# Amendment to Prohibited Transaction Exemption 2020-02

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-08066

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** April 25, 2024
- **Citation:** 89 FR 32260

## Text

DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application No. D-12057]
ZRIN 1210-ZA32
Amendment to Prohibited Transaction Exemption 2020-02

AGENCY:

Employee Benefits Security Administration, U.S. Department of Labor.

ACTION:

Amendment to Class Exemption PTE 2020-02.

SUMMARY:

This document contains a notice of amendment to class prohibited transaction exemption (PTE) 2020-02, which provides relief for investment advice fiduciaries to receive certain compensation that otherwise would be prohibited. The amendment affects participants and beneficiaries of employee benefit plans, individual retirement account (IRA) owners, and fiduciaries with respect to such plans and IRAs.

DATES:

The amendment is effective September 23, 2024.

FOR FURTHER INFORMATION CONTACT:

Susan Wilker, telephone (202) 693-8540, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor (this is not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The Employee Retirement Income Security Act of 1974 (ERISA) provides, in relevant part, that a person is a fiduciary with respect to a plan to the extent they render investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or have any authority or responsibility to do so.
1

Title I of ERISA (referred to herein as Title I) imposes duties and restrictions on persons who are “fiduciaries” with respect to employee benefit plans. 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.”
2

1
Section 3(21)(A)(ii) is codified at 29 U.S.C. 1002(3)(21)(A)(ii). The provision is in Title I of the ERISA (referred to herein as Title I), which is codified in Title 29 of the U.S. Code. This preamble refers to the codified provisions in Title I by reference to sections of ERISA, as amended, and not by their numbering in Section 29 of the U.S. Code.

2
ERISA section 404(a).

In addition to fiduciary obligations, ERISA has prohibited transaction rules that “categorically bar[]” plan fiduciaries from engaging in transactions deemed “likely to injure the pension plan.”
3

These prohibitions broadly forbid a fiduciary from “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.”
4

Congress gave the Department of Labor (the Department) broad authority 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.
5

3

Harris Trust Sav. Bank
v.
Salomon Smith Barney Inc.,
530 U.S. 238, 241-42 (2000) (citation and quotation marks omitted).

4
ERISA section 406(b)(1), (3), 29 U.S.C. 1106(b)(1), (3).

5
ERISA section 408(a), 29 U.S.C. 1108(a).

ERISA's Title II (also referred to herein as the Code), includes a parallel provision in section 4975(e)(3)(B), which defines a fiduciary of a tax-qualified plan, including individual retirement accounts (IRAs). Title II governs the conduct of fiduciaries to plans defined in Code section 4975(e)(1), which includes IRAs.
6

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 does not directly impose specific duties of prudence and loyalty on fiduciaries as Title I does in ERISA section 404(a), it prohibits fiduciaries from engaging in conflicted transactions on many of the same terms as Title I.
7

Under the Reorganization Plan No. 4 of 1978, which Congress subsequently ratified in 1984,
8

Congress generally granted the Department authority to interpret the fiduciary definition and issue administrative exemptions from the prohibited transaction provisions in Code section 4975.
9

6
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.

7
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.”

8
Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).

9
5 U.S.C. App. 752 (2018).

On December 18, 2020, the Department exercised this authority and adopted PTE 2020-02, a prohibited transaction exemption for investment advice fiduciaries with respect to employee benefit plans and IRAs. This exemption ensured that those saving for retirement could have access to high quality advice by requiring fiduciary advice providers to render advice that is in their plan and IRA customers' best interest in order to receive any compensation that would otherwise be prohibited by ERISA and the Code.

On October 31, 2023, the Department released the proposed Retirement Security Rule: Definition of an Investment Advice Fiduciary (the Proposed Rule), along with proposed amendments to administrative prohibited transaction exemptions available to investment advice fiduciaries.
10

The Department designed the Proposed Rule to ensure that the protections established by Titles I and II of ERISA would uniformly apply to all investment advice that is provided to “Retirement Investors”
11

), concerning the investment of their retirement assets, and that Retirement Investors' reasonable expectations are honored when they receive investment advice from financial professionals who hold themselves out as trusted advice providers.

10
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.

11
As defined in Section V(l), Retirement Investor means a Plan, Plan participant or beneficiary, IRA, IRA owner or beneficiary, Plan fiduciary within the meaning of ERISA section (3)(21)(A)(i) or (iii) and Code section 4975(e)(3)(A) or (C) with respect to the Plan, or IRA fiduciary within the meaning of Code section 4975(e)(3)(A) or (C) with respect to the IRA.

At the same time the Department published the Proposed Rule, it also released the proposed amendment to PTE 2020-02 (the Proposed Amendment), proposed amendments to PTEs 75-1, 77-4, 80-83, 83-1, and 86-128 that apply to the provision of investment advice (the Mass Amendment), and proposed amendments to PTE 84-24 and invited

all interested persons to submit written comments on each.
12

12
The Proposed Amendment was released on October 31, 2023, and was published in the
Federal Register
on November 3, 2023. 88 FR 75979.

The Department received written comments on the Proposed Amendment, and on December 12 and 13, 2023, it held a virtual public hearing where witnesses provided commentary on the Proposed Amendment. After carefully considering the comments it received and the testimony presented at the hearing, the Department is granting the final amendment to PTE 2020-02 that is discussed herein (the Final Amendment) on its own motion pursuant to its authority under ERISA section 408(a) and Code section 4975(c)(2) and in accordance with its exemption procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27, 2011)).
13

13
Reorganization Plan No. 4 of 1978 (5 U.S.C. App. 1 (2018)) generally transferred the authority of the Secretary of the Treasury to grant administrative exemptions under Code section 4975 to the Secretary of Labor. Procedures Governing the Filing and Processing of Prohibited Transaction Exemption Applications were amended effective April 8, 2024 (29 CFR part 2570, subpart B (89 FR 4662 (January 24, 2024)).

Elsewhere in this edition of the
Federal Register
, the Department is finalizing (1) the Proposed 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 ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B) (the “Regulation”), (2) the Mass Amendment, and (3) the amendment to PTE 84-24.

Comments and Description of the Amendment to PTE 2020-02

As discussed below, the Department is broadening PTE 2020-02 to cover more transactions and revising some of the exemption's conditions to emphasize the core standards underlying the exemption. Consistent with the Proposed Amendment and PTE 2020-02 as it was originally granted in December 2020, this Final Amendment ensures that trusted advisers adhere to fundamental standards of fiduciary conduct when they receive compensation that otherwise is prohibited by ERISA and the Code as a result of recommending investment products and services to Retirement Investors.
14

14
When using the term “adviser,” the Department does not refer only to investment advisers registered under the Investment Advisers Act of 1940 or under state law, but rather to any person rendering fiduciary investment advice under the Regulation. For example, as used herein, an adviser can be an individual who is, among other things, a representative of a registered investment adviser, a bank or similar financial institution, an insurance company, or a broker-dealer.

Under these core standards, Financial Institutions
15

and the “Investment Professionals”
16

who work for them must:

15
As defined in Section V(d) and including registered investment advisers, banks or similar institutions, insurance companies, broker-dealers and non-bank trustees.

16
As defined in Section V(g)).

• acknowledge their fiduciary status
17

in writing to the Retirement Investor;

17
For purposes of this disclosure, and throughout the exemption, the term “fiduciary status” is limited to fiduciary status under Title I of ERISA, the Code, or both. While this exemption uses some of the same terms that are used in the SEC's Regulation Best Interest and/or in the Investment Advisers Act and related interpretive materials issued by the SEC or its staff, the Department retains interpretive authority with respect to satisfaction of this exemption.

• disclose their services and material conflicts of interest to the Retirement Investor;

• adhere to Impartial Conduct Standards requiring them to:

○ investigate and evaluate investments, provide advice, and exercise sound judgment in the same way that knowledgeable and impartial professionals would in similar circumstances (the Care Obligation);

○ never place their own interests ahead of the Retirement Investor's interest, or subordinate the Retirement Investor's interests to their own (the Loyalty Obligation);

○ charge no more than reasonable compensation and, if applicable, comply with Federal securities laws regarding “best execution”; and

○ avoid making misleading statements about investment transactions and other relevant matters;

• adopt firm-level policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and mitigate conflicts of interest that could otherwise cause violations of those standards;

• document and disclose the specific reasons for any rollover recommendations; and

• conduct an annual retrospective compliance review.

This Final Amendment builds on the existing conditions and:

• expands the exemption's scope to include recommendations of any investment product, regardless of whether the product is sold on a principal or agency basis;

• adds non-bank Health Savings Account (HSA) trustees and custodians to the definition of Financial Institution with respect to HSAs;

• revises the disclosure requirements in the Final Amendment to more closely track other regulators' disclosure requirements with respect to the provision of investment advice;

• limits 10-year disqualification to serious misconduct that has been determined in a court proceeding;

• provides new streamlined exemption provisions for Financial Institutions that give fiduciary advice in connection with a Request for Proposal (RFP) to provide investment management services as an ERISA section 3(38) investment manager; and

• makes certain other minor revisions to, and clarifications of, existing provisions of the exemption.

In addition, although the Department proposed to expand the recordkeeping requirement in the exemption, the Final Amendment maintains the recordkeeping provisions already in PTE 2020-02 without change.

The Final Amendment, which is described in more detail below, is part of the Department's broader package of changes to the definition of fiduciary advice and associated exemptions published elsewhere in today's
Federal Register
. The Department has worked to ensure that each separate regulatory action being finalized today, while capable of operating independently, works together within ERISA's existing framework. Together, these changes reduce the gap in protections that previously existed with respect to ERISA-covered investments and level the playing field for all investment advice fiduciaries. Still, the amended Regulation and each of the PTEs operate independently and should continue to do so if any component of the rulemaking is invalidated.

The Department notes the views of some commenters that it should have delayed making changes so that Financial Institutions, Investment Professionals, and the Department could have gained more experience with PTE 2020-02, as currently written, or that it should even have foregone making any changes at all in light of new standards of care imposed on broker-dealers by the Securities and Exchange Commission (SEC), and on insurance companies and insurance agents by State insurance regulators. In making changes to PTE 2020-02, however, the Department has paid close attention to the work of other regulators, and sought to build upon and complement, rather than disrupt, their compliance structures. For example, the Department has designed the Final Amendment in manner that should place Financial Institutions that have already built robust compliance structures in compliance with the SEC's

Regulation Best Interest: the Broker-Dealer Standard of Conduct (Regulation Best Interest)
18

in a strong position to comply with the closely aligned revised conditions of PTE 2020-02.

18
17 CFR § 240.15l-1.

The Final Amendment also reflects the Department's ongoing review of issues of fact, law, and policy related to PTE 2020-02, and more generally, its regulation of fiduciary investment advice.
19

Moreover, the changes described herein reflect the Department's experience facilitating compliance with PTE 2020-02, consideration of the input it received from meetings with stakeholders since the exemption originally was finalized in 2020, and the comments received, and testimony provided, at the virtual hearing in response to the Proposed Amendment and the proposed regulation.

