Rule2024-08065
Retirement Security Rule: Definition of an Investment Advice Fiduciary
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
April 25, 2024
Effective
September 23, 2024
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
The Department of Labor (Department) is adopting a final rule defining when a person renders "investment advice for a fee or other compensation, direct or indirect" with respect to any moneys or other property of an employee benefit plan, for purposes of the definition of a "fiduciary" in the Employee Retirement Income Security Act of 1974 (Title I of ERISA or the Act). The final rule also applies for purposes of Title II of ERISA to the definition of a fiduciary of a plan defined in Internal Revenue Code (Code), including an individual retirement account or other plan identified in the Code. The Department also is publishing elsewhere in this issue of the Federal Register amendments to Prohibited Transaction Exemption 2020-02 (Improving Investment Advice for Workers & Retirees) and to several other existing administrative exemptions from the prohibited transaction rules applicable to fiduciaries under Title I and Title II of ERISA.
Full Text
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<title>Federal Register, Volume 89 Issue 81 (Thursday, April 25, 2024)</title>
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[Federal Register Volume 89, Number 81 (Thursday, April 25, 2024)]
[Rules and Regulations]
[Pages 32122-32258]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-08065]
[[Page 32121]]
Vol. 89
Thursday,
No. 81
April 25, 2024
Part IV
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2510
Retirement Security Rule: Definition of an Investment Advice Fiduciary;
Final Rule
Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules
and Regulations
[[Page 32122]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2510
RIN 1210-AC02
Retirement Security Rule: Definition of an Investment Advice
Fiduciary
AGENCY: Employee Benefits Security Administration, Department of Labor
ACTION: Final rule
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SUMMARY: The Department of Labor (Department) is adopting a final rule
defining when a person renders ``investment advice for a fee or other
compensation, direct or indirect'' with respect to any moneys or other
property of an employee benefit plan, for purposes of the definition of
a ``fiduciary'' in the Employee Retirement Income Security Act of 1974
(Title I of ERISA or the Act). The final rule also applies for purposes
of Title II of ERISA to the definition of a fiduciary of a plan defined
in Internal Revenue Code (Code), including an individual retirement
account or other plan identified in the Code. The Department also is
publishing elsewhere in this issue of the Federal Register amendments
to Prohibited Transaction Exemption 2020-02 (Improving Investment
Advice for Workers & Retirees) and to several other existing
administrative exemptions from the prohibited transaction rules
applicable to fiduciaries under Title I and Title II of ERISA.
DATES: This regulation is effective September 23, 2024.
FOR FURTHER INFORMATION CONTACT:
<bullet> For questions regarding the rule: contact Luisa Grillo-
Chope, Office of Regulations and Interpretations, Employee Benefits
Security Administration (EBSA), 202-693-8510. (Not a toll-free number).
<bullet> For questions regarding the prohibited transaction
exemptions: contact Susan Wilker, Office of Exemption Determinations,
EBSA, 202-693-8540. (Not a toll-free number).
<bullet> For questions regarding the Regulatory Impact Analysis:
contact James Butikofer, Office of Research and Analysis, EBSA, 202-
693-8434. (Not a toll-free number).
Customer Service Information: Individuals interested in obtaining
information from the Department of Labor concerning Title I of ERISA
and employee benefit plans may call the Employee Benefits Security
Administration (EBSA) Toll-Free Hotline, at 1-866-444-EBSA (3272) or
visit the Department of Labor's website (<a href="https://www.dol.gov/agencies/ebsa">https://www.dol.gov/agencies/ebsa</a>).
SUPPLEMENTARY INFORMATION:
A. Executive Summary
The Department is issuing a final rule defining an investment
advice fiduciary for purposes of Title I and Title II of ERISA. The
final rule defines when a person is a fiduciary in connection with
providing advice to an investor saving for retirement through a
workplace retirement plan or other type of retirement plan such as an
IRA. Such retirement investors include participants and beneficiaries
in workplace retirement plans, IRA owners and beneficiaries, as well as
plan and IRA fiduciaries with authority or control with respect to the
plan or IRA.
Under the final rule, a person is an investment advice fiduciary if
they provide a recommendation in one of the following contexts:
<bullet> The person either directly or indirectly (e.g., through or
together with any affiliate) makes professional investment
recommendations to investors on a regular basis as part of their
business and the recommendation is made under circumstances that would
indicate to a reasonable investor in like circumstances that the
recommendation:
[cir] is based on review of the retirement investor's particular
needs or individual circumstances,
[cir] reflects the application of professional or expert judgment
to the retirement investor's particular needs or individual
circumstances, and
[cir] may be relied upon by the retirement investor as intended to
advance the retirement investor's best interest; or
<bullet> The person represents or acknowledges that they are acting
as a fiduciary under Title I of ERISA, Title II of ERISA, or both with
respect to the recommendation.
The recommendation also must be provided ``for a fee or other
compensation, direct or indirect'' as defined in the final rule.
As compared to the previous regulatory definition, which was
finalized in 1975, the final rule better reflects the text and the
purposes of ERISA and better protects the interests of retirement
investors, consistent with the Department's mission to ensure the
security of the retirement, health, and other workplace-related
benefits of America's workers and their families.
The final rule is designed to ensure that retirement investors'
reasonable expectations are honored when they receive advice from
financial professionals who hold themselves out as trusted advice
providers. The Department's regulation fills an important gap in those
advice relationships where advice is not currently treated as fiduciary
advice under the 1975 regulation's approach to ERISA's functional
fiduciary definition. This may be the case even though the financial
professional holds themselves out as providing recommendations that are
based on review of the retirement investor's needs or circumstances and
the application of professional or expert judgment to the retirement
investor's needs or circumstances, and that can be relied upon to
advance the retirement investor's best interest.
Together with amendments to administrative exemptions (PTEs) from
the prohibited transaction rules applicable to fiduciaries under Title
I and Title II of ERISA published elsewhere in this issue of the
Federal Register, the final rule is intended to protect the interests
of retirement investors by requiring persons who are defined in the
final rule as investment advice fiduciaries to adhere to stringent
conduct standards and mitigate their conflicts of interest. The amended
PTEs' compliance obligations are generally consistent with the best
interest obligations set forth in the Securities and Exchange
Commission's (SEC) Regulation Best Interest and its Commission
Interpretation Regarding Standard of Conduct for Investment Advisers
(SEC Investment Adviser Interpretation), each released in 2019.
