Retirement Security Rule: Definition of an Investment Advice Fiduciary

Federal RegisterApr 25, 2024

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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2510

RIN 1210-AC02

Retirement Security Rule: Definition of an Investment Advice Fiduciary

AGENCY:

Employee Benefits Security Administration, Department of Labor

ACTION:

Final rule

SUMMARY:

The Department of Labor (Department) is adopting a final rule defining when a person renders “investment advice for a fee or other compensation, direct or indirect” with respect to any moneys or other property of an employee benefit plan, for purposes of the definition of a “fiduciary” in the Employee Retirement Income Security Act of 1974 (Title I of ERISA or the Act). The final rule also applies for purposes of Title II of ERISA to the definition of a fiduciary of a plan defined in Internal Revenue Code (Code), including an individual retirement account or other plan identified in the Code. The Department also is publishing elsewhere in this issue of the

Federal Register

amendments to Prohibited Transaction Exemption 2020-02 (Improving Investment Advice for Workers & Retirees) and to several other existing administrative exemptions from the prohibited transaction rules applicable to fiduciaries under Title I and Title II of ERISA.

DATES:

This regulation is effective September 23, 2024.

FOR FURTHER INFORMATION CONTACT:

•

For questions regarding the rule:

contact Luisa Grillo-Chope, Office of Regulations and Interpretations, Employee Benefits Security Administration (EBSA), 202-693-8510. (Not a toll-free number).

•

For questions regarding the prohibited transaction exemptions:

contact Susan Wilker, Office of Exemption Determinations, EBSA, 202-693-8540. (Not a toll-free number).

•

For questions regarding the Regulatory Impact Analysis:

contact James Butikofer, Office of Research and Analysis, EBSA, 202-693-8434. (Not a toll-free number).

Customer Service Information:

Individuals interested in obtaining information from the Department of Labor concerning Title I of ERISA and employee benefit plans may call the Employee Benefits Security Administration (EBSA) Toll-Free Hotline, at 1-866-444-EBSA (3272) or visit the Department of Labor's website (

https://www.dol.gov/agencies/ebsa

SUPPLEMENTARY INFORMATION:

A. Executive Summary

The Department is issuing a final rule defining an investment advice fiduciary for purposes of Title I and Title II of ERISA. The final rule defines when a person is a fiduciary in connection with providing advice to an investor saving for retirement through a workplace retirement plan or other type of retirement plan such as an IRA. Such retirement investors include participants and beneficiaries in workplace retirement plans, IRA owners and beneficiaries, as well as plan and IRA fiduciaries with authority or control with respect to the plan or IRA.

Under the final rule, a person is an investment advice fiduciary if they provide a recommendation in one of the following contexts:

• The person either directly or indirectly (

e.g.,

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:

○ is based on review of the retirement investor's particular needs or individual circumstances,

○ reflects the application of professional or expert judgment to the retirement investor's particular needs or individual circumstances, and

○ may be relied upon by the retirement investor as intended to advance the retirement investor's best interest; or

• 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 recommendation also must be provided “for a fee or other compensation, direct or indirect” as defined in the final rule.

As compared to the previous regulatory definition, which was finalized in 1975, the final rule better reflects the text and the purposes of ERISA and better protects the interests of retirement investors, consistent with the Department's mission to ensure the security of the retirement, health, and other workplace-related benefits of America's workers and their families.

The final rule is designed to ensure that retirement investors' reasonable expectations are honored when they receive advice from financial professionals who hold themselves out as trusted advice providers. The Department's regulation fills an important gap in those advice relationships where advice is not currently treated as fiduciary advice under the 1975 regulation's approach to ERISA's functional fiduciary definition. This may be the case even though the financial professional holds themselves out as providing recommendations that are based on review of the retirement investor's needs or circumstances and the application of professional or expert judgment to the retirement investor's needs or circumstances, and that can be relied upon to advance the retirement investor's best interest.

Together with amendments to administrative exemptions (PTEs) from the prohibited transaction rules applicable to fiduciaries under Title I and Title II of ERISA published elsewhere in this issue of the

Federal Register

, the final rule is intended to protect the interests of retirement investors by requiring persons who are defined in the final rule as investment advice fiduciaries to adhere to stringent conduct standards and mitigate their conflicts of interest. The amended PTEs' compliance obligations are generally consistent with the best interest obligations set forth in the Securities and Exchange Commission's (SEC) Regulation Best Interest and its Commission Interpretation Regarding Standard of Conduct for Investment Advisers (SEC Investment Adviser Interpretation), each released in 2019.

The Department anticipates that the most significant benefits of the final rule and amended PTEs will stem from the application of ERISA's fiduciary protections under Title I and Title II and PTE conditions to all covered investment advice provided to retirement investors. Under the final rule and amended PTEs, advice providers that satisfy the definition of an investment advice fiduciary will be required to adhere to the prudence standard of care, reduce retirement investor exposure to conflicted advice that may erode investment returns, and adopt protective conflict-mitigation requirements.

The references in this document to a “fiduciary” are intended to mean an ERISA Title I and Title II fiduciary unless otherwise stated.

Requiring advice providers to operate in compliance with ERISA fiduciary protections will be especially beneficial with respect to those transactions that currently are not uniformly covered by fiduciary protections consistent with ERISA's high standards. Those transactions include recommendations to roll over assets from a workplace

retirement plan to an IRA in those cases in which the advice provider is not subject to Federal securities law standards and, as is often the case, has not previously advised the customer about plan or IRA assets on a regular basis. Other examples include investment recommendations with respect to many commonly purchased retirement annuities, such as fixed indexed annuities; recommendations of other investments that may not be subject to the SEC's Regulation Best Interest, such as real estate, certain certificates of deposit, and other bank products; and investment recommendations to plan fiduciaries with authority or control with respect to the plan.

A proposed rule and proposed amendments to the PTEs were released by the Department on October 31, 2023 for notice and public comment, and public hearings on the proposals were held on December 12 and 13, 2023. The Department has made certain changes and clarifications in the final rule in response to public comments on the proposal and the testimony presented at the public hearings. The final rule narrows the contexts in which a covered recommendation will constitute ERISA fiduciary investment advice and makes clear that the test for fiduciary status is objective. Similarly, a new paragraph in the regulatory text 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 rule. Additionally, the final rule makes clear that the 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. Accordingly, the rule excludes plan and IRA investment advice fiduciaries from the definition of a retirement investor. As a result, an asset manager does not render fiduciary advice simply by making recommendations to a financial professional or firm that, in turn, will render advice to retirement investors in a fiduciary capacity. The Department believes the final rule, with these revisions, appropriately defines an investment advice fiduciary to comport with reasonable investor expectations of trust and confidence.

B. Background

1. Title I and Title II of ERISA and the 1975 Rule

Title I of ERISA imposes duties and restrictions on persons who are “fiduciaries” with respect to employee benefit plans. In particular, fiduciaries to Title I plans must adhere to duties of prudence and loyalty. ERISA section 404 provides that Title I plan fiduciaries must act with the “care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims,” and that they also must discharge their duties with respect to a plan “solely in the interest of the participants and beneficiaries.”

ERISA section 404, 29 U.S.C. 1104.

These fiduciary duties, which are rooted in the common law of trusts, are reinforced by prohibitions against transactions involving conflicts of interest because of the dangers such transactions pose to plans and their participants. The prohibited transaction provisions of ERISA, including Title II of ERISA which is codified in the Internal Revenue Code (Code), “categorically bar[ ]” plan fiduciaries from engaging in transactions deemed “likely to injure the pension plan”

absent compliance with a prohibited transaction exemption. The provisions include prohibitions on a fiduciary's “deal[ing] with the assets of the plan in his own interest or for his own account,” and “receiv[ing] any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.”

Thus, ERISA requires fiduciaries who have conflicts of interest, including from financial incentives, to comply with protective conditions in a prohibited transaction exemption. Congress included some statutory prohibited transaction exemptions in ERISA and also authorized the Department to grant conditional administrative exemptions from the prohibited transaction provisions, but only if the Department finds that the exemption is (1) administratively feasible for the Department, (2) in the interests of the plan and of its participants and beneficiaries, and (3) protective of the rights of participants and beneficiaries of such plan.

Harris Trust Sav. Bank

Salomon Smith Barney Inc.,

530 U.S. 238, 241-42 (2000) (citation and quotation marks omitted).

ERISA section 406(b)(1), (3), 29 U.S.C. 1106(b)(1), (3).

ERISA section 408(a), 29 U.S.C. 1108(a).

Title II of ERISA, codified in the Code,

governs the conduct of fiduciaries to plans defined in Code section 4975(e)(1), which includes IRAs.

Some plans defined in Code section 4975(e)(1) are also covered by Title I of ERISA, but the definitions of such plans are not identical. Although Title II, as codified in the Code, does not directly impose specific duties of prudence and loyalty on fiduciaries as in ERISA section 404(a), it prohibits fiduciaries from engaging in conflicted transactions on many of the same terms as Title I.

Under the Reorganization Plan No. 4 of 1978, which Congress subsequently ratified in 1984,

Congress generally granted the Department authority to interpret the fiduciary definition and issue administrative exemptions from the prohibited transaction provisions in Code section 4975.

This preamble discussion includes some references to the Code in the context of discussions of Title II of ERISA involving specific provisions codified in the Code. The Department understands that references to the Code are useful but emphasizes that both Title I and Title II are covered by the same general definition of fiduciary and the same general framework of prohibited transactions, and that, under both Title I and Title II, fiduciaries must comply with the conditions of an available prohibited transaction exemption in order to engage in an otherwise prohibited transaction.

For purposes of the final rule, the term “IRA” is defined as any account or annuity described in Code section 4975(e)(1)(B)-(F), and includes individual retirement accounts, individual retirement annuities, health savings accounts, and certain other tax-advantaged trusts and plans. However, for purposes of any rollover of assets between a Title I plan and an IRA described in this preamble, the term “IRA” includes only an account or annuity described in Code section 4975(e)(1)(B) or (C). Additionally, while the Department uses the term “

retirement

investor” throughout this document to describe advice recipients, that is not intended to suggest that the fiduciary definition applies only with respect to employee pension benefit plans and IRAs that are retirement savings vehicles. As discussed herein, the final rule applies with respect to plans as defined in Title I and Title II of ERISA that make investments. In this regard, see also paragraph (f)(12) that provides that the term “investment property” “does not include health insurance policies, disability insurance policies, term life insurance policies, or other property to the extent the policies or property do not contain an investment component.”

26 U.S.C. 4975(c)(1);

cf. id.

at 4975(f)(5), which defines “correction” with respect to prohibited transactions as placing a plan or an IRA in a financial position not worse than it would have been in if the person had acted “under the highest fiduciary standards.”

Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).

5 U.S.C. App. 752 (2018).

Many of the protections, duties, and liabilities in both Title I and Title II of ERISA hinge on fiduciary status. ERISA includes a statutory definition of a

fiduciary at section 3(21)(A), which provides that a person is a fiduciary with respect to a plan to the extent the person (i) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or discretionary responsibility in the administration of such plan.