19
See Emp. Benefits Sec. Admin. (EBSA), U.S. Dep't of Lab., New Fiduciary Advice Exemption: PTE 2020-02 Improving Investment Advice for Workers & Retirees Frequently Asked Questions (Apr. 2021), (“2021 FAQs”),
available at https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.pdf.
“Q5. Will the Department take more actions relating to the regulation of fiduciary investment advice?: The Department is reviewing issues of fact, law, and policy related to PTE 2020-02, and more generally, its regulation of fiduciary investment advice. The Department anticipates taking further regulatory and sub-regulatory actions, as appropriate, including amending the investment advice fiduciary regulation, amending PTE 2020-02, and amending or revoking some of the other existing class exemptions available to investment advice fiduciaries. Regulatory actions will be preceded by notice and an opportunity for public comment. Additionally, although future actions are under consideration to improve the exemption, the Department believes that core components of PTE 2020-02, including the Impartial Conduct Standards and the requirement for strong policies and procedures, are fundamental investor protections which should not be delayed while the Department considers additional protections or clarifications.”

As discussed in greater detail below, the Department has concluded that, as amended, the exemption is flexible, workable, and provides a sound and uniform framework for Financial Institutions and Investment Professionals to provide high quality investment advice to Retirement Investors. The amended exemption also is broadly available to be relied on by Financial Institutions and Investment Professionals, without regard to their business model, fee structure, or type of product recommended, subject to their compliance with fundamental standards that protect Retirement Investors. To the extent that Financial Institutions and Investment Professionals honor terms of the amended exemption, Retirement Investors will benefit from the application of a common standard to all fiduciary investment advice recommendations to Retirement Investors that ensures they will receive prudent and loyal investment recommendations from Financial Institutions and Investment Professionals competing on a level playing field that is protective of Retirement Investors' interests.

Applicability Date

The Final Amendment is applicable to transactions pursuant to investment advice provided on or after September 23, 2024 (the “Applicability Date”). For transactions engaged in pursuant to investment advice recommendations that were provided before the Final Amendment's Applicability Date, the prior version of PTE 2020-02 will remain available for all parties that are currently relying on the exemption.
20

20
To the extent a party receives ongoing compensation for a recommendation that was made before the Applicability Date, including through a systematic purchase payment or trailing commission, the amended PTE 2020-02 would not apply unless and until new investment advice is provided.

Several commenters stated that the Proposed Amendment's Applicability Date (60-days after publication in the
Federal Register
) did not provide sufficient time for Financial Institutions and Investment Professionals to fully comply with the amended conditions. In response to these comments, the Department is adding a new Section VI, which provides a phase-in period for the one-year period beginning September 23, 2024. Thus, Financial Institutions and Investment Professionals may receive reasonable compensation under Section I of the amended exemption during this phase-in period if they comply with the Impartial Conduct Standards in Section II(a) and the fiduciary acknowledgment requirement under Section II(b)(1). This one-year phase-in period is the same as the one-year compliance period the Department provided when it originally granted PTE 2020-02.

The Department confirms that if a transaction occurred before the Applicability Date or pursuant to a systematic purchase program established before the Applicability Date, the restrictions of ERISA section 406(a)(1)(A), 406(a)(1)(D), and 406(b) and the sanctions imposed by Code section 4975(a) and (b), by reason of Code section 4975(c)(1)(A), (D), (E) and (F), will not apply to: (1) the receipt, directly or indirectly, of reasonable compensation by a Financial Institution, Investment Professional, or any Affiliate and Related Entity, as such terms are defined in Section V, in connection with investment advice; or (2) the purchase or sale of an asset in a principal transaction, and the receipt of a mark-up, mark-down, or other payment, in either case as a result of the provision of investment advice within the meaning of ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B) and regulations thereunder. Also, no party would be required to comply with the amended conditions for a transaction that occurred before the Applicability Date.

Expanded Exemption Scope

The Department is expanding the scope of PTE 2020-02 in the Final Amendment to make it more broadly available, as requested by industry commenters. As amended, the exemption is available for Financial Institutions and Investment Professionals to receive reasonable compensation for recommending a broad range of investment products to Retirement Investors, including insurance and annuity products. Both the existing exemption and the Proposed Amendment provided narrower relief. Specifically, Section I(b) of the Proposed Amendment stated:

This exemption permits Financial Institutions and Investment Professionals, and their Affiliates and Related Entities, to engage in the following transactions, including as part of a rollover from a Plan to an IRA as defined in Code section 4975(e)(1)(B) or (C), as a result of the provision of investment advice within the meaning of ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B):

(1) The receipt of reasonable compensation; and

(2) The purchase or sale of an asset in a riskless principal transaction or a Covered Principal Transaction, and the receipt of a mark-up, mark-down, or other payment.

Some commenters expressed concern that the scope of covered transactions in the Proposed Amendment was unduly limited. As support, some commenters pointed to the Department's proposed simultaneous repeal of other exemptions covering investment advice and expressed concern that they would need to rely on PTE 2020-02 or PTE 84-24 for any compensation for providing investment advice. One commenter noted that some investment advice fiduciaries that formerly could rely on the same exemption (
e.g.,
PTE 77-4) for both advice and for other transactions, such as asset management, would now have to rely on multiple exemptions. Another commenter suggested that PTE 2020-02 was not a good substitute for PTE 77-4 because it was more burdensome.

However, as the Department discussed in the preamble to the

proposed Mass Amendment,
21

the Department is seeking to provide a single standard of care that would apply universally to all fiduciary investment advice, regardless of the specific type of product or advice provider. This uniform regulatory structure for investment advice will provide greater protection for Retirement Investors and create a level playing field among investment advice providers by ensuring that advice transactions are subject to a common set of standards that are specifically designed to protect Retirement Investors from the inherent dangers posed by conflicts of interest and to ensure prudent advice. These common standards, which are included in both this exemption and the amended PTE 84-24, importantly include the Impartial Conduct Standards, the policies and procedures requirement, and the obligation to conduct annual retrospective reviews, each of which is further described below. In the Department's judgment, the advice transactions that were formerly covered by PTE 77-4 and the other exemptions affected by the Mass Amendment are just as deserving of these core protections as other advice transactions, and the need for protection is just as great.

21
88 FR 76032.

Several commenters emphasized the need for a universal standard covering investment advice provided to Retirement Investors. These commenters described Retirement Investors who reasonably expect their relationship with an investment advice provider to be one in which they can—and should—place trust and confidence in the advice provider's recommendations. In light of the asymmetry of information and knowledge between a Retirement Investor and an advice provider, commenters noted that the Retirement Investor is at increased risk that the advice provider will prioritize its own compensation at the expense of the Retirement Investor's savings.

To ensure that there is a common standard that Retirement Investors can rely on for all products and for all tax-advantaged retirement accounts, the Department is broadening this exemption to make it available for recommendations of all types of products by all fiduciary investment advice providers as defined in ERISA, the Code, and the final Regulation that the Department is issuing today.

Transactions With Parties In Interest

In this Final Amendment, the Department is expanding the scope of the PTE 2020-02 to permit Financial Institutions, Investment Professionals, and their Affiliates and Related Entities, to receive reasonable compensation (including commissions, fees, mark ups, mark downs, and other payments) that would otherwise be prohibited under ERISA and the Code as a result of providing investment advice within the meaning of ERISA section 3(21)(A)(ii), Code section 4975(e)(3)(B), and the final Regulation to Retirement Investors, including as part of a rollover from an employee benefit plan to an IRA. This is a change from the Proposed Amendment, and from the exemption that was finalized in 2020, which granted limited relief for “covered principal transactions” and “riskless principal transactions,” as those terms were defined in the Proposed Amendment. The Final Amendment provides exemptive relief for all transactions—regardless of whether they are executed on a principal or agent basis. This expansion in the scope of the exemption responds to many commenters' concerns that the Proposed Amendment unduly narrowed the availability of the exemption, including the concerns of those who argued that the language in Section I of the exemption did not sufficiently clarify whether recommendations involving insurance and annuity products were covered transactions.

This expansion in scope also responds to many industry commenters who expressed particular concern that the Proposed Amendment of PTE 2020-02 and the proposed Mass Amendment would leave certain principal transactions that previously were covered by a class exemption without exemptive relief. Many of these commenters urged the Department to expand the scope of covered principal transactions in PTE 2020-02, including to provide relief for closed-end funds that are traded on a principal basis upon their inception. Some commenters asserted more generally that the Department was inappropriately substituting its own judgment for that of Retirement Investors and their fiduciary investment advice providers and effectively preventing Retirement Investors from purchasing a wide range of securities that are recommended.

However, other commenters disagreed. Some commenters urged the Department to further narrow the scope of Covered Principal Transactions. For example, one commenter encouraged the Department to add the limitation “for cash” to the definition of Covered Principal Transaction, which would prevent in-kind transactions from being treated as covered principal transactions. This commenter asserted that such a change would reduce the complexity and the conflicts of interest that otherwise would be associated with such transactions. Other commenters generally supported the Department's Proposed Amendment with its limited coverage for principal transactions.

Although the Department is expanding the scope of the exemption, the Department continues to be concerned about the heightened conflicts of interest inherent in principal transactions. Principal transactions involve the purchase from, or sale to, a Plan or an IRA of an investment on behalf of the Financial Institution's own account or the account of a person directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with the Financial Institution. Because an investment advice fiduciary engaging in a principal transaction is involved with both sides of the transaction, a Financial Institution or Investment Professional providing fiduciary investment advice in a principal transaction has a clear and direct conflict of interest.

In addition, the securities that are typically traded in principal transactions often lack pre-trade price transparency and can be illiquid. As a result, Retirement Investors may find it especially challenging to evaluate the reasonableness of recommended principal transactions. Because of these challenges, there is a danger that Financial Institutions and Investment Professionals will favor their own interests by selling unwanted investments from their inventory to unwitting investors, overcharge investors, or otherwise take advantage of investors and put their interests ahead of the investors' interests. Historically, the Department has provided relief for principal transactions that is limited in scope and subject to additional protective conditions because of these concerns.

After careful consideration of the comments, the Department is expanding the types of transactions that are covered by the exemption to ensure that Financial Institutions and Investment Professionals can recommend a wide variety of investment products to Retirement Investors. To the extent Financial Institutions and Investment Professionals comply with the stringent standards of care imposed by the Final Amendment and take seriously the exemption's requirements relating to policies and procedures, conflict mitigation, and retrospective review, the Department finds that the Final Amendment is both protective and flexible enough to accommodate a wide

range of products, including relatively complex and risky investments. However, the Department cautions that, in order to comply with the exemptions' policies and procedures requirements, Financial Institutions selling products on a principal basis must carefully address how they will mitigate the inherent conflicts of interest associated with recommending these products to Retirement Investors.

More generally, Financial Institutions and Investment Professionals must take special care to protect the interests of Retirement Investors and to avoid favoring their own financial interests at the expense of Retirement Investors' interests. The greater the dangers posed by conflicts of interest, complexity, or risk, the greater the care Investment Professionals and Financial Institutions must take to ensure that their investment recommendations are prudent, loyal, and unaffected by either the Financial Institutions' or the Investment Professionals' conflicts of interest.