The Department anticipates that the most significant benefits of
the final rule and amended PTEs will stem from the application of
ERISA's fiduciary protections under Title I and Title II and PTE
conditions to all covered investment advice provided to retirement
investors. Under the final rule and amended PTEs, advice providers that
satisfy the definition of an investment advice fiduciary will be
required to adhere to the prudence standard of care, reduce retirement
investor exposure to conflicted advice that may erode investment
returns, and adopt protective conflict-mitigation requirements.\1\
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\1\ The references in this document to a ``fiduciary'' are
intended to mean an ERISA Title I and Title II fiduciary unless
otherwise stated.
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Requiring advice providers to operate in compliance with ERISA
fiduciary protections will be especially beneficial with respect to
those transactions that currently are not uniformly covered by
fiduciary protections consistent with ERISA's high standards. Those
transactions include recommendations to roll over assets from a
workplace
[[Page 32123]]
retirement plan to an IRA in those cases in which the advice provider
is not subject to Federal securities law standards and, as is often the
case, has not previously advised the customer about plan or IRA assets
on a regular basis. Other examples include investment recommendations
with respect to many commonly purchased retirement annuities, such as
fixed indexed annuities; recommendations of other investments that may
not be subject to the SEC's Regulation Best Interest, such as real
estate, certain certificates of deposit, and other bank products; and
investment recommendations to plan fiduciaries with authority or
control with respect to the plan.
A proposed rule and proposed amendments to the PTEs were released
by the Department on October 31, 2023 for notice and public comment,
and public hearings on the proposals were held on December 12 and 13,
2023. The Department has made certain changes and clarifications in the
final rule in response to public comments on the proposal and the
testimony presented at the public hearings. The final rule narrows the
contexts in which a covered recommendation will constitute ERISA
fiduciary investment advice and makes clear that the test for fiduciary
status is objective. Similarly, a new paragraph in the regulatory text
confirms that sales recommendations that do not satisfy the objective
test will not be treated as fiduciary advice, and that the mere
provision of investment information or education, without an investment
recommendation, is not advice within the meaning of the rule.
Additionally, the final rule makes clear that the rule is focused on
communications with persons with authority over plan investment
decisions (including selecting investment options for participant-
directed plans), rather than communications with financial services
providers who do not have such authority. Accordingly, the rule
excludes plan and IRA investment advice fiduciaries from the definition
of a retirement investor. As a result, an asset manager does not render
fiduciary advice simply by making recommendations to a financial
professional or firm that, in turn, will render advice to retirement
investors in a fiduciary capacity. The Department believes the final
rule, with these revisions, appropriately defines an investment advice
fiduciary to comport with reasonable investor expectations of trust and
confidence.
B. Background
1. Title I and Title II of ERISA and the 1975 Rule
Title I of ERISA imposes duties and restrictions on persons who are
``fiduciaries'' with respect to employee benefit plans. In particular,
fiduciaries to Title I plans must adhere to duties of prudence and
loyalty. ERISA section 404 provides that Title I plan fiduciaries must
act with the ``care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent [person] acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims,'' and that they also
must discharge their duties with respect to a plan ``solely in the
interest of the participants and beneficiaries.'' \2\
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\2\ ERISA section 404, 29 U.S.C. 1104.
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These fiduciary duties, which are rooted in the common law of
trusts, are reinforced by prohibitions against transactions involving
conflicts of interest because of the dangers such transactions pose to
plans and their participants. The prohibited transaction provisions of
ERISA, including Title II of ERISA which is codified in the Internal
Revenue Code (Code), ``categorically bar[ ]'' plan fiduciaries from
engaging in transactions deemed ``likely to injure the pension plan''
\3\ absent compliance with a prohibited transaction exemption. The
provisions include prohibitions on a fiduciary's ``deal[ing] with the
assets of the plan in his own interest or for his own account,'' and
``receiv[ing] any consideration for his own personal account from any
party dealing with such plan in connection with a transaction involving
the assets of the plan.'' \4\ Thus, ERISA requires fiduciaries who have
conflicts of interest, including from financial incentives, to comply
with protective conditions in a prohibited transaction exemption.
Congress included some statutory prohibited transaction exemptions in
ERISA and also authorized the Department to grant conditional
administrative exemptions from the prohibited transaction provisions,
but only if the Department finds that the exemption is (1)
administratively feasible for the Department, (2) in the interests of
the plan and of its participants and beneficiaries, and (3) protective
of the rights of participants and beneficiaries of such plan.\5\
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\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).
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Title II of ERISA, codified in the Code,\6\ governs the conduct of
fiduciaries to plans defined in Code section 4975(e)(1), which includes
IRAs.\7\ Some plans defined in Code section 4975(e)(1) are also covered
by Title I of ERISA, but the definitions of such plans are not
identical. Although Title II, as codified in the Code, does not
directly impose specific duties of prudence and loyalty on fiduciaries
as in ERISA section 404(a), it prohibits fiduciaries from engaging in
conflicted transactions on many of the same terms as Title I.\8\ Under
the Reorganization Plan No. 4 of 1978, which Congress subsequently
ratified in 1984,\9\ Congress generally granted the Department
authority to interpret the fiduciary definition and issue
administrative exemptions from the prohibited transaction provisions in
Code section 4975.\10\
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\6\ This preamble discussion includes some references to the
Code in the context of discussions of Title II of ERISA involving
specific provisions codified in the Code. The Department understands
that references to the Code are useful but emphasizes that both
Title I and Title II are covered by the same general definition of
fiduciary and the same general framework of prohibited transactions,
and that, under both Title I and Title II, fiduciaries must comply
with the conditions of an available prohibited transaction exemption
in order to engage in an otherwise prohibited transaction.