The same definition of a fiduciary is in Code section 4975(e)(3).

ERISA section 3(21)(A), 29 U.S.C. 1002(21)(A).

26 U.S.C. 4975(e)(3).

These statutory definitions broadly assign fiduciary status for purposes of Title I and Title II of ERISA. Thus, “any authority or control” over plan assets is sufficient to confer fiduciary status, and any person who renders “investment advice for a fee or other compensation, direct or indirect” is an investment advice fiduciary, regardless of whether they have direct control over the plan's assets, and regardless of their status under another statutory or regulatory regime. In the absence of fiduciary status, persons who provide investment advice to retirement investors would neither be subject to Title I of ERISA's fundamental fiduciary standards, nor responsible under Title I and Title II of ERISA for avoiding prohibited transactions. The broad statutory definition, the prohibitions on conflicts of interest, and the core fiduciary obligations of prudence and loyalty (as applicable) all reflect Congress' recognition in 1974, when it passed ERISA, of the fundamental importance of investment advice to protect the interests of retirement investors.

In 1975, shortly after ERISA was enacted, the Department issued a regulation at 29 CFR 2510.3-21(c)(1) (the 1975 regulation) that defined the circumstances under which a person renders “investment advice” to an employee benefit plan within the meaning of ERISA section 3(21)(A)(ii), such that the person would be a fiduciary under ERISA.

The 1975 regulation significantly narrowed the plain and expansive language of ERISA section 3(21)(A)(ii), creating a five-part test that must be satisfied in order for a person to be treated as a fiduciary by reason of rendering investment advice. Under the five-part test, a person is a fiduciary only if they: (1) render advice as to the value of securities or other property, 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, arrangement, or understanding with the plan or a plan fiduciary that (4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that (5) the advice will be individualized based on the particular needs of the plan. At the time the 1975 regulation was issued, the Department of the Treasury had sole regulatory authority over Code section 4975(e)(3), and issued a virtually identical regulation, 26 CFR 54.4975-9(c)(1), which applies to plans defined in Code section 4975.

40 FR 50842 (Oct. 31, 1975).

40 FR 50840 (Oct. 31, 1975). The issuance of this 1975 regulation pre-dated The Reorganization Plan No. 4 of 1978, and thus authority to issue this regulatory definition under Title II of ERISA was still with the Department of the Treasury.

Since 1975, the retirement plan landscape has changed significantly, with a shift from defined benefit plans (in which decisions regarding investment of plan assets are primarily made by professional asset managers) to defined contribution/individual account plans, such as 401(k) plans (in which decisions regarding investment of plan assets are often made by plan participants who lack professional investment expertise). In 1975, individual retirement accounts had only recently been created (by ERISA itself), and 401(k) plans did not yet exist.

Retirement assets were principally held in pension funds controlled by large employers or other large plan sponsors and professional money managers. Now, IRAs and plans providing for participant-directed investments, such as 401(k) plans, have become more common retirement vehicles as opposed to traditional pension plans, and rollovers of workplace retirement plan assets to IRAs are commonplace. Individuals, regardless of their financial literacy, have thus become increasingly responsible for their own retirement savings, and have increasingly become direct recipients of investment advice with respect to those savings.

Section 2002(b) of Title II of ERISA established individual retirement accounts with the addition of 408(a) to the Code.

See

Public Law 93-406.

The shift toward individual control over retirement investing (and the associated shift of risk to individuals) has been accompanied by a dramatic increase in the variety and complexity of financial products and services, which has widened the information gap between investment advice providers and their clients. Plan participants and other retirement investors may be unable to assess the quality of the advice they receive and may not be in a position to learn of and guard against the investment advice provider's conflicts of interest.

However, as a result of the five-part test in the 1975 regulation, and its limiting interpretation of ERISA's statutory, functional fiduciary definition, many financial professionals, consultants, and financial advisers have no legal obligation to adhere to the fiduciary standards in Title I of ERISA or to the prohibited transaction rules in Title I and Title II of ERISA, despite the critical role these professionals, consultants and advisors play in guiding plan and IRA investments. In many situations, this disconnect undermines the reasonable expectations of retirement investors in today's marketplace; a retirement investor may reasonably expect that the advice they are receiving from a trusted adviser is fiduciary advice even when, under the 1975 regulation's interpretation, it is not. If these investment advice providers are not fiduciaries under Title I or Title II of ERISA, they do not have obligations under Federal pension law to either avoid prohibited transactions or comply with the protective conditions in a PTE.

In the securities law context, both SEC Regulation Best Interest and the Advisers Act fiduciary duty have specific obligations related to disclosure and/or mitigation of conflicts of interest. The SEC also adopted the Form CRS, which is a brief relationship summary required to be provided by broker-dealers and investment advisers to retail investors. The SEC stated that the Form CRS “is intended to inform retail investors about: [t]he types of client and customer relationships and services the firm offers; the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; whether the firm and its financial professionals currently have reportable legal or disciplinary history; and how to obtain additional information about the firm.” 84 FR 33492 (July 12, 2019).

Recently, other regulators have recognized the need for change in the regulation of investment recommendations and have imposed enhanced conduct standards on financial professionals who make investment recommendations, including broker-dealers and insurance agents. As a result, the regulatory landscape today is very different than it was even five years ago. In 2019, the SEC adopted Regulation Best Interest, which established an enhanced best interest standard of conduct applicable to broker-dealers when making a recommendation of any securities transaction or investment strategy involving securities to retail customers.

The SEC also issued its SEC Investment Adviser Interpretation

in 2019, which addressed the conduct standards applicable to investment advisers under the Investment Advisers Act of 1940 (Advisers Act).

Describing these actions, the SEC has said, “key elements of the standard of conduct that applies to broker-dealers under Regulation Best Interest will be substantially similar to key elements of the standard of conduct that applies to investment advisers pursuant to their fiduciary duty under the Advisers Act.”

In this connection, the SEC has also stressed that Regulation Best Interest “aligns the standard of conduct with retail customers' reasonable expectations.”

Regulation Best Interest: The Broker-Dealer Standard of Conduct, 84 FR 33318 (July 12, 2019) (Regulation Best Interest release).

84 FR 33669 (July 12, 2019).

Regulation Best Interest release, 84 FR 33318, 33330 (July 12, 2019);

see also

ERISA section 408(a); Code section 4975(c)(2).

Best Interest Contract Exemption, 81 FR at 21077.

Id.

at 21076.

Id.

at 21078-9.

81 FR 21139 (Apr. 8, 2016); 81 FR 21147 (Apr. 8, 2016); 81 FR 21181 (Apr. 8, 2016); 81 FR 21208 (Apr. 8, 2016).

3. Litigation Over the 2016 Rulemaking

The 2016 Final Rule and related new and amended exemptions (collectively, the 2016 Rulemaking) was challenged in multiple lawsuits. In

National Association for Fixed Annuities

Perez,

a district court in the District of Columbia upheld the 2016 Rulemaking in the context of a broad challenge on multiple grounds.

Among other things, the court found that the 2016 Final Rule comports with both the text and the purpose of ERISA, and it noted “if anything, it is the five-part test—and not the current rule—that is difficult to reconcile with the statutory text. Nothing in the phrase `renders investment advice' suggests that the statute applies only to advice provided `on a regular basis.' ”

Relatedly, in

Market Synergy

United States Department of Labor,

the U.S. Court of Appeals for the Tenth Circuit affirmed a district court's decision similarly upholding the 2016 Rulemaking as it applied to fixed indexed annuities.

Nat'l Assoc. for Fixed Annuities

Perez,

217 F.Supp.3d 1 (D.D.C. 2016) [hereinafter

NAFA

]. On December 15, 2016, the U.S. Court of Appeals for the District of Columbia denied an emergency request to stay application of the definition or the exemptions pending an appeal of the district court's ruling.

Nat'l Assoc. for Fixed Annuities

Perez,

No. 16-5345, 2016 BL 452075 (D.C. Cir. 2016).

NAFA,

217 F. Supp. 3d at 23, 27-28.

885 F.3d 676 (10th Cir. 2018);

see Thrivent Financial for Lutherans

Acosta,

No. 16-CV-03289, 2017 WL 5135552 (D. Minn. Nov. 3, 2017) (granting the Department's motion for a stay and the plaintiff's motion for a preliminary injunction, with respect to Thrivent's suit challenging the BIC Exemption's bar on class action waivers as exceeding the Department's authority and as unenforceable under the Federal Arbitration Act).

On March 15, 2018, however, the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) overturned a district court's decision upholding the validity of the 2016 Final Rule

and vacated the entire 2016 Rulemaking, in

Chamber of Commerce

United States Department

of Labor (Chamber).

The Fifth Circuit held that the 2016 Final Rule conflicted with ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B). Specifically, the Fifth Circuit found that the 2016 Final Rule swept too broadly and extended to relationships that lacked “trust and confidence,” which the court stated were hallmarks of the common-law fiduciary relationship that Congress intended to incorporate into the statutory definitions. The court concluded that “all relevant sources indicate that Congress codified the touchstone of common-law fiduciary status—the parties' underlying relationship of trust and confidence—and nothing in the statute `requires' departing from the touchstone.”

Chamber of Commerce

Hugler,

231 F. Supp. 3d 152 (N.D. Tex. Feb. 8, 2017) (finding, among other things, that in the 2016 Final Rule, the Department reasonably removed the “regular basis” requirement; and noting, “if anything, however, the five-part test is the more difficult interpretation to reconcile with who is a fiduciary under ERISA.”).

885 F.3d 360 (5th Cir. 2018);

but see id.

at 391 (“Nothing in the phrase `renders investment advice for a fee or other compensation' suggests that the statute applies only in the limited context accepted by the panel majority.”) (Stewart, C.J., dissenting).

Id.

at 369;

but see Mertens

Hewitt Associates,

508 U.S. 248, 262 (1993) (finding that Congress intentionally departed from the common law of trusts by defining an ERISA “ `fiduciary' not in terms of formal trusteeship, but in

functional

terms . . . thus expanding the universe of persons subject to fiduciary duties”) (citations omitted).

In addition to holding that the 2016 Final Rule conflicted with the statutory definitions in Title I and Title II of ERISA, the Fifth Circuit in

Chamber

also determined that the 2016 Rulemaking failed to honor the difference in the Department's authority over employee benefit plans under Title I of ERISA and IRAs under Title II, by imposing “novel and extensive duties and liabilities on parties otherwise subject only to the prohibited transactions penalties.”

These included the conditions of the BIC Exemption and Principal Transactions Exemption that required financial institutions and individual fiduciary advisers to enter into contracts with their customers with specific duties, warranties, and disclosures, and forbade damages limitations and class action waivers. Under the Code, IRA investors do not have a private right of action. Instead, the primary remedy for a violation of the prohibited transaction provisions under the Code is the assessment of an excise tax.