Financial Institutions and Investment Professionals

The amended exemption is broadly available for Financial Institutions and Investment Professionals, and their Affiliates and Related Entities, including (but not limited to) independent marketing organizations (IMOs), field marketing organization (FMOs), brokerage general agencies (BGAs) and others providing administrative support.

In this Final Amendment, the Department has made some ministerial changes to the existing definitions of Investment Professionals, Affiliates and Related Entities for clarity. In particular, the Department has clarified that the definition of “Related Entity” includes two components: (i) a party that has an interest in an Investment Professional or Financial Institution; and (ii) a party in which an Investment Professional or Financial Institution has an interest, in either case when that interest may affect the fiduciary's best judgment as a fiduciary. The Department has also made ministerial changes, such as changing “described” to “defined” in referencing ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B). Some commenters also suggested other changes in nomenclature, but the Department has concluded that the terms, as defined in the Final Amendment, are appropriately clear and consistent.

The Final Amendment also broadens the definition of the term Financial Institution to include non-bank trustees or custodians that are approved to serve in these capacities under Treasury Regulation 26 CFR 1.408-2(e) (as amended), but only to the extent they are serving as non-bank trustees or custodians with respect to HSAs. Several commenters requested the Department to expand the definition of Financial Institution under the exemption to include these non-bank trustees or custodians. As explained by some commenters, IRS-approved non-bank trustees and custodians are permitted to administer HSAs and are subject to numerous requirements under regulations and guidance issued by the Department of the Treasury.
22

Some commenters stated that these non-bank trustees service a meaningful portion of the HSA market, and argued that without eligibility to use PTE 2020-02, they may be forced to exit the market. According to these commenters, with reduced competition and fewer choices, costs to HSA plan sponsors and participants could increase. One commenter further stated that the failure to include IRS-approved non-bank HSA trustees and custodians in the definition would be inconsistent with the intent of Congress to regulate such entities similarly to other Financial Institutions under ERISA and the Code.

22
According to the commenter, in order for a non-bank trustee or custodian to receive this certification, the entity must submit a written application to the Commissioner of the IRS demonstrating, generally, its ability to act within the accepted rules of fiduciary conduct, its capacity to account for large numbers of accountholders, its fitness to handle funds normally associated with the handling of retirement funds, sufficient net worth, and that its procedures adhere to established rules of fiduciary conduct (including that all employees taking part in the performance of the entity's fiduciary duties are required to be bonded in an amount of at least $250,000). The entity is also required to undergo an annual audit of its books and records by a qualified public accountant to determine, among other things, whether the HSA accounts have been administered in accordance with applicable law.
See
Treasury Regulation 26 CFR 1.408-2(e) (as amended).

After consideration of these comments, which were limited to concerns regarding HSAs, the Department is expanding the definition of Financial Institution in the Final Amendment to include non-bank trustees and non-bank custodians that are approved under Treasury Regulation 26 CFR 1.408-2(e) (as amended), but only to the extent they are serving in these capacities with respect to HSAs. The Department agrees with commenters that the initial and continuing requirements to remain certified by the Department of the Treasury as a non-bank trustee or custodian provide sufficient regulatory oversight of these entities to include them within the scope of this exemption as applied to HSAs. As amended, these non-bank trustees and custodians will be permitted to serve as Financial Institutions under Section V(d)(5). To implement this change, the Department is redesignating former Section V(e)(5) to (d)(6), which covers other entities that may become Financial Institutions under future individual exemptions.

Retirement Investors

The Department is revising the definition of Retirement Investor in Section V(l) to be consistent with the definition in the final Regulation defining fiduciary investment advice. As revised, both the final Regulation and this Final Amendment define Retirement Investor to mean a Plan, Plan participant or beneficiary, IRA, IRA owner or beneficiary, Plan fiduciary within the meaning of ERISA section (3)(21)(A)(i) or (iii) and Code section 4975(e)(3)(A) or (C) with respect to the Plan, or IRA fiduciary within the meaning of Code section 4975(e)(3)(A) or (C) with respect to the IRA. The preamble to the final Regulation includes additional discussion of the term “Retirement Investor,” which the Department is defining similarly in the Final Amendment to ensure its broad availability to investment advice fiduciaries.

These revisions should alleviate some commenters' concerns that advice providers may provide advisory tools and assistance to fiduciaries who, in turn, render investment advice to Retirement Investors. As revised, neither the final Regulation nor this Final Amendment treats investment advice fiduciaries under section 3(21)(A)(ii) of ERISA or Code section 4975(e)(3)(B) as Retirement Investors.

Exclusions

The Department is also finalizing its amendment to Section I(c) of the exemption, which limits the availability of PTE 2020-02 in certain circumstances. Specifically, section I(c)(1) excludes from the exemption relief provided to Title I Plans if the Investment Professional, Financial Institution, or any Affiliate providing the investment advice is: (A) the employer whose employees are covered by the Plan; or (B) the Plan's named fiduciary or administrator. However, a named fiduciary or administrator or their Affiliate (including a Pooled Plan Provider (PPP) registered with the Department of Labor under 29 CFR 2510.3-44) may rely on the exemption if it is selected to provide investment advice by a fiduciary who is

Independent
23

of the Financial Institution, Investment Professional, and their Affiliates. The Department received several comments opposed to this exclusion, arguing that Financial Institutions should be able to charge fees for advice to their own employees under the conditions of the exemption. The Department, however, is not modifying this provision, because its position continues to be that employers generally should not use their employees' retirement benefits as a potential source of revenue or profit, without additional safeguards. Employers can always render advice and receive reimbursement for their direct expenses incurred in transactions involving their employees without the need for the exemptive relief provided in this exemption.
24

23
As defined in Section V(e), For purposes of subsection I(c)(1), a fiduciary is “Independent” of the Financial Institution and Investment Professional if:

(1) the fiduciary is not the Financial Institution, Investment Professional, or an Affiliate;

(2) the fiduciary does not have a relationship to or an interest in the Financial Institution, Investment Professional, or any Affiliate that might affect the exercise of the fiduciary's best judgment in connection with transactions covered by this exemption; and

(3) the fiduciary does not receive and is not projected to receive within its current Federal income tax year, compensation or other consideration for its own account from the Financial Institution, Investment Professional, or an Affiliate, in excess of two (2) percent of the fiduciary's annual revenues based upon its prior income tax year.

24
A few existing prohibited transaction exemptions apply to employers.
See, e.g.,
ERISA section 408(b)(5) (statutory exemption that provides relief for the purchase of life insurance, health insurance, or annuities, from an employer with respect to a Plan or a wholly owned subsidiary of the employer).

The Department also has determined that it is inappropriate for PTE 2020-02 to be used by a Financial Institution or Investment Professional (or an affiliate thereof) that is the named fiduciary or plan administrator of a Title I Plan to receive additional compensation for providing investment advice to Retirement Investors who are participants in the Financial Institution's own Plan unless the Financial Institution or Investment Professional is selected to serve as an investment advice provider by a fiduciary that is Independent of them. Named fiduciaries and plan administrators have significant authority over plan operations and accordingly, it is imperative for the Financial Institution or Investment Professional to be selected by an Independent fiduciary who will monitor and hold them accountable for their performance as a provider of investment advice services to Retirement Investors covered by the Financial Institution's own Plan.

Pooled Employer Plans and Pooled Plan Providers

The Proposed Amendment would have been available for advice to Pooled Employer Plans (PEPs). Amended Section I(c) of the exemption would have permitted Pooled Plan Providers (PPPs), as defined in Section V(j), and their Affiliates to rely upon the exemption to provide investment advice if they are Financial Institutions within the meaning of the exemption, notwithstanding their status as named fiduciaries or plan administrators. The preamble to the Proposed Amendment stated that a PPP can provide investment advice to a PEP within the framework of the exemption and would allow PEPs to receive investment advice in the same manner as other ERISA plans.
25

While the Proposed Amendment would have created a separate category for PPPs, the Final Amendment clarifies that PPPs can rely on PTE 2020-02 when the PPP is selected by an Independent fiduciary. The change ensures that PPPs are treated in the same manner as any other Financial Institution.
26

25
88 FR at 75982.

26
Under ERISA section 3(43)(B)(iii) employers retain fiduciary responsibility for the selection and monitoring of the PPP and any other named fiduciary of the plan, and an employer would be able to make this independent selection.

Commenters were generally supportive of the proposed approach, but some expressed concern about fiduciary and prohibited transaction issues related to a PPP's decision to hire affiliated parties or employer decisions to participate in a PEP. These issues are outside the scope of this exemption, because they are dependent on the particular facts and circumstances of a specific case. Accordingly, such issues would be better addressed outside the context of the relief provide in this Final Amendment, which is focused on the receipt of reasonable compensation as a result of providing investment advice.

Robo-Advice

PTE 2020-02 initially excluded investment advice generated solely by an interactive website in which computer software-based models or applications provide investment advice based on investor-supplied personal information without any personal interaction with or advice from an Investment Professional (robo-advice). The Proposed Amendment included robo-advice within the scope of PTE 2020-02. While a few commenters expressed concern that the Department was favoring robo-advice, most commenters supported the Department's proposed inclusion. The commenters asserted that the inclusion would simplify compliance for Financial Institutions and Investment Professionals and expand access to investment advice at a lower cost for Retirement Investors. One commenter argued that by allowing some robo-advice, the Department was making the exemption available for certain instances of discretionary investment management, as long as it was not provided by a human. However, the Department confirms that the exclusion in Section I(c)(2) limits the exemption to fiduciary investment advice.

After considering these comments, the Department is finalizing this amendment as proposed to expand the scope of the exemption by removing Section I(c)(2), which excluded robo-advice from the exemption. As discussed in the preamble to the Proposed Amendment, the Department understands that Financial Institutions may use a combination of computer models and individual Investment Professionals to provide investment advice and implement a single set of policies and procedures that governs all investment recommendations. Like any other investment advice arrangement, Financial Institutions relying on computer models must satisfy the exemption's Impartial Conduct Standards and other protective conditions in order to receive exemptive relief. As stated above, the amended exemption is sufficiently protective and flexible to accommodate a wide range of investment advice arrangements, including robo-advice.

Therefore, after reviewing the comments, the Department has not been presented with any evidence that would lead it to conclude that robo-advice arrangements cannot comply with the same conditions that are applicable to other investment advice arrangements. Additionally, the failure to include such arrangements in the amended exemption could reduce access to an important and cost-effective means of delivering investment advice to many participants and beneficiaries. The Department does not agree with the suggestion of a few commenters that the inclusion of robo-advice in the exemption would give such arrangements an unfair competitive advantage, inasmuch as they are subject to the same conditions as other advisory arrangements under the terms of the exemption.