\7\ For purposes of the final rule, the term ``IRA'' is defined
as any account or annuity described in Code section 4975(e)(1)(B)-
(F), and includes individual retirement accounts, individual
retirement annuities, health savings accounts, and certain other
tax-advantaged trusts and plans. However, for purposes of any
rollover of assets between a Title I plan and an IRA described in
this preamble, the term ``IRA'' includes only an account or annuity
described in Code section 4975(e)(1)(B) or (C). Additionally, while
the Department uses the term ``retirement investor'' throughout this
document to describe advice recipients, that is not intended to
suggest that the fiduciary definition applies only with respect to
employee pension benefit plans and IRAs that are retirement savings
vehicles. As discussed herein, the final rule applies with respect
to plans as defined in Title I and Title II of ERISA that make
investments. In this regard, see also paragraph (f)(12) that
provides that the term ``investment property'' ``does not include
health insurance policies, disability insurance policies, term life
insurance policies, or other property to the extent the policies or
property do not contain an investment component.''
\8\ 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.''
\9\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
\10\ 5 U.S.C. App. 752 (2018).
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Many of the protections, duties, and liabilities in both Title I
and Title II of ERISA hinge on fiduciary status. ERISA includes a
statutory definition of a
[[Page 32124]]
fiduciary at section 3(21)(A), which provides that a person is a
fiduciary with respect to a plan to the extent the person (i) exercises
any discretionary authority or discretionary control respecting
management of such plan or exercises any authority or control
respecting management or disposition of its assets, (ii) renders
investment advice for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of such plan, or has any
authority or responsibility to do so, or (iii) has any discretionary
authority or discretionary responsibility in the administration of such
plan.\11\ The same definition of a fiduciary is in Code section
4975(e)(3).\12\
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\11\ ERISA section 3(21)(A), 29 U.S.C. 1002(21)(A).
\12\ 26 U.S.C. 4975(e)(3).
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These statutory definitions broadly assign fiduciary status for
purposes of Title I and Title II of ERISA. Thus, ``any authority or
control'' over plan assets is sufficient to confer fiduciary status,
and any person who renders ``investment advice for a fee or other
compensation, direct or indirect'' is an investment advice fiduciary,
regardless of whether they have direct control over the plan's assets,
and regardless of their status under another statutory or regulatory
regime. In the absence of fiduciary status, persons who provide
investment advice to retirement investors would neither be subject to
Title I of ERISA's fundamental fiduciary standards, nor responsible
under Title I and Title II of ERISA for avoiding prohibited
transactions. The broad statutory definition, the prohibitions on
conflicts of interest, and the core fiduciary obligations of prudence
and loyalty (as applicable) all reflect Congress' recognition in 1974,
when it passed ERISA, of the fundamental importance of investment
advice to protect the interests of retirement investors.
In 1975, shortly after ERISA was enacted, the Department issued a
regulation at 29 CFR 2510.3-21(c)(1) (the 1975 regulation) that defined
the circumstances under which a person renders ``investment advice'' to
an employee benefit plan within the meaning of ERISA section
3(21)(A)(ii), such that the person would be a fiduciary under
ERISA.\13\ The 1975 regulation significantly narrowed the plain and
expansive language of ERISA section 3(21)(A)(ii), creating a five-part
test that must be satisfied in order for a person to be treated as a
fiduciary by reason of rendering investment advice. Under the five-part
test, a person is a fiduciary only if they: (1) render advice as to the
value of securities or other property, or make recommendations as to
the advisability of investing in, purchasing, or selling securities or
other property (2) on a regular basis (3) pursuant to a mutual
agreement, arrangement, or understanding with the plan or a plan
fiduciary that (4) the advice will serve as a primary basis for
investment decisions with respect to plan assets, and that (5) the
advice will be individualized based on the particular needs of the
plan. At the time the 1975 regulation was issued, the Department of the
Treasury had sole regulatory authority over Code section 4975(e)(3),
and issued a virtually identical regulation, 26 CFR 54.4975-9(c)(1),
which applies to plans defined in Code section 4975.\14\
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\13\ 40 FR 50842 (Oct. 31, 1975).
\14\ 40 FR 50840 (Oct. 31, 1975). The issuance of this 1975
regulation pre-dated The Reorganization Plan No. 4 of 1978, and thus
authority to issue this regulatory definition under Title II of
ERISA was still with the Department of the Treasury.
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Since 1975, the retirement plan landscape has changed
significantly, with a shift from defined benefit plans (in which
decisions regarding investment of plan assets are primarily made by
professional asset managers) to defined contribution/individual account
plans, such as 401(k) plans (in which decisions regarding investment of
plan assets are often made by plan participants who lack professional
investment expertise). In 1975, individual retirement accounts had only
recently been created (by ERISA itself), and 401(k) plans did not yet
exist.\15\ Retirement assets were principally held in pension funds
controlled by large employers or other large plan sponsors and
professional money managers. Now, IRAs and plans providing for
participant-directed investments, such as 401(k) plans, have become
more common retirement vehicles as opposed to traditional pension
plans, and rollovers of workplace retirement plan assets to IRAs are
commonplace. Individuals, regardless of their financial literacy, have
thus become increasingly responsible for their own retirement savings,
and have increasingly become direct recipients of investment advice
with respect to those savings.
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\15\ Section 2002(b) of Title II of ERISA established individual
retirement accounts with the addition of 408(a) to the Code. See
Public Law 93-406.
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The shift toward individual control over retirement investing (and
the associated shift of risk to individuals) has been accompanied by a
dramatic increase in the variety and complexity of financial products
and services, which has widened the information gap between investment
advice providers and their clients. Plan participants and other
retirement investors may be unable to assess the quality of the advice
they receive and may not be in a position to learn of and guard against
the investment advice provider's conflicts of interest.\16\ However, as
a result of the five-part test in the 1975 regulation, and its limiting
interpretation of ERISA's statutory, functional fiduciary definition,
many financial professionals, consultants, and financial advisers have
no legal obligation to adhere to the fiduciary standards in Title I of
ERISA or to the prohibited transaction rules in Title I and Title II of
ERISA, despite the critical role these professionals, consultants and
advisors play in guiding plan and IRA investments. In many situations,
this disconnect undermines the reasonable expectations of retirement
investors in today's marketplace; a retirement investor may reasonably
expect that the advice they are receiving from a trusted adviser is
fiduciary advice even when, under the 1975 regulation's interpretation,
it is not. If these investment advice providers are not fiduciaries
under Title I or Title II of ERISA, they do not have obligations under
Federal pension law to either avoid prohibited transactions or comply
with the protective conditions in a PTE.