In the Fifth Circuit's view, the Department had effectively exceeded its authority by giving IRA investors the ability to bring a private cause of action that Congress had not authorized.

Chamber,

885 F.3d at 384.

Code section 4975(a), (b).

Chamber,

885 F.3d at 384.

In response to the Fifth Circuit's vacatur of the 2016 Rulemaking, on May 7, 2018, the Department issued Field Assistance Bulletin 2018-02, Temporary Enforcement Policy on Prohibited Transactions Rules Applicable to Investment Advice Fiduciaries (FAB 2018-02).

FAB 2018-02 announced that, pending further guidance, the Department would not pursue prohibited transaction claims against fiduciaries who were working diligently and in good faith to comply with the Impartial Conduct Standards for transactions that would have been exempted in the BIC Exemption and Principal Transactions Exemption, or treat such fiduciaries as violating the applicable prohibited transaction rules.

Available at

https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-02.

4. Subsequent Actions by the Department

In 2020, the Department issued a technical amendment to the Code of Federal Regulations (CFR) reinserting the 1975 regulation, reflecting the Fifth Circuit's vacatur of the 2016 Final Rule.

The technical amendment also reinserted into the CFR Interpretive Bulletin 96-1 (IB 96-1) relating to participant investment education, which had been removed and largely incorporated into the text of the 2016 Final Rule. Additionally, the Department updated its website to reflect the fact that the pre-existing prohibited transaction exemptions that had been amended in the 2016 Rulemaking had been restored to their pre-amendment form, and also to reflect that the Department had withdrawn the Deseret Letter.

85 FR 40589 (July 7, 2020).

The Department also adopted a new PTE, Improving Investment Advice for Workers & Retirees, also known as PTE 2020-02.

The exemption provides relief that is similar in scope to the BIC Exemption and the Principal Transactions Exemption, but it does not include contract or warranty provisions.

85 FR 82798 (Dec. 18, 2020).

The preamble to PTE 2020-02 also included the Department's interpretation of when advice to roll over assets from a workplace retirement plan to an IRA would constitute fiduciary investment advice under the 1975 regulation's five-part test.

The preamble interpretation confirmed the Department's continued view that the Deseret Letter was incorrect, and that a recommendation to roll assets out of a Title I plan is advice with respect to moneys or other property of the plan and, if provided by a person who satisfies all of the requirements of the 1975 regulatory test, constitutes fiduciary investment advice.

The preamble interpretation also discussed when a recommendation to roll over assets from an employee benefit plan to an IRA would satisfy the “regular basis” requirement.

Additionally, the preamble set forth the Department's interpretation of the 1975 regulation's requirement of “a mutual agreement, arrangement, or understanding” that the investment advice will serve as “a primary basis for investment decisions.”

In April 2021, the Department issued Frequently Asked Questions (FAQs) that, among other things, summarized aspects of the preamble interpretation.

Id.

at 82802-9.

Id.

New Fiduciary Advice Exemption: PTE 2020-02 Improving Investment Advice for Workers & Retirees Frequently Asked Questions,

https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.

The Department's preamble interpretation and certain FAQs were challenged as inconsistent with the 1975 regulation in two lawsuits filed after the issuance of PTE 2020-02.

On February 13, 2023, the U.S. District Court for the Middle District of Florida issued an opinion vacating the policy referenced in FAQ 7 (entitled “When is advice to roll over assets from an employee benefit plan to an IRA considered to be on a `regular basis' ? ”) and remanded it to the Department for further proceedings.

On June 30, 2023, a magistrate judge in the Northern District of Texas filed a report with the judge's findings, conclusions, and recommendations, including a recommendation that the court should vacate portions of PTE 2020-02 that permit consideration of actual or expected Title II investment advice relationships when determining Title I fiduciary status, as inconsistent with the 1975 regulation.

Compl.,

Am. Sec. Ass'n.

U.S. Dep't of Labor,

No. 8:22-CV-330VMC-CPT, 2023 WL 1967573 (M.D. Fla. Feb. 13, 2023); Compl.,

Fed'n of Ams. for Consumer Choice

U.S. Dep't of Labor,

No. 3:22-CV-00243-K-BT (N.D. Tex. Feb. 2, 2022).

Am. Sec. Ass'n.

U.S. Dep't of Labor,

2023 WL 1967573, at *22-23.

See

Findings, Conclusions, and Recommendations of the United States Magistrate Judge,

Fed'n of Ams. for Consumer Choice

U.S. Dep't of Labor,

No. 3:22-CV-00243-K-BT, 2023 WL 5682411, at *27-29 (N.D. Tex. June 30, 2023) [hereinafter

FACC

]. As of the date of this final rule, the district court judge has not yet taken action regarding the magistrate judge's report and recommendations.

5. Other Regulatory Developments

U.S. Securities and Exchange Commission

Since the vacatur of the Department's 2016 Rulemaking, other regulators have considered and adopted enhanced standards of conduct for financial professionals as a method of addressing, among other things, conflicts of interest. At the Federal level, on June 5, 2019, the SEC finalized a regulatory package relating to conduct standards for broker-dealers and investment advisers. The package included Regulation Best Interest, which established an enhanced best interest standard of conduct applicable to broker-dealers when making a recommendation of any securities transaction or investment strategy involving securities to retail customers.

See

Regulation Best Interest release, 84 FR 33318 (July 12, 2019).

The SEC's Regulation Best Interest enhanced the broker-dealer standard of conduct “beyond existing suitability obligations.”

According to the SEC, this

Id.

[A]lign[ed] the standard of conduct with retail customers' reasonable expectations by requiring broker-dealers, among other things, to: Act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer; and address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest, and in instances where [the SEC has] determined that disclosure is insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the conflict.

Id.

Regulation Best Interest's “best interest obligation” includes a Disclosure Obligation, a Care Obligation, a Conflict of Interest Obligation, and a Compliance Obligation. The Care Obligation requires broker-dealers, in making recommendations, to exercise “reasonable diligence, care, and skill” to:

(A) Understand the potential risks, rewards, and costs associated with the recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers;

(B) Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer's investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the financial or other interest of the broker, dealer, or such natural person ahead of the interest of the retail customer; [and]

(C) Have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer's best interest when viewed in isolation, is not excessive and is in the retail customer's best interest when taken together in light of the retail customer's investment profile and does not place the financial or other interest of the broker, dealer, or such natural person making the series of recommendations ahead of the interest of the retail customer.

17 CFR 240.15l-1(a)(2)(ii).

In guidance on the care obligations applicable to both broker-dealers and investment advisers, the SEC staff explained,

In the context of providing investment advice and recommendations to retail investors, the care obligations generally include three overarching and intersecting components. . . . [T]hese components are:

Understanding the potential risks, rewards, and costs associated with a product, investment strategy, account type, or series of transactions (the “investment or investment strategy”);

Having a reasonable understanding of the specific retail investor's investment profile, which generally includes the retail investor's financial situation (including current income) and needs; investments; assets and debts; marital status; tax status; age; investment time horizon; liquidity needs; risk tolerance; investment experience; investment objectives and financial goals; and any other information the retail investor may disclose in connection with the recommendation or advice; and

Based on the understanding of the first two elements, as well as, in the staff's view, a consideration of reasonably available alternatives, having a reasonable basis to conclude that the recommendation or advice provided is in the retail investor's best interest.

Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations (footnotes omitted),

https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers.

The Conflict of Interest Obligation requires the broker-dealer to establish, maintain, and enforce written policies and procedures reasonably designed to:

(A) Identify and at a minimum disclose, [in accordance with Regulation Best Interest], or eliminate, all conflicts of interest associated with such recommendations;

(B) Identify and mitigate any conflicts of interest associated with such recommendations that create an incentive for a natural person who is an associated person of a broker or dealer to place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer;

(C) Identify and disclose any material limitations placed on the securities or investment strategies involving securities that may be recommended to a retail customer and any conflicts of interest associated with such limitations, and prevent such limitations and associated conflicts of interest from causing the broker, dealer, or a natural person who is an associated person of the broker or dealer to make recommendations that place the interest of the broker, dealer, or such natural person ahead of the interest of the retail customer [in accordance with Regulation Best Interest]; and

(D) Identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.

17 CFR 240.15l-1(a)(2)(iii).

A conflict of interest is defined as “an interest that might incline a broker, dealer, or a natural person who is an associated person of a broker or dealer—consciously or unconsciously—to make a recommendation that is not disinterested.”

Id.

at (b)(3).

In guidance on conflicts of interest applicable to both broker-dealers and investment advisers, the SEC staff has stated,

All broker-dealers, investment advisers, and financial professionals have at least some conflicts of interest with their retail investors. Specifically, they have an economic incentive to recommend products, services, or account types that provide more revenue or other benefits for the firm or its financial professionals, even if such recommendations or advice are not in the best interest of the retail investor. . . . Consistent with their obligation to act in a retail investor's best interest, firms must address conflicts in a way that will prevent the firm or its financial professionals from providing recommendations or advice that places their interests ahead of the interests of the retail investor.

Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflict of Interest,

https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest.

In the Regulation Best Interest Release, the SEC stated that “[t]he Commission has crafted Regulation Best Interest to draw on key principles underlying fiduciary obligations, including those that apply to investment advisers under the Advisers Act, while providing specific requirements to address certain aspects of the relationships between broker-dealers and their retail customers.”

The SEC emphasized that, “[i]mportantly, regardless of whether a retail investor chooses a broker-dealer or an investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial

professional ahead of the interests of the retail investor.”

The SEC also noted that the standard of conduct established by Regulation Best Interest cannot be satisfied through disclosure alone.

84 FR 33318, 33320 (July 12, 2019).

Id.

at 33321.

Id.

at 33390.

The SEC's Regulation Best Interest applies to broker-dealers and their associated persons when they make a recommendation to a retail customer of any “securities transaction or investment strategy involving securities (including account recommendations).”

According to the SEC, this language encompasses recommendations to roll over or transfer assets in a workplace retirement plan account to an IRA, and recommendations to take a plan distribution.

However, the SEC also stated that while Regulation Best Interest applies to advice regarding a person's own retirement account such as a 401(k) account or IRA, it does not cover advice to workplace retirement plans themselves or to their legal representatives when they are receiving advice on the plan's behalf.

17 CFR 240.15l-1(a)(1).

Regulation Best Interest Release, 84 FR 33318, 33337 (July 12, 2019).

Id.

at 33343-44.

The SEC Investment Adviser Interpretation, published simultaneously with Regulation Best Interest, reaffirmed and in some cases clarified aspects of the fiduciary duty of an investment adviser under the Advisers Act.

The SEC stated that “an investment adviser's fiduciary duty under the Investment Advisers Act comprises both a duty of care and a duty of loyalty.”

According to the SEC, “[t]his fiduciary duty is based on equitable common law principles and is fundamental to advisers' relationships with their clients under the Advisers Act.”

The fiduciary duty under the Federal securities laws requires an adviser “to adopt the principal's goals, objectives, or ends.”