Investment Discretion

The Proposed Amendment would have redesignated Section I(c)(3) of PTE 2020-02 as Section I(c)(2) to exclude from the exemption investment advice that is provided to a Retirement Investor by a Financial Institution or Investment Professional when such Financial Institution or Investment Professional is serving in a fiduciary capacity other than as an investment advice fiduciary within the meaning of ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B) (and the regulations issued thereunder). The Department is finalizing this provision as proposed. As discussed in the preamble to the Proposed Amendment, the Department does not intend to change the substance of this exclusion and is clarifying that Financial Institutions and Investment Professionals cannot rely on the exemption when they act in a fiduciary capacity other than as an investment advice fiduciary. The Department notes that other exemptions exist for other types of transactions, such as discretionary asset management.

Impartial Conduct Standards

Care Obligation and Loyalty Obligation

The Department is retaining the substance of the exemption's requirement for Financial Institutions and Investment Professionals to act in the Retirement Investor's “Best Interest” and finalizing proposed clarifications. However, the Department is replacing the term “Best Interest” in the Final Amendment with its two separate components: the Care Obligation and the Loyalty Obligation. The Final Amendment specifically refers to each obligation separately, although they are unchanged in substance from the previous version of PTE 2020-02 and the Proposed Amendment. Both the Care Obligation and the Loyalty Obligation must be satisfied when investment advice is provided. As defined in amended Section V(b), to meet the Care Obligation, advice must reflect 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, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor. As defined in amended Section V(h), to meet the Loyalty Obligation, the Financial Institution and Investment Professional must not place the financial or other interests of the Investment Professional, Financial Institution or any Affiliate, Related Entity, or other party ahead of the interests of the Retirement Investor or subordinate the Retirement Investor's interests to those of the Investment Professional, Financial Institution or any Affiliate, Related Entity.

The Department is changing its nomenclature for these two obligations in response to comments that the phrase “best interest” was used in many contexts throughout this rulemaking and by various regulators with possibly different shades of meaning. For example, in paragraph (c)(1)(i) of the final Regulation, fiduciary status is based, in part, on whether a recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation “may be relied upon by the retirement investor as intended to advance the retirement investor's best interest.” In the context of the final Regulation, however, “best interest” is not meant to refer to the specific requirements of the “Best Interest” standard used in PTE 2020-02, which incorporated ERISA's standards of prudence and loyalty, but rather to refer more colloquially to circumstances in which a reasonable investor would believe the advice provider is looking out for them and working to promote their interests. As discussed in the preamble to the proposed Amendment, the Department is also adding an example from the prior PTE 2020-02 preamble to the operative text of Section II(a)(1) specifying that it is impermissible for the Investment Professional to recommend a product that is worse for the Retirement Investor because it is better for the Investment Professional's or the Financial Institution's bottom line.

Similarly, in recommending whether a Retirement Investor should pursue a particular investment strategy through a brokerage or advisory account, the Investment Professional must base the recommendation on the Retirement Investor's financial interests, rather than any competing financial interests of the Investment Professional. For example, in order for an Investment Professional to recommend that a Retirement Investor enter into an arrangement requiring the Retirement Investor to pay an ongoing advisory fee to the Investment Professional, the Professional must prudently conclude that the Retirement Investor's interests would be better served by this arrangement than the payment of a one-time commission to buy and hold a long-term investment. In making recommendations as to account type, it is important for the Investment Professional to ensure that the recommendation carefully considers the reasonably expected total costs over time to the Retirement Investor, and that the Investment Professional base its recommendations on the financial interests of the Retirement Investor and avoid subordinating those interests to the Investment Professional's competing financial interests.

It bears emphasis, that this standard should not be read as somehow foreclosing the Investment Professional and Financial Institution from being paid on a transactional basis or ongoing basis, nor does it foreclose investment advice on proprietary products or investments that generate third-party payments,
27

or advice based on investment menus that are limited to such products, in part or whole. Financial Institutions and Investment Professionals are entitled to receive reasonable compensation that is fairly disclosed for their work. As further described below, Financial Institutions that offer a restricted menu of proprietary products or products that generate third-party payments must ensure their policies and procedures satisfy the conditions of Section II(c).

27
The Department considers “third-party payments” to include such payments as sales charges when not paid directly to the Financial Institution, Investment Professional, or an Affiliate or Related Entity by a Retirement Investor; gross dealer concessions; revenue sharing payments; 12b-1 fees; distribution, solicitation or referral fees; volume-based fees; fees for seminars and educational programs; and any other compensation, consideration, or financial benefit provided to the Financial Institution, Investment Professional or an Affiliate or Related Entity by a third party as a result of a transaction covered by this exemption involving a Retirement Investor.

The Department received many comments on the Impartial Conduct Standards. Several commenters supported the principles-based approach, which they asserted provide fundamental investor protections that are necessary to ensure the advice is in the interest of the Retirement Investors. Some commenters noted how many investment advice professionals already hold themselves to similar professional standards of conduct. One commenter, in particular, stated that these high standards have not resulted in less access to advice.

Other commenters objected to the Impartial Conduct Standards. Some commenters argued that the Department does not have authority to include these conditions in a prohibited transaction exemption. According to these commenters, because the Care Obligation and Loyalty Obligation are based on ERISA's prudence and loyalty requirements in Title I, the Department cannot require these standards to apply

when advice is provided to an IRA or other Title II Plan. Some commenters suggested the Department instead rely on the standards finalized by the SEC or the National Association of Insurance Commissioners (NAIC). One commenter stated that the Department is deliberately extending ERISA Title I statutory duties of prudence and loyalty to brokers and insurance representatives who sell to IRA plans, although Title II has no such requirements.

The Department disagrees with these commenters. ERISA section 408(a) and Code section 4975(c)(2) expressly permit the Department (through the Reorganization Plan No. 4 of 1978) to grant “a conditional or unconditional exemption” as long as the exemption is “(A) administratively feasible, (B) in the interests of the plan and of its participants and beneficiaries, and (C) protective of the rights of participants and beneficiaries of the plan.”
28

Nothing in these provisions forbids the Department from drawing on the same common law standards of prudence and loyalty that have been used in analogous contexts for hundreds of years, requires the Department to limit conditions to novel provisions that Congress did not include anywhere else in ERISA's text, or expresses a preference for including standards taken from other State or Federal regulatory structures while disregarding those set forth in ERISA. These standards are an essential part of ensuring the advice is in the interest of and protective of Retirement Investors and are also administratively feasible and have been central to PTE 2020-02 since it was originally granted. In finalizing the Impartial Conduct Standards in 2020, the Department explained that this condition “merely recognizes that fiduciaries of IRAs, if they seek to use this exemption for relief from prohibited transactions, should adhere to a best interest standard consistent with their fiduciary status and a special relationship of trust and confidence.”
29

Additionally, while Title I imposes a duty of care and a duty of loyalty on fiduciaries in all situations, the concept of care and loyalty are not unique to Title I or even to ERISA but are rather foundational principles of trust and agency law. The SEC imposes duties of care and loyalty on investment advisers and broker-dealers. The 2020 NAIC Suitability In Annuity Transactions Model Regulation 275 (the “NAIC Model Regulation”) also relies on underlying principles of care and loyalty. These core requirements are not singularly reserved for Title I of ERISA and the Department disagrees that it is inappropriate to apply these requirements to investment advice fiduciaries to Title II plans who want to engage in otherwise statutorily prohibited transactions.

28
ERISA section 408(a), Code section 4975(c)(2).

29
85 FR 82822

The Department received several comments on how this standard applies to insurance sales. A few commenters argued that the proposed revisions to PTE 2020-02 should take a different approach to recognize the unique aspects of its application to the insurance industry. Commenters pointed out differences between the NAIC Model Regulation standard and the exemption's Impartial Conduct Standards. One commenter accused the Department of “entrapping insurance agents” by holding them to the fiduciary standard based on their actions. However, a different commenter specifically supported the Department's proposal, stating that NAIC Model Regulation does not require producers to act in the “best interest of their customers,” and called out the need for a clear uniform standard.

A few commenters specifically raised questions about the continued applicability of Question 18 from the 2021 FAQs.
30

Question 18 asked, “[h]ow can insurance industry financial institutions comply with the exemption?” In response, the Department confirmed that PTE 2020-02 is available for insurance products, particularly for independent producers that work with multiple insurance companies. The Department confirms that the Department's reasoning in the response to FAQ 18 remains true for PTE 2020-02 as amended by the Final Amendment.

30
See
supra
at note 19.

The Department is aware that insurance companies often sell insurance products and fixed (including indexed) annuities through different distribution channels. While some insurance agents are employees of an insurance company, other insurance agents are independent, and work with multiple insurance companies. PTE 2020-02 applies to all of these business models. In addition to PTE 2020-02, the Department is also simultaneously publishing amendments to PTE 84-24 elsewhere in this edition of the
Federal Register
which provide a pathway to compliance for insurance companies that market their products through independent insurance agents, without requiring the companies to assume or acknowledge fiduciary status.

However, insurance companies and agents may also rely upon PTE 2020-02 to the same extent as other Financial Institutions and Investment Professionals to receive relief for the receipt of otherwise prohibited compensation as a result of investment recommendations, including commissions. To the extent an insurance company that markets its products through independent agents chooses to rely on PTE 2020-02, the independent insurance agent and the financial institution (
i.e.,
the insurance company) must satisfy the exemption's conditions, including the fiduciary acknowledgement and the Impartial Conduct Standards with respect to that recommendation. In such cases, the insurance company must adopt policies and procedures to ensure it complies with the Impartial Conduct Standards and avoid incentives that place the insurance company's or the independent agent's interests ahead of the Retirement Investor's interest.

While independent producers may recommend products issued by a variety of insurance companies, PTE 2020-02 does not require insurance companies to exercise supervisory responsibility with respect to independent producers' sales of the products of unrelated and unaffiliated insurance companies for which the insurance company does not receive any compensation or have any financial interest.
31

When an insurance company is the supervisory financial institution for purposes of the exemption with respect to such an independent producer, its obligation is simply to ensure that the insurer, its affiliates, and related entities meet the exemption's terms with respect to the insurance company's annuity which is the subject of the transaction.

31
As defined in PTE 84-24, an Independent Producer is ”a person or entity that is licensed under the laws of a State to sell, solicit or negotiate insurance contracts, including annuities, and that sells to Retirement Investors products of multiple unaffiliated insurance companies, and (1) is not an employee of an insurance company (including a statutory employee as defined under Code section 3121(d)(e)); or (2) is a statutory employee of an insurance company which has no financial interest int the covered transaction.”

Under the exemption, the insurance company must:

• adopt and implement prudent supervisory and review mechanisms to safeguard the agent's compliance with the Impartial Conduct Standards when recommending the insurance company's products;

• avoid improper incentives to preferentially recommend the products, riders, and annuity features that are most lucrative for the insurance company at the customer's expense;

• ensure that the agent receives no more than reasonable compensation for its services in connection with the

transaction (
e.g.,
by monitoring market prices and benchmarks for the insurance company's products, services, and agent compensation); and

• adhere to the disclosure and other conditions set forth in the exemption.