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\16\ In the securities law context, both SEC Regulation Best
Interest and the Advisers Act fiduciary duty have specific
obligations related to disclosure and/or mitigation of conflicts of
interest. The SEC also adopted the Form CRS, which is a brief
relationship summary required to be provided by broker-dealers and
investment advisers to retail investors. The SEC stated that the
Form CRS ``is intended to inform retail investors about: [t]he types
of client and customer relationships and services the firm offers;
the fees, costs, conflicts of interest, and required standard of
conduct associated with those relationships and services; whether
the firm and its financial professionals currently have reportable
legal or disciplinary history; and how to obtain additional
information about the firm.'' 84 FR 33492 (July 12, 2019).
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Recently, other regulators have recognized the need for change in
the regulation of investment recommendations and have imposed enhanced
conduct standards on financial professionals who make investment
recommendations, including broker-dealers and insurance agents. As a
result, the regulatory landscape today is very different than it was
even five years ago. In 2019, the SEC adopted Regulation Best Interest,
which established an enhanced best interest standard of conduct
applicable to broker-dealers when making a recommendation of any
securities transaction or investment strategy involving securities to
retail customers.\17\ The SEC also issued its SEC Investment Adviser
Interpretation
[[Page 32125]]
in 2019, which addressed the conduct standards applicable to investment
advisers under the Investment Advisers Act of 1940 (Advisers Act).\18\
Describing these actions, the SEC has said, ``key elements of the
standard of conduct that applies to broker-dealers under Regulation
Best Interest will be substantially similar to key elements of the
standard of conduct that applies to investment advisers pursuant to
their fiduciary duty under the Advisers Act.'' \19\ In this connection,
the SEC has also stressed that Regulation Best Interest ``aligns the
standard of conduct with retail customers' reasonable expectations.''
\20\
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\17\ Regulation Best Interest: The Broker-Dealer Standard of
Conduct, 84 FR 33318 (July 12, 2019) (Regulation Best Interest
release).
\18\ 84 FR 33669 (July 12, 2019).
\19\ Regulation Best Interest release, 84 FR 33318, 33330 (July
12, 2019); see also Staff Bulletin: Standards of Conduct for Broker-
Dealers and Investment Advisers Care Obligation, (``[b]oth
[Regulation Best Interest] for broker-dealers and the [Advisers Act]
fiduciary standard for investment advisers are drawn from key
fiduciary principles that include an obligation to act in the retail
investor's best interest and not to place their own interests ahead
of the investor's interest.''), <a href="https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers">https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers</a>.
\20\ Regulation Best Interest release, 84 FR 33318 (July 12,
2019).
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In 2020, the National Association of Insurance Commissioners (NAIC)
also revised its Suitability In Annuity Transactions Model Regulation
to provide that insurance agents must act in the consumer's best
interest, as defined by the Model Regulation, when making a
recommendation of an annuity. Under the NAIC Model Regulation, insurers
would also be expected to establish and maintain a system to supervise
recommendations so that the insurance needs and financial objectives of
consumers at the time of the transaction are effectively addressed.\21\
The stated goal of the NAIC working group related to the NAIC Model
Regulation was ``to seek clear, enhanced standards for annuity sales so
consumers understand the products they purchase, are made aware of any
material conflicts of interest, and are assured those selling the
products do not place their financial interests above consumers'
interests.'' \22\ According to the NAIC, as of March 11, 2024, 45
jurisdictions have implemented the revisions to the NAIC Model
Regulation.\23\
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\21\ Available at <a href="http://www.naic.org/store/free/MDL-275.pdf">www.naic.org/store/free/MDL-275.pdf</a>.
\22\ See <a href="https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard">https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard</a>.
\23\ See <a href="https://content.naic.org/sites/default/files/inline-files/275%20Final%20Map_2020%20Changes_March%2011%202024.pdf">https://content.naic.org/sites/default/files/inline-files/275%20Final%20Map_2020%20Changes_March%2011%202024.pdf</a>.
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These regulatory efforts reflect the widespread understanding that
broker-dealers and insurance agents commonly make recommendations to
their customers for which they are compensated as a regular part of
their business; that investors rely upon these recommendations; and
that regulatory protections are important to ensure that the
recommendations are in the best interest of the retail customer (in the
case of broker-dealers) or consumers (in the case of insurance
agents).\24\ After careful review of the existing regulatory landscape,
the Department has concluded that the 1975 regulation should also be
revised to reflect current realities in light of the text and purposes
of Title I and Title II of ERISA.
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\24\ The SEC stated in the Regulation Best Interest release that
``there is broad acknowledgment of the benefits of, and support for,
the continuing existence of the broker-dealer business model,
including a commission or other transaction-based compensation
structure, as an option for retail customers seeking investment
recommendations.'' 84 FR 33318, 33319 (July 12, 2019). The NAIC
Model Regulation section 5.M. defines a recommendation as ``advice
provided by a producer to an individual consumer that was intended
to result or does result in a purchase, an exchange or a replacement
of an annuity in accordance with that advice.'' Section 5.B. defines
``cash compensation'' as ``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.'' (Emphasis added), <a href="https://content.naic.org/sites/default/files/inline-files/MDL-275.pdf">https://content.naic.org/sites/default/files/inline-files/MDL-275.pdf</a>.
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In the current landscape, the 1975 regulation narrows the broad
statutory definition in ways that no longer serve the purposes of Title
I and Title II of ERISA to protect the interests of retirement
investors. This is especially the case given the growth of participant-
directed investment arrangements and IRAs, the conflicts of interest
associated with investment recommendations, and the pressing need for
plan participants, IRA owners, and their beneficiaries to receive sound
advice from professional financial advisers when making critical
investment decisions in an increasingly complex financial marketplace.
As the SEC and NAIC recognized, many different types of financial
professionals, including insurance agents, broker-dealers, investment
advisers subject to the Advisers Act, and others, make recommendations
to investors for which they are compensated, and investors rightly rely
upon these recommendations with an expectation that they are receiving
advice that is in their best interest. Like these other regulators, the
Department has concluded that it is appropriate to update the existing
regulatory structure to ensure that it properly protects the financial
interests of retirement investors as Congress intended. As reflected in
this regulatory package, after evaluation of the types of investment
advisory relationships that should give rise to ERISA fiduciary status,
the Department has concluded that it is appropriate to revise the
regulatory definition of an investment advice fiduciary under Title I
and Title II of ERISA in the manner set forth herein.