The SEC stated:

84 FR 33669 (July 12, 2019).

Id.

at 33671 (footnote omitted).

Id.

at 33670.

Id.

at 33671.

This means the adviser must, at all times, serve the best interest of its client and not subordinate its client's interest to its own. In other words, the investment adviser cannot place its own interests ahead of the interests of its client. This combination of care and loyalty obligations has been characterized as requiring the investment adviser to act in the “best interest” of its client at all times.

Id.

(footnote omitted).

The SEC further stated, “[t]he investment adviser's fiduciary duty is broad and applies to the entire adviser-client relationship.”

An investment adviser's fiduciary duty under the Advisers Act applies to advice about whether to rollover assets from one account to another, including rolling over from retirement accounts into an account that will be managed by the investment adviser or an affiliate.

at 33670. See also

id.

fn. 17 (citing authorities where the Commission previously recognized the broad scope of section 206 of the Advisers Act in a variety of contexts).

Id.

at 33674.

State Legislative and Regulatory Developments

Since the vacatur of the Department's 2016 Rulemaking, there have also been legislative and regulatory developments at the State level involving conduct standards. For instance, the Massachusetts Securities Division amended its regulations to apply a fiduciary conduct standard under which broker-dealers and their agents must “[m]ake recommendations and provide investment advice without regard to the financial or any other interest of any party other than the customer.”

950 Mass. Code Regs. 12.204 & 12.207 as amended effective March 6, 2020;

see

Consent Order,

In the Matter of Scottrade, Inc.,

No. E-2017-0045 (June 30, 2020);

see also Enf't Section of Massachusetts Sec. Div. of Office of Sec'y of Commonwealth

Scottrade, Inc.,

327 F. Supp. 3d 345, 352 (D. Mass. 2018) (discussing enforcement actions under Massachusetts securities and other consumer protection laws). A challenge to the regulation was rejected by the Massachusetts Supreme Judicial Court.

See Robinhood Fin. LLC

Sec'y of Commonwealth of Mass,

No. SJC-13381, 2023 WL 5490571 (Mass. Aug. 25, 2023).

Additionally, the NAIC Model Regulation, updated in 2020, provides that insurance agents must act in the consumer's “best interest,” as defined by the Model Regulation, when making a recommendation of an annuity, and insurers must establish and maintain a system to supervise recommendations so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed.

The NAIC Model Regulation also provides that it does not apply to transactions involving contracts used to fund an employee pension or welfare plan covered by ERISA.

According to the NAIC, as of March 11, 2024, 45 jurisdictions have implemented the revisions to the model regulation.

Available at

www.naic.org/store/free/MDL-275.pdf.

NAIC Model Regulation at section 4.B.(1).

See https://content.naic.org/sites/default/files/inline-files/275%20Final%20Map_2020%20Changes_March%2011%202024.pdf.

The NAIC Model Regulation includes a best interest obligation comprised of a care obligation, a disclosure obligation, a conflict of interest obligation, and a documentation obligation, applicable to an insurance producer.

If these specific obligations are met, the producer is treated as satisfying the overarching best interest standard as expressed in the NAIC Model Regulation. The care obligation states that the producer, in making a recommendation, must exercise “reasonable diligence, care and skill” to:

A producer is defined in section 5.L. of the NAIC Model Regulation as “a person or entity required to be licensed under the laws of this state to sell, solicit or negotiate insurance, including annuities.” Section 5.L. further provides that the term producer includes an insurer where no producer is involved.

(i) Know the consumer's financial situation, insurance needs and financial objectives;

(ii) Understand the available recommendation options after making a reasonable inquiry into options available to the producer;

(iii) Have a reasonable basis to believe the recommended option effectively addresses the consumer's financial situation, insurance needs and financial objectives over the life of the product, as evaluated in light of the consumer profile information; and

(iv) Communicate the basis or bases of the recommendation.

NAIC Model Regulation at section 6.A.(1)(a).

The NAIC conflict of interest obligation requires the producer to “identify and avoid or reasonably manage and disclose material conflicts of interest, including material conflicts of interest related to an ownership interest.”

Further, under the NAIC Model Regulation, insurers are required to “establish and maintain reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific annuities within a limited period of time.”

Id.

at section 6.A.(3).

Id.

at section 6.C.(2)(h).

The NAIC Model Regulation's requirements regarding mitigation of material conflicts of interest are not as stringent as either the Department's approach under ERISA or the SEC's approach. This is made clear in the NAIC Model Regulation's definition of a “material conflict of interest” which expressly carves out all “cash compensation or non-cash compensation” from treatment as sources of conflicts of interest.

“Cash compensation” that is excluded from the definition of a material conflict of interest is broadly defined to include “any discount, concession, fee, service fee, commission, sales charge, loan, override, or cash benefit received by a producer in connection with the

recommendation or sale of an annuity from an insurer, intermediary, or directly from the consumer,” and “non-cash compensation” is also broadly defined to include “any form of compensation that is not cash compensation, including, but not limited to, health insurance, office rent, office support and retirement benefits.”

Id.

at section 5.I.

Id.

at section 5.B. and J.

Recent guidance from the SEC staff on broker-dealer and investment adviser conflicts of interest, on the other hand, makes clear that conduct standards in the securities market require a “robust, ongoing process that is tailored to each conflict.”

The SEC staff guidance provides a detailed list of types of compensation that the SEC staff believes are examples of common sources of conflicts of interest, as follows:

Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflict of Interest,

https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest.

compensation, revenue or other benefits (financial or otherwise) to the firm or its affiliates, including fees and other charges for the services provided to retail investors (for example, compensation based on assets gathered and/or products sold, including but not limited to receipt of assets under management (“AUM”) or engagement fees, commissions, markups, payment for order flow, cash sweep programs, or other sales charges) or payments from third parties whether or not related to sales or distribution (for example, sub-accounting or administrative services fees paid by a fund or revenue sharing);

compensation, revenue or other benefits (financial or otherwise) to financial professionals from their firm or its affiliates (for example, compensation or other rewards associated with quotas, bonuses, sales contests, special awards; differential or variable compensation based on the product sold, accounts recommended, AUM, or services provided; incentives tied to appraisals or performance reviews; forgivable loans based upon the achievement of specified performance goals related to asset accumulation, revenue benchmarks, client transfer, or client retention);

compensation, revenue or other benefits (financial or otherwise) (including, but not limited to, gifts, entertainment, meals, travel, and related benefits, including in connection with the financial professional's attendance at third-party sponsored trainings and conferences) to the financial professionals resulting from other business or personal relationships the financial professional may have, relationships with third parties that may relate to the financial professional's association or affiliation with the firm or with another firm (whether affiliated or unaffiliated), or other relationships within the firm; an

compensation, revenue or other benefits (financial or otherwise) to the firm or its affiliates resulting from the firm's or its financial professionals' sales or offer of proprietary products or services, or products or services of affiliates.

Id.

The NAIC expressly disclaimed that its standard creates fiduciary obligations, and the obligations in its Model Regulation differ in significant respects from those applicable to broker-dealers in the SEC's Regulation Best Interest or to investment advisers pursuant to the Advisers Act's fiduciary duty.

In addition to disregarding all forms of compensation as a source of material conflicts of interest, as discussed above, the NAIC Model Regulation's “best interest” standard is satisfied by the four component obligations—the care, disclosure, conflict of interest, and documentation obligations—but these components do not expressly incorporate the best interest obligation not to put the producer's or insurer's interests before the customer's interests, even though compliance with the component obligations' terms is treated as meeting the NAIC Model Regulation's “best interest” standard. Similarly, the NAIC Model Regulation's care obligation does not repeat the “best interest” requirement but instead includes a requirement to “have a reasonable basis to believe the recommended option effectively addresses the consumer's financial situation, insurance needs and financial objectives . . . .”

100

Additionally, the obligation to comply with the “best interest” standard is limited to the individual producer, as opposed to the insurer responsible for supervising the producer.

Section 6.A.(1)(d) of the NAIC Model Regulation provides, “[t]he requirements under this subsection do not create a fiduciary obligation or relationship and only create a regulatory obligation as established in this regulation.” In recent insurance industry litigation against the Department, plaintiff Federation of Americans for Consumer Choice, Inc., stated that “[t]here is a world of difference” between the NAIC Model Regulation and ERISA's fiduciary regime.

See

Pls.' (1) Br. In Opp'n to Defs.' Cross-Motion to Dismiss for Lack of Jurisdiction or, in the Alternative, for Summ. J., and (2) Reply Br. in Supp. of Pls. Mot. for Summ. J, 40,

Fed'n of Ams. for Consumer Choice

U.S. Dep't of Labor,

No. 3:22-CV-00243-K-BT (Nov. 7, 2022) (comparing ERISA's best interest requirement to NAIC Model Regulation 275, sections 2.B and 6.A.(1)(d)).

100

NAIC Model Regulation at section 6.A.(1)(a)(iii).

The State of New York took a different approach than the NAIC Model Regulation in its NY Insurance Regulation 187, effective February 1, 2020. Under the New York regulation, an insurance producer acts in the best interest of the consumer when, among other things,

the producer's . . . recommendation to the consumer is based on an evaluation of the relevant suitability information of the consumer and reflects the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the circumstances then prevailing. Only the interests of the consumer shall be considered in making the recommendation. The producer's receipt of compensation or other incentives permitted by the Insurance Law and the Insurance Regulations is permitted by this requirement provided that the amount of the compensation or the receipt of an incentive does not influence the recommendation.

Thus, under New York law, insurance producers must act prudently in making a recommendation and must not allow compensation or other incentives to influence their recommendations. According to the American Council of Life Insurers, out of 713 life insurers in the United States, 81 were domiciled in New York in 2022, and annuity direct premium receipts in New York in 2022 totaled $31.4 billion.

101

ACLI 2023 Life Insurers Fact Book,

https://www.acli.com/-/media/public/pdf/news-and-analysis/publications-and-research/2023-fact-book-chapters/2023aclifactbook.pdf.

The regulatory changes described above cover many, but not all, of the assets held by ERISA retirement plans and IRAs. Further, the SEC's Regulation Best Interest and the NAIC Model Regulation are each limited in important ways in terms of their application to advice provided to ERISA plan fiduciaries.

102

For example, Regulation Best Interest does not cover advice to workplace retirement plans or their representatives (such as an employee of a small business who is a fiduciary of the business's 401(k) plan).

103

The NAIC Model Regulation specifically states that it does not apply to transactions involving contracts used to fund an employee pension or welfare plan covered by ERISA.

104

And there remain investments held by retirement investors in retirement accounts that are not covered by securities laws or insurance laws, including real estate, certain certificates of deposit and other banking products, commodities, and precious metals. The Department believes that retirement investors and the regulated community are best served by ERISA fiduciary protections in Title I and Title II that apply to all

investments that retirement investors may make with respect to their retirement accounts when they receive recommendations from trusted advice providers. Amendments to the ERISA regulation are necessary to achieve that result.

102

The fiduciary obligations of investment advisers under the Advisers Act are not limited in this way, however.

