability of the exemption and an additional section for independent insurance agents providing investment advice. The proposed changes include that this exemption:

is no longer available for investment advice fiduciaries and fiduciaries who have discretionary management of plan assets (they would generally have to use PTE 2020-02).
is not available for specific investment advice involving ERISA plans transactions where the insurance agent, insurer, or any affiliate is the employer administrator.
is available to independent insurance agents authorized to sell annuities from two or more unrelated insurers to provide investment advice for annuity products (including rollovers); however, they must:
- Fully disclose their compensation;
- Comply with impartial conduct standards (like PTE 2020-02);
- Provide investor documentation as to why the recommendation is in their best interest; and
- Meet the disclosure requirements similar to PTE 2020-02 regarding fiduciary status, fees, services, conflicts of interest, and a description of products they are licensed and authorized to sell, along with limitations.

PTEs 75-1, 77-4, 80-83, 83-1, and 86-128

In general, these PTEs are amended so that investment advice to ERISA plans or IRAs are excluded (they would generally need to use PTE 2020-02). A high-level summary of each PTE is noted below:

PTE 75-1: Covers a variety of brokerage transactions, mutual fund purchases, underwriting transactions, and extensions of credit.
PTE 77-4:Covers a retirement plan-end mutual fund, discretionary transactions, and can be used to provide advice to a plan or IRA owner to purchase a proprietary mutual fund.
PTE 80-83: Allows security purchase when the proceeds may be used to retire or reduce a debt to the fiduciary.
PTE 83-1: Provides relief for the purchase of mortgage pool interests.
PTE 86-128: Covers brokerage transactions where a plan pays a fee for executing securities transactions.

Effective Date

The DOL proposes to make the rule effective 60 days after the final rule and PTE amendments are published in the Federal Register. Comments are due on or before January 2, 2024. Comments are welcome on the proposed timeframe as well as other changes addressed within the proposals. The DOL is also anticipating that they will hold a public hearing on December 18, 2023.

Written comments must reference RIN 1210-AC02 and may be submitted either through:

Federal eRulemaking Portal at www.regulations.gov.
Mail to Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Ave. NW, Washington, DC 20210, Attention: Definition of Fiduciary RIN 1210-AC02.

The subject matter in this communication is educational only and provided with the understanding that Principal^® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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