2. Prior Rulemakings
The Department began the process of reexamining the regulatory
definition of an investment advice fiduciary under Title I and Title II
of ERISA in 2010. After issuing two notices of proposed rulemaking,
conducting multiple days of public hearings, and over six years of
deliberations, on April 8, 2016, the Department replaced the 1975
regulation with a new regulatory definition of a fiduciary under ERISA
(the 2016 Final Rule) which applied under Title I and Title II of
ERISA.\25\ In the preamble to the 2016 Final Rule, the Department noted
that the 1975 regulation's five-part test had been created in a very
different context and investment advice marketplace.\26\ The Department
expressed concern that specific elements of the five-part test--which
are not found in the text of Title I or Title II of ERISA--worked to
defeat retirement investors' legitimate expectations when they received
investment advice from trusted advice providers in the modern
marketplace for financial advice.\27\
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\25\ See Definition of the Term ``Fiduciary,'' 75 FR 65263 (Oct.
22, 2010) (proposed rule); Definition of the Tern ``Fiduciary'';
Conflict of Interest Rule--Retirement Investment Advice, 80 FR 21928
(Apr. 20, 2015) (proposed rule); Definition of the Term
``Fiduciary''; Conflict of Interest Rule--Retirement Investment
Advice, 81 FR 20946 (Apr. 8, 2016) (final rule).
\26\ Definition of the Term ``Fiduciary''; Conflict of Interest
Rule--Retirement Investment Advice, 81 FR at 20946.
\27\ Id. at 20955.
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The Department identified the ``regular basis'' element \28\ in the
five-part test as a particularly important example of the 1975
regulation's shortcomings.\29\ The Department stated that the
requirement that advice be provided on a ``regular basis'' had failed
to draw a sensible line between fiduciary and non-fiduciary conduct and
had undermined ERISA's protective purpose.\30\ The Department pointed
to examples of transactions in which a
[[Page 32126]]
discrete instance of advice can be of critical importance to the plan,
such as a one-time purchase of a group annuity to cover all of the
benefits promised to substantially all of a plan's participants for the
rest of their lives when a defined benefit plan terminates, or a plan's
expenditure of hundreds of millions of dollars on a single real estate
transaction based on the recommendation of a financial adviser hired
for purposes of that one transaction.\31\
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\28\ This refers to the requirement in the 1975 regulation that,
in order for fiduciary status to attach, investment advice must be
provided by the person ``on a regular basis.'' See 40 FR 50842 (Oct.
31, 1975).
\29\ Definition of the Term ``Fiduciary''; Conflict of Interest
Rule--Retirement Investment Advice, 81 FR at 20955.
\30\ Id.
\31\ Id.
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The Department likewise expressed concern that the requirements in
the 1975 regulation of a ``mutual agreement, arrangement, or
understanding'' that advice would serve as ``a primary basis for
investment decisions'' had encouraged investment advice providers in
the current marketplace to use fine print disclaimers as potential
means of avoiding ERISA fiduciary status, even as they marketed
themselves as providing tailored or individualized advice based on the
retirement investor's best interest.\32\ Additionally, the Department
noted that the ``primary basis'' element of the five-part test appeared
in tension with the statutory text and purposes of Title I and Title II
of ERISA.\33\ If, for example, a prudent plan fiduciary hires multiple
specialized advisers for an especially complex transaction, it should
be able to rely upon any or all of the consultants that it hired to
render advice, regardless of arguments about whether one could
characterize the advice, in some sense, as primary, secondary, or
tertiary.\34\
---------------------------------------------------------------------------
\32\ Id.
\33\ Id.
\34\ Id. at 20955-56.
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The 2016 Final Rule defined an investment advice fiduciary for
purposes of Title I and Title II of ERISA in a way that would apply
fiduciary status in a wider array of advice relationships than the
five-part test in the 1975 regulation.\35\ The 2016 Final Rule
generally covered: (1) recommendations by a person who represents or
acknowledges that they are acting as a fiduciary within the meaning of
ERISA; (2) advice rendered pursuant to a written or verbal agreement,
arrangement or understanding that the advice is based on the particular
investment needs of the retirement investor; and, most expansively, (3)
recommendations directed to a specific retirement investor or investors
regarding the advisability of a particular investment or management
decision with respect to securities or other investment property of the
plan or IRA.\36\
---------------------------------------------------------------------------
\35\ Id. at 20946.
\36\ Id. at 20997.
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The 2016 Final Rule also specifically superseded a 2005 Advisory
Opinion, 2005-23A (commonly known as the Deseret Letter) which had
opined that it is not fiduciary investment advice under Title I of
ERISA to make a recommendation as to distribution options from an
employee benefit plan, even if accompanied by a recommendation as to
where the distribution would be invested.\37\
---------------------------------------------------------------------------
\37\ Id. at 20949.
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On the same date it published the 2016 Final Rule, the Department
also published two new administrative class exemptions from the
prohibited transaction provisions of Title I and Title II of ERISA: the
Best Interest Contract Exemption (BIC Exemption) \38\ and the Class
Exemption for Principal Transactions in Certain Assets Between
Investment Advice Fiduciaries and Employee Benefit Plans and IRAs
(Principal Transactions Exemption).\39\ The Department granted the new
exemptions with the objective of promoting the provision of investment
advice that is in the best interest of retail investors such as plan
participants and beneficiaries, IRA owners and beneficiaries, and
certain plan fiduciaries, including small plan sponsors.\40\
---------------------------------------------------------------------------
\38\ 81 FR 21002 (Apr. 8, 2016).
\39\ 81 FR 21089 (Apr. 8, 2016).
\40\ 81 FR 21002 (April 8, 2016).
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The new exemptions included conditions designed to protect the
interests of the retirement investors receiving advice.\41\ The
exemptions required investment advice fiduciaries to adhere to the
following ``Impartial Conduct Standards'': providing advice in
retirement investors' best interest; charging no more than reasonable
compensation; and making no misleading statements about investment
transactions and other important matters.\42\ In the case of IRAs and
non-Title I plans, the exemption required these standards to be set
forth in an enforceable contract with the retirement investor, which
also was required to include certain warranties and disclosures.\43\
The exemption further provided that parties could not rely on the
exemption if they included provisions in their contracts disclaiming
liability for compensatory remedies or waiving or qualifying retirement
investors' right to pursue a class action or other representative
action in court.\44\ In conjunction with the new exemptions, the
Department also made amendments to pre-existing exemptions, namely PTEs
75-1, 77-4, 80-83, 83-1, 84-24 and 86-128, to require compliance with
the Impartial Conduct Standards and to make certain other changes.\45\
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\41\ Best Interest Contract Exemption, 81 FR 21002; see also
ERISA section 408(a); Code section 4975(c)(2).