103

Regulation Best Interest release, 84 FR 33318, 33343-44 (July 12, 2019). Regulation Best Interest would apply, however, to retail customers receiving recommendations for their own retirement accounts.

Id.

104

NAIC Model Regulation at section 4.B.(1).

6. Coordination With Other Agencies

Under Title I and Title II of ERISA, the Department has primary responsibility for the regulation of ERISA fiduciaries' advice to retirement investors. Because of the fundamental importance of retirement investments to workers' financial security and the tax-preferred status of plans and IRAs, Congress defined the scope of ERISA fiduciary coverage broadly and imposed stringent obligations on ERISA fiduciaries, including prohibitions on conflicted transactions that do not have direct analogues under the securities and insurance laws. The fiduciary protections and prohibited transaction rules set forth in Title I and Title II of ERISA, as applicable, broadly apply to covered fiduciaries, irrespective of the particular investment product they recommend or their status as investment advisers under the Advisers Act, broker-dealers, insurance agents, bankers, or other status. This final rule is designed to ensure that the standards and rules applicable under Title I and Title II of ERISA are broadly uniform as applied to retirement investors receiving advice from a trusted advisor across different categories of investment advice providers and advisory relationships.

At the same time, many commenters stressed the need to harmonize the Department's efforts with rulemaking activities by other regulators, including the SEC's standards of care for providing investment advice and the Commodity Futures Trading Commission's (CFTC) business conduct standards for swap dealers (and comparable SEC standards for security-based swap dealers). In addition, some commenters have urged coordination with other agencies regarding IRA products and services.

As the SEC has adopted regulatory standards for broker-dealers that are based on fiduciary principles of care and loyalty also applicable to investment advisers under the Advisers Act, and the NAIC has issued a model law that includes a best interest standard, the Department believes that it is possible to hew to the unique regulatory structure imposed by the law governing tax-preferred retirement investments, adopt a regulatory approach that provides a broadly uniform standard for all retirement investors when they receive advice from a trusted advisor, as contemplated by Title I and Title II of ERISA, and avoid the imposition of obligations that conflict with financial professionals' obligations under other applicable Federal and State laws. In particular, in the Department's view, PTE 2020-02, as amended and published elsewhere in today's

Federal Register

, is consistent with the requirements of the SEC's Regulation Best Interest and the fiduciary obligations of investment advisers under the Advisers Act. Therefore, broker-dealers and investment advisers that have already adopted meaningful compliance mechanisms for Regulation Best Interest and the Advisers Act fiduciary duty, respectively, should be able to adapt easily to comply with the amended PTE.

Nevertheless, to better understand whether the proposed rule and proposed amendments to the PTEs would have subjected investment advice providers to requirements that conflict with or add to their obligations under other Federal laws, the Department has reached out to and consulted with the staff of the SEC; other securities, banking, and insurance regulators;

105

the Department of the Treasury, including the Federal Insurance Office; and the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that oversees broker-dealers.

105

The Department acknowledges the comments from the NAIC expressing disappointment that the Department coordinated with the NAIC staff rather than with the NAIC members prior to the proposed rule's publication and that the Department did not share its intended approach in advance of public release of the proposal. As the NAIC's comment acknowledged, however, the staff level discussions focused on aspects of the NAIC Model Regulation. Further, immediately after the release of the proposed rule, the Department met with NAIC members and repeatedly offered additional meetings before the rule was finalized. The NAIC also offered substantive comments to the proposed rule after its release, which the Department has carefully considered along with other commenters, including the comments of many others in the insurance industry.

The Department has also consulted and coordinated with the Department of the Treasury and the Internal Revenue Service (IRS), particularly on the subject of IRAs, and will continue to do so. Although the Department of Labor has responsibility for issuing regulations and prohibited transaction exemptions under section 4975 of the Code, which applies to IRAs, the IRS maintains general responsibility for enforcing the excise tax applicable to prohibited transactions. The IRS' responsibilities extend to the imposition of excise taxes on fiduciaries who participate in prohibited transactions. As a result, the Department and the IRS share responsibility for addressing self-dealing by investment advice fiduciaries to tax-qualified plans and IRAs.

7. Proposed Retirement Security Rule

On October 31, 2023, the Department released the proposed Retirement Security Rule: Definition of an Investment Advice Fiduciary, along with proposed amendments to PTE 2020-02 and proposed amendments to other administrative prohibited transaction exemptions available to investment advice fiduciaries.

106

The proposed rule was designed to ensure that protections established by Titles I and II of ERISA would apply to all advice that retirement investors receive from trusted advice providers concerning investment of their retirement assets in a way that ensures that retirement investors' reasonable expectations are honored.

107

106

The proposals were released on the Department's website on October 31, 2023. They were published in the

Federal Register

on November 3, 2023, at 88 FR 75890, 88 FR 75979, 88 FR 76004, and 88 FR 76032.

107

Proposed Retirement Security Rule, 88 FR 75890 (Nov. 3, 2023).

Under the proposal, a person would be an investment advice fiduciary under Title I and Title II of ERISA if they provide investment advice or make an investment recommendation to a retirement investor (

i.e.,

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 compensation, direct or indirect,” as defined in the proposed rule; and the person makes the recommendation in one of the following contexts:

• The person either directly or indirectly (

e.g.,

through or together with any affiliate) has discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities or other investment property for the retirement investor;

• The person either directly or indirectly (

e.g.,

through or together with any affiliate) 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 person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.

108

Id.

The proposal's preamble highlighted developments in retirement savings vehicles and in the investment advice marketplace since the 1975 regulation was adopted that have altered the way retirement investors interact with investment advice providers.

109

As noted previously, in 1975, retirement plans were primarily defined benefit plans, which were typically managed by sophisticated financial professionals. IRAs were not major market participants and 401(k) plans were not yet in existence. Today, however, plan participants, IRA owners, and their beneficiaries exercise direct authority over their investments, and depend upon a wide range of financial professionals, including broker-dealers, investment advisers subject to the Advisers Act, insurance agents, and others on how to make complex decisions about the management of retirement assets.

109

Id.

at 75892-3, 75899-900.

The Department expressed the view in the proposal that when a financial professional satisfies all five parts of the 1975 regulation with respect to a given instance of advice, the professional is properly treated as an investment advice fiduciary in accordance with the parties' reasonable understanding of the nature of their relationship.

110

However, the 1975 regulation, as applied to the current marketplace, is underinclusive in assigning fiduciary status because it fails to capture many circumstances in which an investor would reasonably expect that they can place their trust and confidence in the advice provider as acting in their best interest. The Department's experience in the current marketplace is that the five-part test—in particular, the “regular basis” requirement and the requirement of “a mutual agreement, arrangement or understanding” that the investment advice will serve as “a primary basis for investment decisions”—too often works to defeat legitimate retirement investor expectations of impartial advice and allows investment advice providers to hold themselves out as offering individualized advice that is intended to promote the best interest of the customer, when they, in fact, have no such obligation under the 1975 regulation's implementation of Title I or Title II of ERISA.

110

Id.

at 75899.

The proposal noted that these components of the five-part test are not found in the statute's text, and in today's marketplace, undermine legitimate investor understandings of a professional relationship centered around the investor's best interest.

111

In other words, there are currently many situations where the retirement investor reasonably expects that their relationship with the advice provider is one in which the investor can (and should) place trust and confidence in the recommendation, yet which are not covered by the 1975 regulation. The proposal was designed to reconcile the regulatory text with both today's retirement investors' reasonable expectations, along with the statutory text and purpose of ERISA.

112

111

Id.

112

Id.

The Department stated in the proposal that an important premise of Title I and Title II of ERISA is that fiduciaries' conflicts of interest should not be left unchecked, but rather should be carefully regulated through rules requiring adherence to basic fiduciary norms and avoidance of prohibited transactions.

113

The specific duties to avoid conflicts of interest or comply with a prohibited transaction exemption applicable to fiduciaries under Title I and Title II of ERISA stem from Congress' judgment regarding the best way to protect the public interest in tax-advantaged benefit arrangements that are critical to workers' financial and physical health. In contrast to the Federal laws and other regulatory regimes which can permit certain conflicts if prescribed disclosure obligations are met, the statutory prohibited transaction provisions in Title I and Title II of ERISA contemplate a more stringent approach for the protection of these tax-advantaged retirement savings. In this context, an appropriately constructed regulatory definition of an investment advice fiduciary under Title I and Title II of ERISA is essential.

113

Id.

C. Overview of the Comments Received on the Proposal

The Department received over 400 individual comments and just under 20,000 petition submissions as part of 14 separate petitions on the proposal. These comments and petitions came from consumer groups, financial services companies, academics, trade and industry associations, and others, both in support of, and in opposition to, the proposed rule and proposed amendments to the PTEs.

114

The 2023 proposed rule and proposed amendments to the PTEs provided for a 60-day comment period which ended on January 2, 2024. The Department held a virtual public hearing on December 12-13, 2023, at which over 40 witnesses testified. The Department posted a video recording of the virtual public hearing on its website on December 19, 2023, an unofficial hearing transcript on December 22, 2023, and the official hearing transcript on January 10, 2024.

Commenters on the proposal generally agreed that as a result of the shift from defined benefit plans to 401(k)-type individual account retirement plans, retirement investors today face increased responsibility for ensuring their own secure retirement.

115

Commenters cited studies indicating that many Americans are concerned that they will not have saved enough money to achieve that goal.

116

Many commenters discussed the related importance of retirement investors' access to professional investment advice. In connection with these points, some commenters said the proposed update to the investment advice fiduciary definition would provide important protections that would support retirement investors' access to investment advice intended to advance their interests. Other commenters said the proposed update to the investment advice fiduciary definition was not necessary and that the scope of the proposed definition exceeded the Department's jurisdiction and could reduce access to advice. These comments and the Department's responses are discussed in this preamble Section C. Comments on specific provisions of the proposal are discussed in preamble Section D.

115

References to “comments” and “commenters” in this preamble generally include written comments, petitions, and hearing testimony.

116

See, e.g.,

Board of Governors of the Federal Reserve System, “Economic Well-Being of U.S. Households in 2022” 67 May 2023,

available at https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf,

(“While most non-retired adults had some type of retirement savings, only 31 percent of non-retirees thought their retirement saving was on track, down from 40 percent in 2021.”)

1. Comments Supporting the Proposal

Commenters supporting the proposal echoed many of the concerns expressed by the Department in the proposal's preamble. These commenters emphasized the need to update the 1975 regulation to better align with retirement investor expectations in today's retirement investment marketplace and to fill important gaps in advice relationships where advice is not currently required to be provided in the retirement investor's best interest

and the investor may not be aware of that fact.

Some commenters expressed specific support for applying ERISA fiduciary protections to recommendations to roll over assets from a workplace retirement plan to an IRA, in light of the significant consequences of that decision. They also expressed support for applying ERISA fiduciary protections to recommendations to plan fiduciaries where, currently, advice regarding plan investment options may not be considered to occur on a regular basis, and therefore would not be considered ERISA fiduciary advice. Commenters said many employers, even larger employers, are not necessarily knowledgeable about selecting prudent investment options for the plans they sponsor.