Under the exemption, the obligation of the insurance company with respect to independent producers is to oversee the recommendation and sale of its products by the independent producer, not the recommendations and sales by the independent producer involving another insurance company's products. Insurance companies could also comply with the exemption by creating oversight and compliance systems through contracts with insurance intermediaries such as IMOs, FMOs or BGAs. As one possible approach, an insurance intermediary could eliminate compensation incentives across all the insurance companies that work with the insurance intermediary, assisting each of the insurance companies with their independent obligations under the exemption. This might involve the insurance intermediary's review of documentation prepared by insurance agents to comply with the exemption, as may be required by the insurance company, or the use of third-party industry comparisons available in the marketplace to help independent insurance agents recommend products that are prudent for their retirement investor customers.

Finally, commenters raised an issue relating to administrative feasibility of PTE 2020-02 and its core conditions, arguing that it is too early to determine whether PTE 2020-02, as currently constituted, is administrable under ERISA section 408(a) and Code section 4975(c)(2), and that the Department has not provided evidence to evaluate whether it is administrable. Other commenters questioned the administrative feasibility of both PTE 84-24 and PTE 2020-02 more generally and took issue with the added or expanded conditions of both exemptions.

The Department notes, however, that the core conditions of both PTE 2020-02 and PTE 84-24, including all the Impartial Conduct Standards, reflect core fiduciary obligations that have been present in ERISA since its passage nearly fifty years ago, and that the duties of care and loyalty are rooted in trust law obligations that long predate ERISA. The Department and the financial services industry have decades of experience with the administration of these requirements and the Department is confident that Financial Institutions, Insurers and investment professionals can adopt supervisory structures and make investment recommendations that meet basic standards of prudence and loyalty, and that do not involve overcharging or misleading Retirement Investors.

Moreover, the changes to the exemptions accompany the Regulation, which makes significant changes to the prior rule on fiduciary investment advice, and those changes also reflect decades of experience with the prior rule and its shortcomings in the modern advice marketplace, as discussed in the preamble to the Regulation. In making revisions to PTE 2020-02, the Department has been careful to ensure that parties who are currently relying upon the exemption will be able to continue to do so, without undue additional burden or needless change, and many of the changes simply expand the scope of relief available. In addition, PTE 2020-02 and PTE 84-24 give firms considerable flexibility in adopting oversight structures to manage conflicts of interest and promote compliance. The Final Rule and the exemptions cover many transactions that would not have been treated as fiduciary advice prior to this rulemaking. Taken together, they fill gaps in the regulatory structure that were not effectively addressed by the 1975 rule or PTE 2020-02.

Based on its long experience with the advice rule, the existing exemption structure, and the core Impartial Conduct Standards, the Department has concluded that the proposed changes are necessary, administrable and consistent with the protective standards of ERISA section 408 and Code section 4975(c)(2). The Department also notes that similar regulatory efforts have been initiated and successfully administered by other State and Federal regulators. These regulatory efforts and structures include New York's Rule 187,
32

the NAIC Model Regulation, the SEC's Regulation Best Interest, and the regulation of advisers under the Investment Advisers Act.

32
Suitability and Best Interest in Life Insurance and Annuity Transactions, 11 NYCRR 224.

Reasonable Compensation

The Department is retaining in the Final Amendment the reasonable compensation and best execution standards from PTE 2020-02 as proposed. Section II(a)(2)(A) provides that the compensation received, directly or indirectly, by the Financial Institution, Investment Professional, their Affiliates and Related Entities for their fiduciary investment advice services provided to the Retirement Investor must not exceed reasonable compensation within the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2). In addition, Section II(a)(2)(B) provides that the Financial Institution and Investment Professional must seek to obtain the best execution of the recommended investment transaction that is reasonably available under the circumstances as required by the Federal securities laws.

The Department received some comments objecting to the reasonable compensation standard. Some commenters stated that this standard is not specific enough and could chill an Investment Professional's willingness to recommend certain products that carry high commissions. Other commenters argued that this practice would ultimately limit the range of products available to Retirement Investors.

The Department is finalizing the reasonable compensation standard as proposed. The obligation to pay no more than reasonable compensation to service providers has been part of ERISA since its passage.
33

For example, the ERISA section 408(b)(2) and Code section 4975(d)(2) statutory exemptions expressly require that all types of services arrangements involving Plans and IRAs result in the service provider receiving no more than reasonable compensation. When acting as service providers to Plans or IRAs, Investment Professionals and Financial Institutions have long been subject to this requirement, regardless of their fiduciary status.

33
The default rule under common law likewise requires that a trustee's compensation be reasonable.
E.g., Nat'l Assoc. for Fixed Annuities
v.
Perez,
217 F. Supp. 3d 1, 43-44 (D.D.C. 2016) (“[C]ommon law includes requirements of `reasonable compensation' for trustees . . . .” (citations omitted)); Restatement (Third) of Trusts § 38(1) (2003) (“A trustee is entitled to reasonable compensation out of the trust estate for services as trustee . . . .”).

The reasonable compensation standard requires that compensation received by Financial Institutions and Investment Professionals not be excessive, as measured by the market value of the particular services, rights, and benefits the Investment Professional and Financial Institution are delivering to the Retirement Investor. Given the conflicts of interest associated with the commissions and other payments that are covered by the exemption and the potential for self-dealing, it is particularly important for the Department to require Investment Professionals' and Financial Institutions' adherence to these statutory standards, which are rooted in common-law principles.

The reasonable compensation standard applies to all covered transactions under the exemption,

including those involving investment products that bundle services and investment guarantees or other benefits, such as annuity products. In assessing the reasonableness of compensation in connection with covered transactions involving these products, it is appropriate to consider the value of the guarantees and benefits as well as the value of the services. When assessing the reasonableness of compensation, Financial Institutions and Investment Professionals generally must consider the value of all the services and benefits provided to Retirement Investors for the compensation, not just some of the services and benefits. If Financial Institutions and Investment Professionals need additional guidance in this respect, they should refer to the Department's regulatory interpretations under ERISA section 408(b)(2) and Code section 4975(d)(2).
34

34

See
29 CFR 2550.408b-2.

No Materially Misleading Statements

The Department is also retaining the requirement in Section II(a)(3) of PTE 2020-02 that prohibits Financial Institutions and Investment Professionals from making materially misleading statements to Retirement Investors. The Department is also clarifying that the prohibition against misleading statements applies to both written and oral statements. In particular, the Department is also clarifying that this condition is not satisfied if a Financial Institution or Investment Professional omits information that is needed to make the statement not misleading in light of the circumstances under which it was made.

The Department received a comment expressing concern that this condition is too vague. The Department disagrees. As the Department explained when it granted PTE 2020-02, “materially misleading statements are properly interpreted to include statements that omit a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading. Retirement Investors are clearly best served by statements and representations that are free from material misstatements and omissions.”
35

The Final Amendment merely adds clarity by incorporating this understanding into the exemption's operative text. Numerous courts have similarly recognized that statements can be misleading by virtue of material omissions, as well as by affirmative misstatements.
36

This is not a unique or new concept for Financial Institutions. For example, in adopting Regulation Best Interest, the SEC reminded broker-dealers of their obligations under the anti-fraud provisions of Federal Securities laws for failure to disclose material information to their customers when they have a duty to make such disclosure.
37

Financial Institutions and Investment Professionals best promote the interests of Retirement Investors by ensuring that their communications with their customers are not materially misleading.

35
85 FR 82826.

36

E.g., Vest
v.
Resolute FP US Inc.,
905 F.3d 985, 990 (6th Cir. 2018) (“[A] material omission qualifies as misleading information.”);
Kalda
v.
Sioux Valley Physician Partners, Inc.,
481 F.3d 639, 644 (8th Cir. 2007) (“Additionally, a fiduciary has a duty to inform when it knows that silence may be harmful and cannot remain silent if it knows or should know that the beneficiary is laboring under a material misunderstanding of plan benefits.” (internal citations omitted));
Krohn
v.
Huron Mem'l Hosp.,
173 F.3d 542, 547 (6th Cir. 1999) (“[A] fiduciary breaches its duties by materially misleading plan participants, regardless of whether the fiduciary's statements
or omissions
were made negligently or intentionally.”) (emphasis added);
see Mathews
v.
Chevron Corp.,
362 F.3d 1172, 1183 (9th Cir. 2004).

37
84 FR 33348, note 303. The Department observes that this requirement is also consistent with, for example, the requirement under section 206 of the Advisers Act, which bars an investment adviser from making materially false or misleading statements
or omissions
to any client or prospective client.
See In the Matter of S Squared Tech. Corp.,
Release No. 1575 (SEC. Release No. Aug. 7, 1996). The SEC's Rule 10b-5 under the Exchange Act imposes a similar requirement. 17 CFR 240.10b-5(b).
See also SEC
v.
Cap. Gains Rsch. Bureau, Inc.,
375 U.S. 180, 200 (1963) (“Failure to disclose material facts must be deemed fraud or deceit within its intended meaning”).

Accordingly, the Department is finalizing the provisions in the exemption related to materially misleading statements as proposed, with minor ministerial changes to the wording, such as moving the phrases “to the Retirement Investor” and “materially misleading” for clarity.

Disclosure

The Department is generally finalizing the disclosure conditions with some modifications to the Proposed Amendment, as discussed below. While many commenters raised concerns about the burden that would be imposed on Financial Institutions if the Department required additional disclosure, others expressed support for the Department to impose additional disclosure obligations. It is important that Retirement Investors have a clear understanding of the compensation, services, and conflicts of interest associated with recommendations if they are to make fully informed decisions. Additionally, clear and accurate disclosures can deter Financial Institutions and Investment Professionals from engaging in otherwise abusive practices that they would prefer not to expose.

One commenter suggested revising the disclosure condition to provide that it is sufficient for the Retirement Investor to have received the disclosure, without necessarily placing the responsibility squarely on the Financial Institution and Investment Professional to make the required disclosures. The Department declines to change the exemption from the proposal in this manner. The Department notes that, while Financial Institutions can coordinate the transmittal of required disclosures with others and rely upon vendors and others to ensure transmittal, ultimately the responsibility to make required disclosures, including the fiduciary acknowledgement, rests with the Financial Institution and Investment Professionals as set out in the exemption. In the Department's view, the proper exercise of this responsibility is critical to ensuring that Retirement Investors receive important, accurate, and timely information, and to ensuring that Financial Institutions and Investment Professionals manage their fiduciary obligations with the seriousness they deserve.

In the preamble to the Proposed Amendment, the Department requested comments regarding whether Financial Institutions should be required to provide additional disclosures on third-party compensation to Retirement Investors on a publicly available website. One potential benefit of such disclosure would be to provide information about conflicts of interest that could be used, not only by Retirement Investors, but by consultants and intermediaries who could, in turn, use the information to rate and evaluate various advice providers in ways that would assist Retirement Investors. Industry commenters generally opposed the condition, stating that it would impose significant costs to continuously maintain such a website without a commensurate benefit to the Retirement Investors.

Based on these comments, the Department has determined not to include a website disclosure requirement as an exemption condition at this time. While the Department may reconsider this decision at some future date based on its experience with the Regulation and related exemptions, any such future amendments would be subject to public notice and comment through a formal rulemaking process. Consistent with the Recordkeeping conditions in Section IV, the Department intends, however, to

regularly request that Financial Institutions provide their investor disclosures to the Department to ensure that they are providing sufficient information in a manner that the Retirement Investor can understand, and that the disclosures are serving their intended purpose.