\42\ Best Interest Contract Exemption, 81 FR at 21077.
\43\ Id. at 21076.
\44\ Id. at 21078-9.
\45\ 81 FR 21139 (Apr. 8, 2016); 81 FR 21147 (Apr. 8, 2016); 81
FR 21181 (Apr. 8, 2016); 81 FR 21208 (Apr. 8, 2016).
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3. Litigation Over the 2016 Rulemaking
The 2016 Final Rule and related new and amended exemptions
(collectively, the 2016 Rulemaking) was challenged in multiple
lawsuits. In National Association for Fixed Annuities v. Perez, a
district court in the District of Columbia upheld the 2016 Rulemaking
in the context of a broad challenge on multiple grounds.\46\ Among
other things, the court found that the 2016 Final Rule comports with
both the text and the purpose of ERISA, and it noted ``if anything, it
is the five-part test--and not the current rule--that is difficult to
reconcile with the statutory text. Nothing in the phrase `renders
investment advice' suggests that the statute applies only to advice
provided `on a regular basis.' '' \47\ Relatedly, in Market Synergy v.
United States Department of Labor, the U.S. Court of Appeals for the
Tenth Circuit affirmed a district court's decision similarly upholding
the 2016 Rulemaking as it applied to fixed indexed annuities.\48\
---------------------------------------------------------------------------
\46\ Nat'l Assoc. for Fixed Annuities v. Perez, 217 F.Supp.3d 1
(D.D.C. 2016) [hereinafter NAFA]. On December 15, 2016, the U.S.
Court of Appeals for the District of Columbia denied an emergency
request to stay application of the definition or the exemptions
pending an appeal of the district court's ruling. Nat'l Assoc. for
Fixed Annuities v. Perez, No. 16-5345, 2016 BL 452075 (D.C. Cir.
2016).
\47\ NAFA, 217 F. Supp. 3d at 23, 27-28.
\48\ 885 F.3d 676 (10th Cir. 2018); see Thrivent Financial for
Lutherans v. Acosta, No. 16-CV-03289, 2017 WL 5135552 (D. Minn. Nov.
3, 2017) (granting the Department's motion for a stay and the
plaintiff's motion for a preliminary injunction, with respect to
Thrivent's suit challenging the BIC Exemption's bar on class action
waivers as exceeding the Department's authority and as unenforceable
under the Federal Arbitration Act).
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On March 15, 2018, however, the U.S. Court of Appeals for the Fifth
Circuit (Fifth Circuit) overturned a district court's decision
upholding the validity of the 2016 Final Rule \49\ and vacated the
entire 2016 Rulemaking, in Chamber of Commerce v. United States
Department
[[Page 32127]]
of Labor (Chamber).\50\ The Fifth Circuit held that the 2016 Final Rule
conflicted with ERISA section 3(21)(A)(ii) and Code section
4975(e)(3)(B). Specifically, the Fifth Circuit found that the 2016
Final Rule swept too broadly and extended to relationships that lacked
``trust and confidence,'' which the court stated were hallmarks of the
common-law fiduciary relationship that Congress intended to incorporate
into the statutory definitions. The court concluded that ``all relevant
sources indicate that Congress codified the touchstone of common-law
fiduciary status--the parties' underlying relationship of trust and
confidence--and nothing in the statute `requires' departing from the
touchstone.'' \51\
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\49\ Chamber of Commerce v. Hugler, 231 F. Supp. 3d 152 (N.D.
Tex. Feb. 8, 2017) (finding, among other things, that in the 2016
Final Rule, the Department reasonably removed the ``regular basis''
requirement; and noting, ``if anything, however, the five-part test
is the more difficult interpretation to reconcile with who is a
fiduciary under ERISA.'').
\50\ 885 F.3d 360 (5th Cir. 2018); but see id. at 391 (``Nothing
in the phrase `renders investment advice for a fee or other
compensation' suggests that the statute applies only in the limited
context accepted by the panel majority.'') (Stewart, C.J.,
dissenting).
\51\ Id. at 369; but see Mertens v. Hewitt Associates, 508 U.S.
248, 262 (1993) (finding that Congress intentionally departed from
the common law of trusts by defining an ERISA `` `fiduciary' not in
terms of formal trusteeship, but in functional terms . . . thus
expanding the universe of persons subject to fiduciary duties'')
(citations omitted).
---------------------------------------------------------------------------
In addition to holding that the 2016 Final Rule conflicted with the
statutory definitions in Title I and Title II of ERISA, the Fifth
Circuit in Chamber also determined that the 2016 Rulemaking failed to
honor the difference in the Department's authority over employee
benefit plans under Title I of ERISA and IRAs under Title II, by
imposing ``novel and extensive duties and liabilities on parties
otherwise subject only to the prohibited transactions penalties.'' \52\
These included the conditions of the BIC Exemption and Principal
Transactions Exemption that required financial institutions and
individual fiduciary advisers to enter into contracts with their
customers with specific duties, warranties, and disclosures, and
forbade damages limitations and class action waivers. Under the Code,
IRA investors do not have a private right of action. Instead, the
primary remedy for a violation of the prohibited transaction provisions
under the Code is the assessment of an excise tax.\53\ In the Fifth
Circuit's view, the Department had effectively exceeded its authority
by giving IRA investors the ability to bring a private cause of action
that Congress had not authorized.\54\
---------------------------------------------------------------------------
\52\ Chamber, 885 F.3d at 384.
\53\ Code section 4975(a), (b).
\54\ Chamber, 885 F.3d at 384.