Commenters also said an updated regulatory definition of an investment advice fiduciary would protect retirement investors from harm caused by conflicts of interest. They said conflicts of interest can expose savers to higher costs, lower returns, and greater risk. Some commenters emphasized that retirement investors with modest balances are more vulnerable to harm from conflicted investment advice, as the high fees would disproportionately diminish their savings. One commenter, a State securities regulator, identified multiple examples of abusive sales tactics impacting retirement investors and said more protections are needed.

In this regard, Morningstar submitted a comment that quantified potential benefits of the proposal in two areas. First, as a result of the proposal's coverage of recommendations to plan fiduciaries about the fund lineups in defined contribution plans, participants in workplace retirement plans would save over $55 billion in the first 10 years and over $130 billion in the subsequent 10 years, in undiscounted and nominal dollars, due to reductions in costs associated with investing through their plans. Second, retirement investors rolling over retirement funds into fixed indexed annuities would save over $32.5 billion in the first 10 years and over $32.5 billion in the subsequent 10 years, in undiscounted and nominal dollars, also due to decreased pricing spreads.

117

Available at

https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/00290.pdf.

Morningstar also suggested that the Department should revise its Form 5500 to reduce gaps in the disclosures that would provide additional transparency on fees and compensation. Another commenter suggested that the Department should require plans to provide a 404a-5 participant fee disclosure with cost details, as with their annual reports on Form 5500. The Department acknowledges these comments but notes they are outside the scope of this project.

Commenters supporting the proposal discussed the need for application of ERISA fiduciary protections even in light of other regulators' conduct standards. Some commenters said SEC Regulation Best Interest had only limited reach in that it applies only to investments that are securities and some commenters also said it had only limited requirements for conflict mitigation at the financial institution level. A commenter also said there are disparities in the degree to which firms are implementing SEC Regulation Best Interest's requirements. Commenters referenced a 2023 report by the North American Securities Administrators Association on SEC Regulation Best Interest implementation that found that even as firms have updated their investor profile forms and policies and procedures to focus on Regulation Best Interest obligations, many broker-dealers continue to recommend complex products and rely on financial incentives instead of lower cost, lower risk products.

118

One commenter said alternative assets, which they said included for example, precious metals, real estate, private equity, and debt, may not be subject to standards set by the SEC and that state laws vary and leave gaps in protections for investors in these type of investments.

118

NASAA, Report and Findings of NASAA's Broker-Dealer Section Committee: National Examination Initiative Phase II(B) (Sept. 2023) at 2-3,

https://www.nasaa.org/wp-content/uploads/2023/08/Reg-BI-Phase-II-B-Report-Formatted-8.29.23.pdf.

With respect to the insurance marketplace, several commenters described significant conflicts of interest associated with large commissions on some annuity sales, as well as abusive sales practices. Commenters also noted that the terms of annuity contracts, including surrender charges, may often be detrimental to retirement investors but may not be well understood. One commenter said recommendations of annuities for purchase inside retirement accounts deserve special scrutiny because the annuities are often marketed based on purported tax deferral advantages that would not be realized inside an already tax-preferred retirement account.

Some commenters said these issues are not addressed by the NAIC Model Regulation, which some described as providing a best interest standard in name only, when in substance it remains a suitability standard. One commenter presented a guide developed by the Certified Financial Planner (CFP) Board comparing the CFP Board's Code and Standards to the NAIC Model Regulation, which states, among other things, that the NAIC Model Regulation appears to provide a care obligation that does not rise to the level of a “prudent professional standard.” The guide further states that the NAIC Model Regulation does not effectively require the client's interests to come first.

119

Even though the NAIC Model Regulation's best interest obligation includes the requirement that the producer shall not place the producer's or the insurer's financial interest ahead of the consumer's interest, several commenters observed that none of the component obligations include a specific requirement for the producer to act in the best interest of the consumer. In other words, the NAIC Model Regulation treats the best interest obligation as satisfied if the producer meets specified component obligations, none of which require the producer to put the client's interests first.

119

Available at

https://www.cfp.net/-/media/files/cfp-board/standards-and-ethics/compliance-resources/naic-comparison-guide.pdf.

Commenters also said the NAIC Model Regulation does not sufficiently address compensation-related conflicts of interest, noting that it does not include cash and non-cash compensation within the definition of a material conflict of interest. As discussed above, “cash compensation” that is excluded from the definition of a material conflict of interest is broadly defined to include “any discount, concession, fee, service fee, commission, sales charge, loan, override, or cash benefit received by a producer in connection with the recommendation or sale of an annuity from an insurer, intermediary, or directly from the consumer,” and “non-cash compensation” is also broadly defined to include “any form of compensation that is not cash compensation, including, but not limited to, health insurance, office rent, office support and retirement benefits.”

120

One commenter expressed the view that an annuity producer that recommends an annuity because that particular annuity pays a larger commission or will help the producer meet a sales goal or ensure the producer wins an expensive trip will meet the best interest standard in the NAIC Model Regulation so long as the annuity is “suitable” for the retirement saver.

120

NAIC Model Regulation at section 5.B. and J.

Another commenter noted that there are abuses in life insurance recommendations as well, and that the NAIC has not addressed investment-oriented life insurance policies even

though regulators receive many thousands of customer complaints about the policies.

Several commenters responded to arguments that disclosures are sufficient for financial professionals to avoid conflicts of interest. The commenters stated that, while disclosures are important components of financial regulation and provide transparency, they are ineffective in protecting investors. The commenters noted that the disclosures are often long and full of technical language. The commenters stated that studies showed that disclosures cause investors to trust and increasingly rely on financial professionals, enhancing the ability of financial professionals to provide information not in the investors' best interest.

Overall, these commenters suggested that the proposal would benefit retirement investors by ensuring that investment advice they receive from trusted advice providers is consistent with ERISA's fiduciary protections under Title I and Title II.

2. Comments Opposing the Proposal

Some other commenters said the Department should retain the 1975 regulation as the applicable regulatory definition of an investment advice fiduciary. They said the five parts of the 1975 regulation are needed to describe a relationship of trust and confidence, consistent with the Fifth Circuit's

Chamber

opinion. Some of the commenters further said that the Department had not provided sufficient evidence of existing problems that would be solved by the updated investment advice fiduciary definition.

Commenters also said the proposed rule exceeded the Department's jurisdiction, for a variety of reasons, including in covering advice to roll over from a workplace retirement plan to an IRA as advice under Title I of ERISA. Many commenters said that the proposal suffered the same legal flaws as the 2016 Final Rule and would be legally vulnerable under the

Chamber

opinion. One commenter said that the statutory language in ERISA section 3(21)(A) and Code section 4975(e)(3) provides that a person is a fiduciary only “

to the extent”

they “provide investment advice for a fee or other compensation, direct or indirect,” which indicated there were limits on the breadth of what is considered ERISA fiduciary investment advice.

Some commenters also said that financial professionals paid by commission cannot satisfy the ERISA fiduciary duties under Title I which require, among other things, fiduciaries to discharge their duties with respect to the plan “solely in the interests of the participants and beneficiaries.”

121

These commenters said they understood this standard to require a complete disregard of any financial interest, which they said is incompatible with the business of broker-dealers and insurance agents. Some commenters also said the Department did not have jurisdiction to create a “best interest” standard, which they said has no basis in ERISA. Commenters also said the Department should not rely on “best interest” standards of other regulators to demonstrate trust and confidence required for ERISA fiduciary status. Some commenters said the SEC in Regulation Best Interest and the NAIC in its Model Regulation intentionally created standards that were not fiduciary standards, and the Department should not override those decisions.

121

See

ERISA section 404, 29 U.S.C. 1104.

Many of these commenters also said an updated definition of an investment advice fiduciary is unnecessary in light of the conduct standards in SEC Regulation Best Interest and the adoption by many States of the NAIC Model Regulation. Commenters described these regulatory actions as establishing robust, effective, and workable best interest standards while preserving the ability of retirement investors to work with the financial professional of their choosing and to retain choice as to how they pay for financial services and products.

Some commenters said the proposal's preamble discussion of the NAIC Model Regulation reflected misunderstanding by the Department. They said the NAIC Model Regulation sets forth a clear best interest standard despite not restating the “best interest” requirement in the component obligations. They also said that the NAIC Model Regulation did require mitigation of compensation-related conflicts of interest in the area of sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sales of specific annuities within a limited period of time, and the decision to exclude compensation from the definition of material conflicts of interest demonstrated a conscious choice that the best way to address conflicts is through disclosure.

122

Commenters also identified other types of State insurance laws that provide protection to retirement savers, such as regulations governing insurance advertising. An insurance commissioner commenter said the Department's proposal would displace the requirements of the NAIC Model Regulation as adopted by the States.

122

See

NAIC Model Regulation at section 6.C.(2)(h).

In sum, these commenters generally urged the Department to withdraw the proposal and focus its resources on other priorities.

3. Comments About Preserving Access to Investment Advice and Products in the Retail Market

Many commenters addressed the impact of the proposal on access to investment advice and products in the retail market. Some commenters believed that the rule would lead to advice providers imposing account minimums or raising their fees. Commenters also said that imposing ERISA fiduciary protections on advice and recommendations to retirement investors would lead to a decrease in commission-based arrangements and related access to certain investment products. They said this would be the case because status as an investment advice fiduciary would expose financial services providers to additional compliance costs and litigation risk. Commenters further said that the proposal was insufficiently specific about when ERISA fiduciary status would apply, and uncertainty would result in some providers taking a conservative approach and discontinuing serving retirement investors. Commenters said commission-based arrangements provide a valuable source for investment advice and information, and that a reduction in such arrangements would negatively impact retirement investors who may not be best suited for a fee-based investment advice arrangement.

A number of commenters said the proposal would have a negative impact on access to annuities, which are generally sold on commission. These commenters described annuities as an important option for retirement investors seeking a guaranteed lifetime income stream as part of their retirement plan. Some of these commenters said the Department's proposal failed to recognize the value of these products and was inconsistent with congressional intent to promote lifetime income options, as evidenced by recent pension legislation in the SECURE Act

123

and the SECURE 2.0 Act.

124

Commenters specifically mentioned such features as protection

against volatility, longevity and inflation risk through guarantees.

123

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Public Law 116-94, Dec.20, 2019, Division O.

124

SECURE 2.0 Act of 2022, Public Law 117-328, Dec. 29, 2022, Division T.

In this regard, some commenters said the Department's proposal would impose ERISA fiduciary duties on financial professionals who are traditionally considered salespeople. The commenters said that when the financial professional is paid on commission it should be clear to the retirement investor that the professional is engaging in sales activity, as opposed to providing advice. Commenters said that under the Fifth Circuit's

Chamber

opinion, salespersons are generally not considered to have a relationship of trust and confidence with their customers. One commenter said: “the fact that a broker-dealer or insurance agent acts in a manner that is trustworthy and provides guidance and recommendations in the investor's best interest does not alter the sales relationship and does not implicate or confer fiduciary status.”