Fiduciary Acknowledgment

The Department is retaining the requirement in PTE 2020-02 for Financial Institutions to provide a written acknowledgment of fiduciary status to the Retirement Investor. At or before the time a covered transaction (as defined in Section I(b) of the Final Amendment) occurs, the Financial Institution must provide a written acknowledgment that the Financial Institution and its Investment Professionals are providing fiduciary investment advice to the Retirement Investor and are fiduciaries under Title I of ERISA, Title II of ERISA, or both with respect to the investment recommendation. Section II(b)(2) also requires the Financial Institution to provide a written statement of the Care Obligation and Loyalty Obligation owed by the Investment Professional and Financial Institution to the Retirement Investor. This disclosure must also be provided at or before the Financial Institution engages in the transaction.

The Department received many comments on this requirement. Some commenters supported clarifications that the acknowledgement must make clear that the recommendation is rendered in a fiduciary capacity, though some argued that the acknowledgment should be limited to specific transactions. For example, one commenter urged the Department to provide that the fiduciary acknowledgment must be an “unconditional” acknowledgment of fiduciary status in order to effectively address artful drafting by a Financial Institution that is intended to evade actual fiduciary status. Another commenter provided examples of disclosures that Financial Institutions have in place that are misleading to Retirement Investors. Many of these misleading disclosures state that the Financial Institution has fiduciary status, but then note there are exceptions or limitations to when the Financial Institution is acting as a fiduciary, without clearly taking a position on the Financial Institution's fiduciary status with respect to the particular recommendation. At best, this drafting may leave the Retirement Investor with many questions about when they are receiving fiduciary advice. At worst, it may leave the Retirement Investor with the mistaken impression that all recommendations it receives are provided in a fiduciary capacity when only some recommendations are subject to the protective conditions of this exemption. The Department agrees with these concerns, which provide further evidence of the need for the Final Amendment to include an unambiguous written acknowledgement requirement. Similarly, the requirement for a written statement of the Care Obligation and Loyalty Obligation is necessary to provide Retirement Investors with a clear statement of the duties Financial Institutions owe them.

Several commenters pointed to the history of Financial Institutions including fine print disclaimers of their fiduciary status. Disclosures have been used to undermine investors' reasonable expectations and the purpose of the fiduciary acknowledgment in Section II(b)(1) is to match the facts to the reasonable expectations of the Retirement Investor. Under the Final Amendment, Financial Institutions cannot acknowledge fiduciary status with respect to a recommendation, only to disclaim it in the fine print. The Final Amendment requires the Financial Institutions and Investment Professionals to acknowledge their fiduciary status with respect to
the
investment recommendation. This change prevents Financial Institutions from making the fiduciary acknowledgment and then including exclusions in fine print.

The Department believes that the requirement, as finalized, makes it unambiguously clear that the recommendation must be acknowledged as made in a fiduciary capacity under ERISA or the Code. It would not be sufficient, for example, to have an acknowledgement provide that “Firm A acknowledges fiduciary status under ERISA with respect to the recommendation to the extent the recommendation is treated by ERISA or Department of Labor regulations as fiduciary” because that statement does not explain when a recommendation would be treated as falling under the fiduciary requirements of ERISA and the Code. In contrast, the Department's model language below says, “We are making investment recommendations to you regarding your retirement plan account or individual retirement account as fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act and/or the Internal Revenue Code, as applicable, which are laws governing retirement accounts.”

A few commenters noted that neither Regulation Best Interest nor the NAIC Model Regulation requires a fiduciary acknowledgment. The Department recognizes that this is a difference between the requirements of this exemption and other sources of law. The point of the acknowledgment under PTE 2020-02 is to ensure that both the fiduciary and the Retirement Investor are clear that the particular recommendation is in fact made in a fiduciary capacity under ERISA or the Code, as defined under the regulation. The Retirement Investor should have no doubt as to the nature of the relationship or the associated compliance obligations. Anything short of that clear acknowledgment fails the exemption condition. It is not enough to alert the Retirement Investor to the fact that there may or may not be fiduciary obligations in connection with a particular recommendation, without stating that, in fact, the recommendation is made in the requisite fiduciary capacity.

Some commenters expressed concern with the timing of the acknowledgment. These commenters stated that Financial Institutions and Investment Professionals might have to acknowledge fiduciary status before they actually receive compensation and know that they are fiduciaries. Some commenters asked whether this acknowledgment might itself be a misleading statement that would be impermissible under Section II(a)(3) of the exemption. To address this concern, the Department has revised the language in Section II(b)(1) of the Final Amendment to further clarify that the disclosure must be provided “[a]t or before the time a covered transaction occurs, as defined in Section I(b).” In response to a specific comment, the Department is further clarifying that, “[f]or purposes of the disclosures required by Section II(b)(1)-(4), the Financial Institution or Investment Professional is deemed to engage in a covered transaction on the later of (A) the date the recommendation is made or (B) the date the Financial Institution or Investment Professional becomes entitled to compensation (whether now or in the future) by reason of making the recommendation.” This is revised from the Proposed Amendment, which would have required the disclosure to acknowledge fiduciary status “when making an investment recommendation.”

The Department is making these clarifications to confirm that the Financial Institution does not have to provide a fiduciary acknowledgment at its first meeting with the Retirement

Investor. Instead, the fiduciary acknowledgment must be made at or before the time the covered transaction occurs.

One commenter opined that the fiduciary acknowledgement condition constitutes “compelled” and “viewpoint-based” speech in violation of the First Amendment and warrants application of a `strict scrutiny' standard of review. As discussed in greater detail in the Regulation, neither the Regulation nor the Final Amendment prohibits speech based on content or viewpoint in any capacity. Instead, the Department simply imposes fiduciary duties on covered parties, and insists on adherence to Impartial Conduct Standards.

The Department also received many comments regarding whether the proposed fiduciary acknowledgment and statement of Best Interest standard amounted to an enforceable contract with the Retirement Investor to adhere to the requirements of PTE 2020-02. As several commenters noted, however, PTE 2020-02 does not impose any contract or warranty requirements on Financial Institutions or Investment Professionals. Instead, it simply requires up-front clarity about the nature of the relationship and services being provided. In marked contrast to the 2016 rulemaking, the Department has imposed no obligation on Financial Institutions or Investment Professionals to enter into enforceable contracts with or to provide enforceable warranties to their customers. The only remedies for violations of the exemption's conditions, and for engaging in a non-exempt prohibited transaction, are those provided by Title I of ERISA, which specifically provides a right of action for fiduciary violations with respect to ERISA-covered plans, and Title II of ERISA, which provides for imposition of the excise tax under Code section 4975. Nothing in the exemption compels Financial Institutions to make contractually enforceable commitments, and as far as the exemption provides, they could expressly disclaim any enforcement rights other than those specifically provided by Title I of ERISA or the Code, without violating any of the exemption's conditions.

For that reason, arguments that the fiduciary acknowledgment requirement is inconsistent with the Fifth Circuit's opinion in
Chamber of Commerce
v.
United States Department of Labor,
885 F.3d 360, 384-85 (5th Cir. 2018) (
Chamber
) are unsupported. In that case, the Fifth Circuit faulted the Department for having effectively created a private cause of action that Congress had not provided.
38

Under this exemption the Department does not create new causes of actions, mandate enforceable contractual commitments, or expand upon the remedial provisions of ERISA or the Code. Requiring clarity as to the nature of the services and relationship is a far cry from the creation of a whole new cause of action or remedial scheme. The Department does not compel fiduciary status or create new causes of action. It merely conditions the availability of the exemption, which is only necessary for plan fiduciaries to receive otherwise prohibited compensation, on Financial Institutions and Investment Professionals providing clarity that the transaction, in fact, involves a fiduciary relationship. In addition, the Department does not purport to bind other State or Federal regulators in any way or to condition relief on the availability of remedies under other laws. It no more creates a new cause of action than any other exemption condition or regulatory requirement that requires full and fair disclosures of services and fees. Moreover, the requirement promotes compliance and supports investor choice by requiring clarity as to the fiduciary nature of the relationship that the Financial Institution or Investment Professional is undertaking with the Retirement Investor.

38

Id.
at 384-85.
But see Nat'l Ass'n for Fixed Annuities
v.
Perez,
217 F. Supp. 3d 1, 37 (D.D.C. 2016) (upholding the challenged provision and noting that “courts . . . have permitted IRA participants and beneficiaries to bring state law claims for breach of contract” (citing
Grund
v.
Del. Charter Guar. & Tr. Co.,
788 F. Supp. 2d 226, 243-44 (S.D.N.Y. 2011))).

The Department has a statutory obligation to ensure that any exemptions from the prohibited transaction provisions are “administratively feasible,” “in the interests of,” and “protective” of the “rights” of Retirement Investors. The fiduciary acknowledgment provides critical support to the Department's ability to make these findings. The Department notes that conditions requiring entities to acknowledge their fiduciary status have become commonplace in recently granted exemptions over the past two years. In this regard, in 2022 and 2023, the Department granted over a dozen exemptions to private parties in which an entity was required to acknowledge its fiduciary status in writing as a requirement for exemptive relief.
39

Written acknowledgement of fiduciary status was required by the Department as early as 1984, when the Department published PTE 84-14,
40

requiring an entity acting as a “qualified professional asset manager” (a QPAM) to have “acknowledged in a written management agreement that it is a fiduciary with respect to each plan that has retained the QPAM.”
41

Fiduciary investment advice providers to IRAs have always been subject to suit in State courts on State-law theories of liability, and this rulemaking does not alter this reality. This rulemaking does not alter the existing framework for bringing suits under State law against IRA fiduciaries and does not aim to do so. State regulators remain free to structure legal relationships and liabilities as they see fit to the extent not inconsistent with Federal law.

39

See, e.g.,
PTE 2023-03, Blue Cross and Blue Shield Association Located in Chicago, Illinois (88 FR 11676, Feb. 23, 2023); PTE 2023-04, Blue Cross and Blue Shield of Arizona, Inc., Located in Phoenix, Arizona (88 FR 11679, Feb. 23, 2023); PTE 2023-05, Blue Cross and Blue Shield of Vermont Located in Berlin, Vermont (88 FR 11681, Feb. 23, 2023); PTE 2023-06, Hawaii Medical Service Association Located in Honolulu, Hawaii (FR 88 11684, Feb. 23, 2023); PTE 2023-07, BCS Financial Corporation Located in Oakbrook Terrace, Illinois (88 FR 11686, Feb. 23, 2023); PTE 2023-08, Blue Cross and Blue Shield of Mississippi, A Mutual Insurance Company Located in Flowood, Mississippi (88 FR 11689, Feb. 23, 2023); PTE 2023-09, Blue Cross and Blue Shield of Nebraska, Inc. Located in Omaha, Nebraska (88 FR 11691, Feb. 23, 2023); PTE 2023-10, BlueCross BlueShield of Tennessee, Inc. Located in Chattanooga, Tennessee (88 FR 11694, Feb. 23, 2023); PTE 2023-11, Midlands Management Corporation 401(k) Plan Oklahoma City, OK (88 FR 11696, Feb. 23, 2023); PTE 2023-16, Unit Corporation Employees' Thrift Plan, Located in Tulsa, Oklahoma (88 FR 45928, July 18, 2023); PTE 2022-02, Phillips 66 Company Located in Houston, TX (87 FR 23245, Apr. 19, 2022); PTE 2022-03, Comcast Corporation Located in Philadelphia, PA (87 FR 54264, Sept. 2, 2022); PTE 2022-04, Children's Hospital of Philadelphia Pension Plan for Union-Represented Employees Located in Philadelphia, PA. (87 FR 71358, Nov. 22, 2022).