---------------------------------------------------------------------------
In response to the Fifth Circuit's vacatur of the 2016 Rulemaking,
on May 7, 2018, the Department issued Field Assistance Bulletin 2018-
02, Temporary Enforcement Policy on Prohibited Transactions Rules
Applicable to Investment Advice Fiduciaries (FAB 2018-02).\55\ FAB
2018-02 announced that, pending further guidance, the Department would
not pursue prohibited transaction claims against fiduciaries who were
working diligently and in good faith to comply with the Impartial
Conduct Standards for transactions that would have been exempted in the
BIC Exemption and Principal Transactions Exemption, or treat such
fiduciaries as violating the applicable prohibited transaction rules.
---------------------------------------------------------------------------
\55\ Available at <a href="https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-02">https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-02</a>.
---------------------------------------------------------------------------
4. Subsequent Actions by the Department
In 2020, the Department issued a technical amendment to the Code of
Federal Regulations (CFR) reinserting the 1975 regulation, reflecting
the Fifth Circuit's vacatur of the 2016 Final Rule.\56\ The technical
amendment also reinserted into the CFR Interpretive Bulletin 96-1 (IB
96-1) relating to participant investment education, which had been
removed and largely incorporated into the text of the 2016 Final Rule.
Additionally, the Department updated its website to reflect the fact
that the pre-existing prohibited transaction exemptions that had been
amended in the 2016 Rulemaking had been restored to their pre-amendment
form, and also to reflect that the Department had withdrawn the Deseret
Letter.
---------------------------------------------------------------------------
\56\ 85 FR 40589 (July 7, 2020).
---------------------------------------------------------------------------
The Department also adopted a new PTE, Improving Investment Advice
for Workers & Retirees, also known as PTE 2020-02.\57\ The exemption
provides relief that is similar in scope to the BIC Exemption and the
Principal Transactions Exemption, but it does not include contract or
warranty provisions.
---------------------------------------------------------------------------
\57\ 85 FR 82798 (Dec. 18, 2020).
---------------------------------------------------------------------------
The preamble to PTE 2020-02 also included the Department's
interpretation of when advice to roll over assets from a workplace
retirement plan to an IRA would constitute fiduciary investment advice
under the 1975 regulation's five-part test.\58\ The preamble
interpretation confirmed the Department's continued view that the
Deseret Letter was incorrect, and that a recommendation to roll assets
out of a Title I plan is advice with respect to moneys or other
property of the plan and, if provided by a person who satisfies all of
the requirements of the 1975 regulatory test, constitutes fiduciary
investment advice.\59\ The preamble interpretation also discussed when
a recommendation to roll over assets from an employee benefit plan to
an IRA would satisfy the ``regular basis'' requirement.\60\
Additionally, the preamble set forth the Department's interpretation of
the 1975 regulation's requirement of ``a mutual agreement, arrangement,
or understanding'' that the investment advice will serve as ``a primary
basis for investment decisions.'' \61\ In April 2021, the Department
issued Frequently Asked Questions (FAQs) that, among other things,
summarized aspects of the preamble interpretation.\62\
---------------------------------------------------------------------------
\58\ Id. at 82802-9.
\59\ Id.
\60\ Id.
\61\ Id.
\62\ New Fiduciary Advice Exemption: PTE 2020-02 Improving
Investment Advice for Workers & Retirees Frequently Asked Questions,
<a href="https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption">https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption</a>.
---------------------------------------------------------------------------
The Department's preamble interpretation and certain FAQs were
challenged as inconsistent with the 1975 regulation in two lawsuits
filed after the issuance of PTE 2020-02.\63\ On February 13, 2023, the
U.S. District Court for the Middle District of Florida issued an
opinion vacating the policy referenced in FAQ 7 (entitled ``When is
advice to roll over assets from an employee benefit plan to an IRA
considered to be on a `regular basis' ? '') and remanded it to the
Department for further proceedings.\64\ On June 30, 2023, a magistrate
judge in the Northern District of Texas filed a report with the judge's
findings, conclusions, and recommendations, including a recommendation
that the court should vacate portions of PTE 2020-02 that permit
consideration of actual or expected Title II investment advice
relationships when determining Title I fiduciary status, as
inconsistent with the 1975 regulation.\65\
---------------------------------------------------------------------------
\63\ Compl., Am. Sec. Ass'n. v. U.S. Dep't of Labor, No. 8:22-
CV-330VMC-CPT, 2023 WL 1967573 (M.D. Fla. Feb. 13, 2023); Compl.,
Fed'n of Ams. for Consumer Choice v. U.S. Dep't of Labor, No. 3:22-
CV-00243-K-BT (N.D. Tex. Feb. 2, 2022).
\64\ Am. Sec. Ass'n. v. U.S. Dep't of Labor, 2023 WL 1967573, at
*22-23.
\65\ See Findings, Conclusions, and Recommendations of the
United States Magistrate Judge, Fed'n of Ams. for Consumer Choice v.
U.S. Dep't of Labor, No. 3:22-CV-00243-K-BT, 2023 WL 5682411, at
*27-29 (N.D. Tex. June 30, 2023) [hereinafter FACC]. As of the date
of this final rule, the district court judge has not yet taken
action regarding the magistrate judge's report and recommendations.
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[[Page 32128]]
5. Other Regulatory Developments
U.S. Securities and Exchange Commission
Since the vacatur of the Department's 2016 Rulemaking, other
regulators have considered and adopted enhanced standards of conduct
for financial professionals as a method of addressing, among other
things, conflicts of interest. At the Federal level, on June 5, 2019,
the SEC finalized a regulatory package relating to conduct standards
for broker-dealers and investment advisers. The package included
Regulation Best Interest, which established an enhanced best interest
standard of conduct applicable to broker-dealers when making a
recommendation of any securities transaction or investment strategy
involving securities to retail customers.\66\
---------------------------------------------------------------------------
\66\ See Regulation Best Interest release, 84 FR 33318 (July 12,
2019).
---------------------------------------------------------------------------
The SEC's Regulation Best Interest enhanced the broker-dealer
standard of conduct ``beyond existing suitability obligations.'' \67\
According to the SEC, this
---------------------------------------------------------------------------
\67\ Id.