Another commenter discussed the proposal in the context of alternative investments, where the commenter said commissions are relatively large. The commenter said applying ERISA's reasonable compensation standard and the PTEs' conduct standards in this context would likely chill willingness to recommend investment products with higher-than-average commissions, including alternative investments that the commenter said provide diversification, income, and other important portfolio elements. They said that although the SEC in Regulation Best Interest does require a focus on costs associated with an investment, it does not employ a distinct inquiry into the broker-dealer's compensation analogous to ERISA's reasonable compensation standard. Therefore, they did not believe that the Department's proposal was consistent with the SEC's approach in Regulation Best Interest or workable for broker-dealers.

Other commenters generally urged the Department to be skeptical of industry predictions of loss of access to advice and services. They believed providers would remain available to serve retirement investors irrespective of account balance size. They also said they were not aware of any decrease in access to advice and products following the recent adoption of other conduct standards including Regulation Best Interest. Rather, they said, the experience with Regulation Best Interest shows that financial professionals paid on commission can comply with an explicit best interest standard that requires conflict mitigation. A commenter also pointed to the fact that financial professionals paid on commission are among the CFP professionals who have adopted the CFP Board fiduciary duty.

These commenters disagreed that retirement investors are well aware when they are receiving a sales pitch. They said retirement investors generally do not understand how financial professionals are paid or the differences in the regulatory requirements applicable to broker-dealers, investment advisers, and insurance agents.

A number of these commenters also said commission-based financial professionals commonly hold themselves out as trusted advice providers. Commenters said that marketing slogans and titles such as “financial advisor,” “financial consultant,” and “wealth manager” are commonly and deliberately used to establish a sense of trust and confidence. One commenter cited several examples of marketing strategies employed in the insurance industry. One such example described a “Trusted Advisor Success Training Workshop” showing insurance agents how they “can have endless streams of new, repeat, and referral business” by “mak[ing] the move from a salesperson to a ‘Trusted Advisor!’”

One commenter described a study that found that 25 of the largest insurance companies and broker-dealers substantively market themselves as offering advice services and using advice titles, even as they continued to rely on the regulatory standards that apply to salespersons.

125

Another commenter provided examples, such as the following statement they said was on the annuities page of an insurance company: “by working with a trusted financial professional, you can discuss your unique circumstances and how best to prepare for the challenges that may lie ahead.” These commenters did not agree that commission-based financial professionals should categorically be excluded as investment advice fiduciaries or that such a categorical exclusion was compelled by the Fifth Circuit's

Chamber

decision.

125

The commenter cited the following press release relating to the study: “Review of 25 Major Brokerage Firms & Insurance Companies Find All Posing as Fiduciaries, Misleading Consumers,” Consumer Federation of America press release, Jan. 18, 2017,

https://consumerfed.org/press_release/review-25-major-brokerage-firms-insurance-companies-find-posing-fiduciaries-misleading-consumers.

A number of comments from financial professionals paid on commission also indicated they did not think of themselves as salespeople. One financial services provider who testified at the Department's public hearing on the proposal and said that most of his customers pay by commission, stated he was not a salesperson and agreed that he did have a relationship of trust and confidence with his customers.

126

He described himself as “[a]n advisor and somebody who helps and serves my clients, that's my highest ethic and creed. . . . I believe those individuals who are called to serve others gravitate towards professions like ours.”

127

126

Testimony of Bryon Holz, National Association of Insurance and Financial Advisors, Transcript of the Public Hearing on the Retirement Security Rule: Definition of an Investment Advice Fiduciary, December 12, 2023, at 176, 180, available at

https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/hearing-transcript-day-1.pdf.

127

Id.

The witness represented the National Association of Insurance and Financial Advisors (NAIFA), a large association representing the interests of insurance professionals, and said “NAIFA members are Main Street advisors who primarily serve and maintain longstanding relationships with individuals, families and small businesses in their communities.”

128

In describing the process for deciding whether to recommend an annuity to someone and determine what the right annuity is, the witness said: “basically we have a long-term relationship where I get to know the client, get to know their needs, their objectives, their risk tolerance and try to figure out what the best products and services are to meet those needs.”

129

Other comments similarly indicated that some financial professionals paid on commission nevertheless view themselves as trusted advisers.

130

128

Id.

129

Id.

at 174.

130

See e.g.,

petition 4, with 3059 submitters (“Having a relationship with a trusted financial advisor helps people save more for retirement. I provide my clients with comprehensive financial advice and as an independent financial advisor, I can recommend products that are in their best interest. Currently, clients can choose how to pay for financial advice by working with financial advisors whose business model aligns with their goals. . . . [C]ommissions are an important way that advisors are able to serve those who may not otherwise be able to afford to work with an advisor because they have less investable assets or because a specific investment strategy with commissions is the most economically available option.”),

https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/petition-004.pdf.

Other commenters said that the Department's proposal would lead to a reduction in sales recommendations in the institutional market and also in the provision of educational information. These comments are discussed in Section E of the preamble. Access to advice in the retail market is further

discussed in section 7 of the Regulatory Impact Analysis.

4. The Department's Decision to Issue the Final Rule

After careful consideration of the comments discussed in this section, the Department has determined to issue a final rule updating the regulatory definition of an investment advice fiduciary, with changes reflecting input from the commenters. This decision reflects the continued view that applying ERISA fiduciary protections under Title I and Title II to trusted advice to retirement investors about their retirement accounts is necessary and appropriate to protect the retirement investors from conflicts of interest.

The Department's Jurisdiction

To begin with, as some commenters noted, when Congress enacted ERISA, it chose to impose a uniquely protective regime on the management and oversight of plan assets. The law's aim was to protect the interests of plan participants and beneficiaries by imposing especially high standards on those who exercise functional authority over plan investments, including rendering investment advice for a fee.

131

As many courts have noted, ERISA's obligations are the “highest known to the law.”

132

Thus, the Department has not deferred completely to the Federal securities laws and State insurance laws, as some commenters advocated, because such deference would not be consistent with congressional intent or ERISA's purposes.

131

One commenter provided following statement by the Chair of the Senate Committee on Labor and Public Welfare upon introduction of the Conference Report on ERISA:

Despite the value of full reporting and disclosure, it has become clear that such provisions are not in themselves sufficient to safeguard employee benefit plan assets from such abuses as self-dealing, imprudent investing, and misappropriation of plan funds. Neither existing State nor Federal law has been effective in preventing or correcting many of these abuses. Accordingly, the legislation imposes strict fiduciary obligations on those who have discretion or responsibility respecting the management, handling, or disposition of pension or welfare plan assets. The objectives of these provisions are to . . . establish uniform fiduciary standards to prevent transactions which dissipate or endanger plan assets. . . .

Statement by Hon. Harrison A. Williams, Jr., Chairman, Senate Committee on Labor and Public Welfare, 120 Congressional Record S 15737 at 11 (Aug. 22, 1974) (introducing the Conference Report on H.R. 2).

132

Donovan

Bierwirth,

680 F.2d 263, 272 n. 8 (2d. Cir. 1982),

cert denied,

459 U.S. 1069 (1982).

Under Title I of ERISA, the Department has express authority to issue regulations defining terms in Title I and to grant administrative exemptions from the prohibited transactions provisions. Pursuant to the President's Reorganization Plan No. 4 of 1978,

133

which Congress ratified in 1984,

134

the Department's authority was expanded to include authority to issue regulations, rulings, and opinions on the definition of a fiduciary with respect to Title II plans under the Code (including IRAs) and to grant administrative prohibited transaction exemptions applicable to them.

135

Thus, the Department has clear authority to promulgate the regulatory definition of a fiduciary under both Title I and Title II of ERISA, and the Department has taken care in this final rule to honor the text and purposes of Title I and Title II of ERISA.

133

5 U.S.C. App. 752 (2018).

134

Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).

135

Sec. 102, 5 U.S.C. App. 752 (2018).

The final rule is consistent with the express text of the statutory definition and will better protect the interests of retirement investors as compared to the 1975 regulation. It comports with the broad language and protective purposes of the statute, while at the same time limiting the treatment of recommendations as ERISA

fiduciary

advice to those objective circumstances in which a retirement investor would reasonably believe that they can rely upon the advice as rendered by a financial professional who is acting in the investor's best interest and on their behalf.

In today's market, the 1975 regulation's five-part test is underinclusive in assigning fiduciary status as it fails to capture many circumstances in which an investor would reasonably expect that they can place their trust and confidence in the advice provider. As noted above, the Department has become concerned that the 1975 regulation's regular basis test has served to defeat objective understandings of the nature of the professional relationship and the reliability of the advice as based on the investor's best interest. The proposal noted that even a discrete instance of advice can be of critical importance to the plan. As another example, under the 1975 regulation's “regular basis” requirement, which is not found in the text of the statute, a financial professional could provide recommendations on a regular basis for many years to an investor regarding the investor's non-retirement accounts and yet still not be considered an investment advice fiduciary with respect to a recommendation to roll over all their retirement savings from the investor's workplace retirement plan to an IRA if that is the first instance of advice with respect to that plan account.

Therefore, the Department does not believe that the 1975 regulation's five-part test is the only test that can properly define an investment advice fiduciary under the statute, and the Department does not believe its authority to revisit the regulatory definition of an investment advice fiduciary and depart from the 1975 five-part test is foreclosed by the

Chamber

opinion. The discrete components of the five-part test are not found in the text of the statute, and commenters did not identify—and the Department's research did not uncover—any common law cases predating enactment of ERISA that limited the application of fiduciary status and obligations to those persons that meet all five of the requirements created and imposed by the 1975 regulation. To the contrary, the Department notes that multiple cases discuss how ERISA's statutory definition of “fiduciary” is broad,

136

with one such case indicating that the definition of “fiduciary” under ERISA is broader than the more restrictive approach the Department articulated through the 1975 five-part test.

137

136

See Eaves

Penn,

587 F.2d 453, 458 (10th Cir. 1978);

Farm King Supply, Inc. Integrated Profit Sharing Plan & Tr.

Edward D. Jones & Co.,

884 F.2d 288, 293 (7th Cir. 1989);

see also Thomas, Head & Greisen Emps. Tr.

Buster,

24 F.3d 1114, 1117 (9th Cir. 1994) (“[T]he definition of fiduciary under ERISA should be liberally construed.” (citing

Consolidated Beef Indus. Inc.

New York Life Ins. Co.,

949 F.2d 960, 964 (8th Cir. 1991),

cert. denied,

503 U.S. 985 (1992))); H. Stennis Little, Jr., & Larry Thrailkill,

Fiduciaries Under ERISA: A Narrow Path to Tread,

30 Vanderbilt L. Rev. 1, 4-5 (1977) (referring to the “broadness of the [statutory] definition” of “fiduciary” under ERISA, such that the definition could cover “insurance salesmen who recommend the purchase of certain types of insurance and receive a commission on the sale of such insurance” and “stock brokers or dealers who recommend certain securities and then participate in the acquisition or disposition of securities and receive a commission for their services”).