40
49 FR 9494 (March 13, 1984).

41
PTE 84-14, Part V, Section (a).

Model Disclosure

To assist Financial Institutions and Investment Professionals in complying with these conditions of the exemption, the Department confirms the following model language will satisfy the disclosure requirement in Section II(b)(1) and (2):

We are making investment recommendations to you regarding your retirement plan account or individual retirement account as fiduciaries within the meaning of Title I of the Employee Retirement Income Security Act and/or the Internal Revenue Code, as applicable, which are laws governing retirement accounts. The way we make money or otherwise are compensated creates some conflicts with your financial interests, so we operate under a special rule that requires us to act in your best interest and not put our interest ahead of yours.

Under this special rule's provisions, we must:

• Meet a professional standard of care when making investment recommendations (give prudent advice) to you;

• Never put our financial interests ahead of yours when making recommendations (give loyal advice);

• Avoid misleading statements about conflicts of interest, fees, and investments;

• Follow policies and procedures designed to ensure that we give advice that is in your best interest;

• Charge no more than what is reasonable for our services; and

• Give you basic information about our conflicts of interest.

While some commenters requested additional model language, the Department is not providing a model for the specific disclosures in Section II(b)(3), (4), and (5) because those disclosures will need to be tailored to the specific Financial Institution's business model. Although the model language above broadly applies to all the advice provider's recommendations, nothing in the exemption would prohibit the advice provider from limiting its fiduciary acknowledgment to specific recommendations or classes of recommendations if it was not acting as a fiduciary in other contexts. The exemption, however, will only cover recommendations that were subject to such an acknowledgment.

Relationship and Conflict of Interest Disclosure

In response to comments, the Department is amending the disclosure requirements of PTE 2020-02. As finalized, Section II(b)(3)-(4) requires the Financial Institution to disclose in writing all material facts relating to the scope and terms of the relationship with the Retirement Investor, including:

(3)(A) The material fees and costs that apply to the Retirement Investor's transactions, holdings, and accounts;

(3)(B) The type and scope of services provided to the Retirement Investor, including any material limitations on the recommendations that may be made to them; and

(4) All material facts relating to Conflicts of Interest that are associated with the recommendation.

This final pre-transaction disclosure is based on the SEC's Regulation Best Interest disclosure requirements.
42

The Department received many comments on the proposed disclosure obligations that focused, in particular, on differences between the SEC's Regulation Best Interest disclosures and the Department's proposed PTE 2020-02 disclosures. Some commenters also asserted that the proposed disclosure requirements of PTE 2020-02 would have imposed a burden on Financial Institutions without providing sufficient incremental benefits to Retirement Investors, above and beyond those provided by Regulation Best Interest. In the view of many commenters, Regulation Best Interest and the SEC's client relationship summary (also called Form CRS) already provided sufficient disclosure in the context of securities recommendations and could serve as the model for a more uniform set of disclosure requirements applicable to Retirement Investors without as much additional cost and burden.

42
Similar obligations exist for investment advisers. “Under its duty of loyalty, an investment adviser must eliminate or make full and fair disclosure of all conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which is not disinterested such that a client can provide informed consent to the conflict.” 2019 Fiduciary Interpretation (84 FR 33671);
see also SEC
v.
Cap. Gains Rsch. Bureau, Inc.,
375 U.S. at 200 (“the darkness and ignorance of commercial secrecy are the conditions upon which predatory practices best thrive”).

Other commenters expressed support for the Department's proposed amendments that would have clarified and tightened the existing PTE 2020-02 disclosure requirements. These commenters supported ensuring that investors have sufficient information to make informed decisions about the costs of an investment advice transaction and about the significance and severity of the investment advice fiduciary's conflicts of interest. Some commenters also supported the proposed requirement for the disclosures to be written in plain English.

The Department's determination to base the Final Amendment's disclosure obligations on the SEC's Regulation Best Interest disclosure obligations is intended to ensure that Retirement Investors receive critical information that they need to make informed investment decisions, while reducing compliance burdens by establishing disclosure requirements that are consistent with the SEC's requirements. This is also responsive to several comments the Department received that highlighted disclosure requirements that commenters argued were more burdensome than the SEC's Regulation Best Interest disclosure requirements. Although this condition does not specifically require the disclosure be in “plain English” the Department notes the importance of plain language principles to ensure the Retirement Investors understand the information they receive.
43

43
In finalizing Regulation Best Interest, the SEC encouraged broker-dealers to use plain English in preparing any disclosures they make. The SEC provided examples such as the use of short sentences and active voice, and avoidance of legal jargon, highly technical business terms, or multiple negatives, 84 FR 33368-69.

Some commenters were particularly concerned about the proposed requirement that Retirement Investors have the “right to obtain specific information regarding costs, fees, and compensation, described in dollar amounts, percentages, formulas” upon request based on the potential burden of such disclosures. Others supported the requirement, including one commenter stating that such information is necessary for Retirement Investors to make an informed judgment as to the costs of a transaction. After consideration of the comments, the Department has determined that the requirements to disclose material fees, costs, conflicts of interest, and services should be sufficient to permit the Retirement Investor to assess both the costs of transactions and the scope and severity of conflicts, without imposing an additional “upon request” disclosure obligation.

In finalizing these disclosures based on the Regulation Best Interest disclosure obligation, however, the Department intends to monitor the effectiveness and utility of the disclosures closely to ensure they serve their intended purpose and give Retirement Investors full and fair notice of services, costs, charges, and conflicts of interest. Based upon its ongoing review of compliance and efficacy, the Department may revisit the scope and content of the disclosure obligations as part of future notice and comment rulemaking. At this time, the Department has concluded the best course of action is to align the disclosure conditions with the requirements of Regulation Best Interest, in order to provide a uniform and cost-effective approach to disclosures, consistent with the Department's statutory obligation to protect the interests of Retirement Investors.

Rollover Disclosure

The Department has also decided to make revisions to the rollover disclosure requirements. Under Section II(b)(5), before engaging in or recommending that a Retirement Investor engage in a rollover from a Plan that is covered by Title I of ERISA, or making a recommendation to a Plan participant or beneficiary as to the post-rollover investment of assets currently held in a

Plan that is covered by Title I, the Financial Institution and Investment Professional must consider and document the bases for their recommendation to engage in the rollover, and must provide that documentation to the Retirement Investor. Relevant factors to be considered must include, to the extent applicable, but in any event are not limited to: (A) the alternatives to a rollover, including leaving the money in the Plan, if applicable; (B) the fees and expenses associated with the Plan and the recommended investment or account; (C) whether an employer or other party pays for some or all of the Plan's administrative expenses; and (D) the different levels of services and investments available under the Plan and the recommended investment or account. The Proposed Amendment specified that this requirement extended to recommended rollovers from a Plan to another Plan or IRA as defined in Code section 4975(e)(1)(B) or (C), from an IRA as defined in Code section 4975(e)(1)(B) or (C) to a Plan, from an IRA to another IRA, or from one type of account to another (
e.g.,
from a commission-based account to a fee-based account).

In support of the rollover disclosure provision under the Proposed Amendment, one commenter highlighted the significance of a rollover decision and said that a “careful analysis” is needed, along with information about fees, expenses, and other investment options, in order to provide Retirement Investors with a “well-supported” recommendation. Another commenter suggested that the Department add consideration of a Retirement Investor's Social Security benefits.

Several commenters expressed concerns over the burden of the rollover documentation and disclosure requirements. Some suggested that the requirements should be limited to the rollovers from Title I Plans to IRAs, rather than including IRA-to-IRA or account-to-account transactions. These commenters argued that the additional requirement would be of limited value to the Retirement Investors while imposing significant costs on the Financial Institutions. Commenters requested that certain types of transactions be excluded, such as those involving a “required minimum distribution” (RMD), an inherited IRA or 401(k) account, investment education, or IRA-to-IRA transfers. Commenters suggested Retirement Investors already receive enough information, and asked if the requirements of this disclosure would be relevant.

The Department continues to believe that the information required to be included in the rollover disclosure is relevant to Retirement Investors. A Retirement Investor should understand what they are giving up in their employer's plan, as well as what they may gain from rolling over their retirement savings to an IRA. While the Department is not specifically adding a blanket requirement to document consideration of a Retirement Investor's Social Security benefit, it also agrees that the Retirement Investor's Social Security benefit may be an important component of the overall analysis to ensure any recommendation will meet the Care Obligation and Loyalty Obligation.

In response to comments about the challenges posed by the documentation requirements outside the plan context, the Department is narrowing the required rollover disclosure requirement in Section II(b)(5) so that it only applies to recommendations to rollovers from Title I Plans. Under the Final Amendment, PTE 2020-02 no longer will require disclosures regarding advice for a Retirement Investor to roll over its account from one IRA to another IRA or to change account type. The Department is also clarifying the language to confirm that the disclosure only applies to advice to engage in a rollover recommendation to a Plan participant or beneficiary as to the post-rollover investment of assets currently held in a Plan that is covered by Title I. The rollover disclosure requirement does not apply when a Financial Institution or Investment Professional does not make a recommendation, even if it does provide investment education.

The Department received comments expressing concern that the information required for the rollover disclosure will not be available to Financial Institutions. A few commenters urged the Department to address this by requiring plans covered by Title I of ERISA to make more information publicly available on their Forms 5500. Other commenters simply stated that Investment Professionals and Financial Institutions would not be able to comply. As the Department explained in the preamble to the Proposed Amendment, however, Investment Professionals and Financial Institutions should make diligent and prudent efforts to obtain information about the fees, expenses, and investment options offered in the Retirement Investor's Plan account to comply with the amended rollover documentation and disclosure requirement of Section II(b)(5).

As the Department also explained in the preamble to the Proposed Amendment, the necessary information should be readily available to the Retirement Investor as a result of Department regulations mandating disclosure of plan-related information to the Plan's participants and beneficiaries that is found at 29 CFR 2550.404a-5. If the Retirement Investor refuses to provide such information, even after a full explanation of its significance, and the information is not otherwise readily available, the Financial Institution and Investment Professional should make a reasonable estimate of a Plan's expenses, asset values, risk, and returns based on publicly available information. The Financial Institution and Investment Professional should document and explain the assumptions used in the estimate and their limitations. In such cases, the Department confirms that the Financial Institution and Investment Professional could rely on alternative data sources, such as the Plan's most recent Form 5500 or reliable benchmarks on typical fees and expenses for the type and size of the Plan that holds the Retirement Investor's assets.