137

See Farm King,

884 F.2d at 293 (discussing “evidence of the wide sweep given to the meaning of ‘fiduciary’ under ERISA” in relation to the narrower definition codified in the 1975 test).

The Department also does not agree with a commenter that said that the proposal would render the “

to the extent

” language in the statute a nullity.

138

Under ERISA's functional test of fiduciary status, as the courts have repeatedly recognized, a person is a fiduciary

to the extent

the person engages in specified activities, and only

to that extent.

139

Under both the proposed rule and the final rule, therefore, a person renders fiduciary advice only to the extent they meet the regulatory definition with respect to the particular communication at issue. A person may be a fiduciary for purposes of one advice transaction and not another, and the person must meet the specific requirements of the final rule to be treated as a fiduciary with respect to any given transaction. To the extent a person does not meet the final rule's requirements (

e.g.,

by not making a recommendation, receiving a fee, providing individualized advice, or purporting to act in the investor's best interest), they are not a fiduciary with respect to that recommendation. The final rule fully adopts the statute's functional and transactional approach to the determination of fiduciary status.

138

ERISA section 3(21)(A)(ii) provides: “a person is a fiduciary with respect to a plan to the extent . . . (ii) [t]he [person] renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so . . . .”

139

See, e.g., Mertens

Hewitt Associates,

508 U.S. 248, 264 (1993);

John Hancock Mut. Life Ins. Co.

Harris Trust & Sav. Bank,

510 U.S. 86, 98 (1993).

The final rule also does not base fiduciary status on firms' or financial professionals' status under other laws, as some commenters have asserted. Instead, the final rule is focused on defining those circumstances in which the retirement investor has a reasonable expectation that the recommendation reflects a professional or expert judgment offered on their behalf and in their interest. In the circumstances specified, a retirement investor would be entitled to treat their relationship with the person making the recommendation as one of trust and confidence. To the extent that a financial professional satisfies the conditions, in part, based on compliance with other regulators' conduct standards, that would merely be a consequence of independent decisions made by other regulators. The final rule does not override those regulators' decisions as to how to characterize their conduct standards, require them to take any particular approach to oversight of investment recommendations, or pin fiduciary status on anything other than a reasonable understanding of the nature of the relationship between the persons giving and receiving the advice. The Department's regulation is based on its unique authority to define a fiduciary for purposes of Title I and Title II of ERISA, establish a uniform definition for all persons giving investment advice to retirement investors under Title I and Title II of ERISA, and fulfill the statute's investor-protective purposes in accordance with the text of the statute.

Moreover, commission-based financial professionals are fully able to satisfy ERISA's fiduciary standard of loyalty in Title I. The Department has long interpreted the duty of loyalty, as set forth in section 404(a)(1)(A) of ERISA (a fiduciary must discharge their duties with respect to the plan “solely in the interests of the participants and beneficiaries”) as establishing a standard that prohibits a fiduciary from “subordinating the interests of participants and beneficiaries in their retirement income to unrelated objectives.”

140

This standard properly applies section 404(a)(1)(A)'s duty of loyalty in the context of advice arrangements. ERISA further permits fiduciaries to receive reasonable compensation—including commission-based compensation—for their services.

141

140

See, e.g.,

Advisory Opinion 2008-05A (June 27, 2008); Letter to Harold G. Korbee (Apr. 22, 1981).

141

ERISA section 408(c)(2), 29 U.S.C. 1108(2); Code section 4975(d)(10).

Indeed, the statute recognizes the impossibility of avoiding all fiduciary conflicts of interest by giving the Department authority to grant exemptions from the prohibited transaction rules. The mere existence of a conflict is insufficient to defeat fiduciary status or to establish a violation of the prohibited transaction rules. Instead, the conflict of interest must be managed in accordance with a statutory exemption or administrative exemption granted by the Department. This does not prevent commission-based compensation arrangements, as some commenters have asserted, so long as the advice provider does not subordinate the interests of the retirement investor to their own financial interests and does not charge more than “reasonable compensation,” as expressly authorized by the statute.

142

Indeed, in many instances, such as those involving advice on “buy and hold” strategies, a commission-based model may be more appropriate for the investor, and a prudent fiduciary may recommend the use of a commission-based structure, rather than advise the investor to enter into an arrangement that requires the payment of ongoing fees without a commensurate need for ongoing advice. Nothing in the text of the statute, the text of the 1975 regulation, or previous guidance draws a distinction between commission-based compensation and other forms of compensation in determining whether a person is a fiduciary when making recommendations for direct or indirect compensation.

142

ERISA section 408(b)(2); 29 U.S.C. 1108(b)(2); Code section 4975(d)(2).

One commenter expressed concern that the rule could reduce access to advice on alternative investments because of the relatively large commissions paid in connection with alternative investments. The commenter said the reasonable compensation requirement did not have an analog in Regulation Best Interest and also would be unworkable for broker-dealers. However, the obligation to pay no more than reasonable compensation to service providers has been long recognized under Title I and Title II of ERISA. The statutory exemptions in ERISA section 408(b)(2) and Code section 4975(d)(2) expressly require services arrangements involving plans and IRAs to result in no more than reasonable compensation to the service provider. Financial institutions and investment professionals—when acting as service providers to plans or IRAs—have long been subject to this requirement, regardless of their fiduciary status. The reasonable compensation standard requires that compensation not be excessive, as measured by the market value of the particular services, rights, and benefits the financial institution and investment professional are delivering to the retirement investor.

To the extent an investment advice fiduciary's receipt of compensation would constitute a self-dealing type prohibited transaction under ERISA section 406(b) and Code section 4975(c)(1)(E) or (F), conditional relief for investment advice fiduciaries to receive compensation that varies based on their investment advice is provided pursuant to amended PTE 2020-02 and amended PTE 84-24. One such condition in these PTEs is adherence to a loyalty obligation that the Department has stated is consistent with the “sole interest” standard in ERISA section 404.

143

The use of the standard in the PTEs is an appropriate exercise of the Department's exemptive authority under ERISA section 408(a) and the Reorganization Plan No. 4 of 1978 to provide an exemption that is protective of the interests of retirement investors, not an improper conflation of the two standards, as suggested by some commenters. Based on this discussion, the Department disagrees with the commenter who said the proposal would be unworkable for broker-dealers.

144

143

Improving Investment Advice for Workers & Retirees, 85 FR 82798, 82823 (Dec. 18, 2020).

144

The Department also notes that there are compensation requirements applicable to broker-

dealers,

see e.g.,

FINRA rule 2121 (fair prices and commissions).

Some commenters also sought to draw a bright line distinction between recommendations made in a sales capacity and those made in a fiduciary capacity, asserting that commission-based recommendations are properly viewed as mere sales pitches that should not lead to ERISA fiduciary status. This approach, however, is neither supported by the text of the statute nor the Department's consistent views starting in 1975 that advice can be compensated through commissions.

145

The text of the statute does not draw a distinction between commissions and other fee-based forms of compensation, but rather broadly refers to “advice for a fee or other compensation, direct or indirect,” which the Department has consistently recognized includes commission-based advice. Accordingly, the final rule properly focuses on the nature of the relationship between the parties, rather than the specific mode of compensation. Whether a firm or financial professional has held themselves out as providing the sort of recommendation that may rightly be relied upon as a fiduciary recommendation is a function of the test set forth in the final rule, which requires compensation, but does not draw a bright line between commissions and fee-based compensation. In those circumstances where the final rule's definition is satisfied, the firm or investment professional is doing much more than merely executing a sale. They are offering a professional recommendation that is purportedly based on the investor's best interest, and that recommendation is central to the relationship and a key component of the services offered to the investor.

145

See e.g.,

U.S. Department of Labor Adv. Op. 83-60A (Nov. 21, 1983) (Rejecting the interpretation that fiduciary status under ERISA section 3(21)(A)(ii) would not attach to broker-dealers unless a broker-dealer provides investment advice for distinct, non-transactional compensation), The Department stated that “if . . . the services provided by the broker-dealer include the provision of `investment advice', as defined in regulation 2510 .3-21(c), it may be reasonably expected that, even in the absence of a distinct and identifiable fee for such advice, a portion of the commissions paid to the broker-dealer would represent compensation for the provision of such investment advice.”

Id.

The statutory language broadly encompasses any “fee or other compensation,” and even under the five-part test promulgated in 1975, the Department rejected the position that payment of compensation through commissions categorically excluded a broker-dealer from being an investment-advice fiduciary.

See

40 FR 508842 (Oct. 31, 1975).

In this connection, however, it is important to note that neither the proposed rule nor the final rule assigns fiduciary status to a party who merely engages in a sales transaction with a retirement investor. Under the express terms of paragraph (d) of the final rule, merely executing a sale does not give rise to fiduciary status. Moreover, even if one makes a recommendation in connection with a commission-based transaction, that recommendation will not amount to fiduciary advice unless the recommendation meets the specific conditions set forth in the final rule, all of which are aimed at ensuring that the advice goes beyond a mere “sales pitch,” and instead reflects the sort of relationship of trust and confidence that should be afforded fiduciary status and protection. To that end, and in response to comments, the Department narrowed the contexts that give rise to fiduciary status, and included a new paragraph confirming that mere sales recommendations devoid of the two covered contexts will not result in ERISA fiduciary status and that investment information or education, without an investment recommendation, will also not result in ERISA fiduciary status.

Finally, some commenters said that the

Chamber

opinion indicated that the Department's authority to regulate conduct in the financial services industry has been limited by the Dodd-Frank Act. The commenters said that under Dodd-Frank, Congress had authorized the SEC, and not the Department, “to promulgate enhanced, uniform standards of conduct for broker-dealers and investment advisers who render ‘personalized investment advice about securities to a retail customer.' ”

The Department's well-settled authority under ERISA to regulate investment advice rendered by fiduciaries to retirement investors in the context of certain annuity sales was not impaired by the Dodd-Frank legislation. Rather, section 913 of the Dodd-Frank Act directed the SEC to study the effectiveness of the rules applicable to investment advice respecting securities by entities subject to SEC regulation “and other Federal and State legal or regulatory standards.” The reference to other standards demonstrates Congress' clear awareness that there are overlapping Federal regulatory schemes. Moreover, this rulemaking is closely aligned with the SEC's standards under both the Advisers Act and under Regulation Best Interest, which was adopted subsequent to the

Chamber

opinion and is rooted in fiduciary principles.

146

See

Regulation Best Interest release, 84 FR 33318, 33330 (July 12, 2019) (noting that Regulation Best Interest “draws from key fiduciary principles underlying fiduciary obligations” and that the “key elements of the standard of conduct that applies to broker-dealers under Regulation Best Interest will be substantially similar to key elements of the standard of conduct that applies to investment advisers pursuant to their fiduciary duty under the Advisers Act.”);