Moreover, while the Department is not imposing the same documentation and disclosure requirements on rollovers from IRA-to-IRA or from one account type to another, it is not relieving the fiduciary of its obligation under the Care Obligation and Loyalty Obligation to make prudent efforts to obtain information about the fees, expenses, and investment options offered in the different accounts or IRAs. It is hard to see how a fiduciary can make a prudent and loyal recommendation, without careful consideration of the financial merits of the alternative approaches. As the SEC has similarly observed with respect to Regulation Best Interest, although the Department has not imposed a specific documentation requirement comparable to the obligation for Plan to IRA rollovers, it is likely to be difficult for a firm to demonstrate compliance with its obligations, or to assess the adequacy of its policies and procedures, without documenting the basis for such recommendations.
44

44
See Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations, Q16, available at
https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest.

Good Faith and Disclosures Prohibited by Law Exceptions

The Department's Proposed Amendment would have added a new Section II(b)(6), which provides that

Financial Institutions will not fail to satisfy their disclosure obligations under Section II(b) solely because they make an error or omission in disclosing the required information while acting in good faith and with reasonable diligence. The Financial Institution must disclose the correct information as soon as practicable, but not later than 30 days after the date on which it discovers or reasonably should have discovered the error or omission. Similarly, Section II(b)(7) allows Investment Professionals and Financial Institutions to rely in good faith on information and assurances from the other entities that are not Affiliates as long as they do not know or have reason to know that such information is incomplete or inaccurate. Under Section II(b)(8), the Financial Institution is not required to disclose information pursuant to Section II(b) if such disclosure is otherwise prohibited by law.

The Department did not receive substantive comments on these provisions and is finalizing these provisions as proposed.

Policies and Procedures

Under Section II(c), Financial Institutions must establish, maintain, and enforce written policies and procedures prudently designed to ensure that the Financial Institution and its Investment Professionals comply with the Impartial Conduct Standards and other exemption conditions. The Financial Institution's policies and procedures must mitigate Conflicts of Interest to the extent that a reasonable person reviewing the policies and procedures and incentive practices as a whole would conclude that they do not create an incentive for a Financial Institution or Investment Professional to place their interests, or those of any Affiliate or Related Entity, ahead of the interests of the Retirement Investor. The Department proposed to amend section II(c) to provide that Financial Institutions may not use quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, or other similar actions or incentives that are intended, or that a reasonable person would conclude are likely, to result in recommendations that do not meet the Care Obligation or Loyalty Obligation. In addition, the Proposed Amendment would require Financial Institutions to provide their complete policies and procedures to the Department upon request within 10 business days of request.

The Department received many comments on the proposed amendments to the policies and procedures. Some of these commenters expressed support for the Department's clarifications, emphasizing the risks inherent in conflicted compensation. The Department also received comments in favor of the proposed requirement that Financial Institutions furnish to the Department complete policies and procedures within 10 business days, asserting that such a requirement would be a meaningful incentive for reasonably designed policies and procedures. Others asserted that the conditions were unworkable. Some commenters were particularly concerned about the requirement that Financial Institutions may not use quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, or other similar actions or incentives that are intended, or that a reasonable person would conclude are likely, to result in recommendations that do not meet the Care Obligation or Loyalty Obligation.

Some commenters read the Proposed Amendment as banning differential compensation. One commenter characterized it as an attack on educational meetings and asserted that it conflicted with Regulation Best Interest and Financial Industry Regulatory Authority (FINRA) rules. The Department disagrees with the commenters' characterizations. The provision neither bans differential compensation, nor prohibits educational meetings. Although ERISA prohibits conflicted transactions between a plan and a fiduciary, the Department has granted this exemption specifically to allow Financial Institutions to receive compensation that varies based on the products they sell and that otherwise would be prohibited under ERISA section 406(b) and Code section 4975(c)(1)(E) and (F). However, in order to do so, the Financial Institution must pay attention to the conflicts that are inherent in its compensation system and must take special care to ensure that it does not create or implement compensation practices that are intended, or that a reasonable person would conclude are likely, to result in recommendations that do not meet the Care Obligation or Loyalty Obligation. Based on the foregoing, the Department is finalizing Section II(c) as proposed with minor edits made for clarity.

Some commenters argued that the Department should rely on other regulators' policies and procedures requirements. Other commenters expressed concern that other regulators are not sufficiently protective in this area. For example, although the NAIC Model Regulation technically requires that producers manage material conflicts of interest, it excludes cash and non-cash compensation from the definition of material conflicts of interest. Thus, the following forms of cash compensation are excluded from the NAIC Model Regulation as sources of conflicts of interest: 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 the following types of “non-cash compensation,” are excluded: health insurance, office rent, office support and retirement benefits. In contrast, the SEC expressly requires investment advisers and broker-dealers to manage such conflicts, including commissions and other forms of compensation.
45

The Department believes that a more uniform approach is appropriate so that all Retirement Investors are protected from conflicts of interest, and to ensure that investment recommendations are driven by the best interest of the Retirement Investor and not the competing interests of the Investment Professional in conflicted compensation arrangements, irrespective of the type of investment product recommended to them (
e.g.,
a fixed indexed annuity as opposed to a security).

45
Regulation Best Interest explicitly requires that broker-dealers establish, maintain, and enforce written policies and procedures reasonably designed to identify and mitigate conflicts of interest at the associated person level.
See generally
84 FR 33318, 33388;
see
Exchange Act rule 15
l
-1(a)(2)(iii)(B). With regards to investment advisers, the SEC has stated that “an adviser must eliminate or at least expose through full and fair disclosure all conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not disinterested.” Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 84 FR 33669, 33671 (July 12, 2019). The SEC staff has also said, “[w]hile compensation practices for financial professionals are an important potential source of conflicts of interest, the staff reminds firms that mitigating conflicts associated with these practices is just one aspect of how firms satisfy their conflict obligations.” See Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflicts of Interest, available at
https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest.

Accordingly, the Department is maintaining the language largely as proposed. While the Department acknowledges that many firms have already built protective structures based on SEC's Regulation Best Interest, the Investment Advisers Act of 1940,
46

or PTE 2020-02, they should be able to build or rely upon existing systems of supervision and compliance to meet their obligations, rather than build whole new structures, as the SEC

observed with respect to broker-dealers' implementation of Regulation Best Interest.
47

Like the SEC, in adopting the policies and procedures requirement for conflict management, the Department has deliberately chosen not to take a highly prescriptive and inflexible approach. Instead, the Final Amendment permits compliance with policies and procedures that accommodate a broad range of business models, so long as they meet the overarching goals of ensuring adherence to the Care and Loyalty Obligations. The Final Amendment's requirement for Financial Institutions' policies and procedures to mitigate Conflicts of Interest is essential for the Department to satisfy its obligations under ERISA section 408(a) and Code section 4975(c)(2). The policies and procedures condition provides Financial Institutions with the flexibility to have different business models based on their specific business needs, while still ensuring that the fiduciary investment advice they provide to Retirement Investors meets the Impartial Conduct Standards.

46
15 U.S.C. 80b-1
et seq.

47
See Regulation Best Interest: The Broker-Dealer Standard of Conduct, Exchange Act Release No. 86031, 84 FR 33318, 33327 (June 5, 2019) (“Reg BI Adopting Release”). (recognizing that “some broker-dealers may rely on existing policies and procedures that address conflicts through methods such as compliance and supervisory systems that are consistent with the Conflict of Interest Obligation” under Regulation Best Interest).

The Department believes that Retirement Investors will best be protected by the objective standard provided under PTE 2020-02, which provides a strong benchmark for assessing policies and procedures. The exemption's principles-based standard focuses on whether a reasonable person would conclude that the Financial Institution's policies and procedures are likely to result in recommendations that do not meet the Care Obligation or Loyalty Obligation. This standard is consistent with Regulation Best Interest and provides an appropriate yardstick for assessing compliance while lending additional clarity and rigor to the obligation to manage adverse incentives. In addition, SEC-registered investment advisers are required to “adopt and implement written policies and procedures reasonably designed to prevent violations, by [the adviser] and [its] supervised persons, of the [Advisers] Act and the rules that the Commission has adopted under the [Advisers Act].”
48

The approach in PTE 2020-02 provides the flexibility necessary for Financial Institutions to insulate Investment Professionals from conflicts of interest under the wide array of business and compensation models followed in today's marketplace.

48
See Rule 206(4)-7 (17 CFR 275.206(4)-7).

The Department understands that many Financial Institutions, particularly insurance companies, rely on educational conferences, and stresses that this provision does not prohibit them. The exemption merely requires reasonable guardrails for conferences, especially if they involve travel. These conferences must be structured in a manner that ensures they are not likely to lead Investment Professionals to make recommendations that do not meet the exemption's Care Obligation or Loyalty Obligation. In addition, the Department notes that properly designed incentives that are simply aimed at increasing the overall amount of retirement saving and investing, without promoting specific products, would not violate the policies and procedures requirement. Similarly, notwithstanding contrary language in the preamble to the Proposed Amendment, the Department recognizes that it can be appropriate to tie attendance at conferences to sales thresholds in certain circumstances (for example, insurance companies could not reasonably be expected to provide training for independent agents who are not recommending their products).

On the other hand, Financial Institutions must take special care to ensure that training conferences held in vacation destinations are not designed to incentivize recommendations that run counter to Retirement Investor interests. Firms should structure training events to ensure that they are consistent with the Care and Loyalty Obligations. Recommendations to Retirement Investors should be driven by the interests of the investor in a secure retirement. Certainly, Financial Institutions should avoid creating situations where the training is merely incidental to the event, and an imprudent recommendation to a Retirement Investor is the only thing standing between an Investment Professional and a luxury getaway vacation.

Similarly, the Department does not require Financial Institutions to categorically eliminate all sales quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, sales contests, quotas, or bonuses. Rather, Financial Institutions are only required to eliminate such incentives that are “intended, or that a reasonable person would conclude are likely, to result in recommendations that do not meet the Care Obligation or Loyalty Obligation.”

While the SEC limited its categorical prohibition on sales contests to time-limited contests, as one commenter observed, the SEC has emphasized that the limited prohibition in Regulation Best Interest should not be read as automatically permitting other activities. Instead, the SEC stressed that “prohibiting certain incentives does not mean that all other incentives are presumptively compliant with Regulation Best Interest.”
49

The SEC noted that “other incentives and practices that are not explicitly prohibited are permitted
provided that the broker-dealer establishes reasonably designed policies and procedures to disclose and mitigate the incentives created, and the broker-dealer and its associated persons comply with the Care Obligation and the Disclosure Obligation
” (emphasis added).
50

In fact, the SEC recognized that if a “firm determines that the conflicts associated with these practices are too difficult to disclose and mitigate, the firm should consider carefully assessing whether it is able to satisfy its best interest obligation in light of the identified conflict and in certain circumstances, may wish to avoid such practice entirely.”
51

49
Reg BI Adopting Release

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-08066. Public record. Not legal advice.