[A]lign[ed] the standard of conduct with retail customers'
reasonable expectations by requiring broker-dealers, among other
things, to: Act in the best interest of the retail customer at the
time the recommendation is made, without placing the financial or
other interest of the broker-dealer ahead of the interests of the
retail customer; and address conflicts of interest by establishing,
maintaining, and enforcing policies and procedures reasonably
designed to identify and fully and fairly disclose material facts
about conflicts of interest, and in instances where [the SEC has]
determined that disclosure is insufficient to reasonably address the
conflict, to mitigate or, in certain instances, eliminate the
conflict.\68\
---------------------------------------------------------------------------
\68\ Id.
Regulation Best Interest's ``best interest obligation'' includes a
Disclosure Obligation, a Care Obligation, a Conflict of Interest
Obligation, and a Compliance Obligation. The Care Obligation requires
broker-dealers, in making recommendations, to exercise ``reasonable
---------------------------------------------------------------------------
diligence, care, and skill'' to:
(A) Understand the potential risks, rewards, and costs
associated with the recommendation, and have a reasonable basis to
believe that the recommendation could be in the best interest of at
least some retail customers;
(B) Have a reasonable basis to believe that the recommendation
is in the best interest of a particular retail customer based on
that retail customer's investment profile and the potential risks,
rewards, and costs associated with the recommendation and does not
place the financial or other interest of the broker, dealer, or such
natural person ahead of the interest of the retail customer; [and]
(C) Have a reasonable basis to believe that a series of
recommended transactions, even if in the retail customer's best
interest when viewed in isolation, is not excessive and is in the
retail customer's best interest when taken together in light of the
retail customer's investment profile and does not place the
financial or other interest of the broker, dealer, or such natural
person making the series of recommendations ahead of the interest of
the retail customer.\69\
---------------------------------------------------------------------------
\69\ 17 CFR 240.15l-1(a)(2)(ii).
In guidance on the care obligations applicable to both broker-
---------------------------------------------------------------------------
dealers and investment advisers, the SEC staff explained,
In the context of providing investment advice and
recommendations to retail investors, the care obligations generally
include three overarching and intersecting components. . . . [T]hese
components are:
Understanding the potential risks, rewards, and costs associated
with a product, investment strategy, account type, or series of
transactions (the ``investment or investment strategy'');
Having a reasonable understanding of the specific retail
investor's investment profile, which generally includes the retail
investor's financial situation (including current income) and needs;
investments; assets and debts; marital status; tax status; age;
investment time horizon; liquidity needs; risk tolerance; investment
experience; investment objectives and financial goals; and any other
information the retail investor may disclose in connection with the
recommendation or advice; and
Based on the understanding of the first two elements, as well
as, in the staff's view, a consideration of reasonably available
alternatives, having a reasonable basis to conclude that the
recommendation or advice provided is in the retail investor's best
interest.\70\
---------------------------------------------------------------------------
\70\ Staff Bulletin: Standards of Conduct for Broker-Dealers and
Investment Advisers Care Obligations (footnotes omitted), <a href="https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers">https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers</a>.
The Conflict of Interest Obligation requires the broker-dealer to
establish, maintain, and enforce written policies and procedures
---------------------------------------------------------------------------
reasonably designed to:
(A) Identify and at a minimum disclose, [in accordance with
Regulation Best Interest], or eliminate, all conflicts of interest
associated with such recommendations;
(B) Identify and mitigate any conflicts of interest associated
with such recommendations that create an incentive for a natural
person who is an associated person of a broker or dealer to place
the interest of the broker, dealer, or such natural person ahead of
the interest of the retail customer;
(C) Identify and disclose any material limitations placed on the
securities or investment strategies involving securities that may be
recommended to a retail customer and any conflicts of interest
associated with such limitations, and prevent such limitations and
associated conflicts of interest from causing the broker, dealer, or
a natural person who is an associated person of the broker or dealer
to make recommendations that place the interest of the broker,
dealer, or such natural person ahead of the interest of the retail
customer [in accordance with Regulation Best Interest]; and
(D) Identify and eliminate any sales contests, sales quotas,
bonuses, and non-cash compensation that are based on the sales of
specific securities or specific types of securities within a limited
period of time.\71\
---------------------------------------------------------------------------
\71\ 17 CFR 240.15l-1(a)(2)(iii).
A conflict of interest is defined as ``an interest that might
incline a broker, dealer, or a natural person who is an associated
person of a broker or dealer--consciously or unconsciously--to make a
recommendation that is not disinterested.'' \72\
---------------------------------------------------------------------------
\72\ Id. at (b)(3).
---------------------------------------------------------------------------
In guidance on conflicts of interest applicable to both broker-
dealers and investment advisers, the SEC staff has stated,
All broker-dealers, investment advisers, and financial
professionals have at least some conflicts of interest with their
retail investors. Specifically, they have an economic incentive to
recommend products, services, or account types that provide more
revenue or other benefits for the firm or its financial
professionals, even if such recommendations or advice are not in the
best interest of the retail investor. . . . Consistent with their
obligation to act in a retail investor's best interest, firms must
address conflicts in a way that will prevent the firm or its
financial professionals from providing recommendations or advice
that places their interests ahead of the interests of the retail
investor.\73\
---------------------------------------------------------------------------
\73\ Staff Bulletin: Standards of Conduct for Broker-Dealers and
Investment Advisers Conflict of Interest, <a href="https://www.sec.gov/tm/iabd-staff-bulletin">https://www.sec.gov/tm/iabd-staff-bulletin</a>-conflicts-interest.
In the Regulation Best Interest Release, the SEC stated that
``[t]he Commission has crafted Regulation Best Interest to draw on key
principles underlying fiduciary obligations, including those that apply
to investment advisers under the Advisers Act, while providing specific
requirements to address certain aspects of the relationships between
broker-dealers and their retail customers.'' \74\ The SEC emphasized
that, ``[i]mportantly, regardless of whether a retail investor chooses
a broker-dealer or an investment adviser (or both), the retail investor
will be entitled to a recommendation (from a broker-dealer) or advice
(from an investment adviser) that is in the best interest of the retail
investor and that does not place the interests of the firm or the
financial
[[Page 32129]]
professional ahead of the interests of the retail investor.'' \75\ The
SEC also noted that the standard of conduct established by Regulation
Best Interest cannot be satisfied through disclosure alone.\76\
---------------------------------------------------------------------------
\74\ 84 FR 33318, 33320 (July 12, 2019).
\75\ Id. at 33321.
\76\ Id. at 33390.
---------------------------------------------------------------------------
The SEC's Regulation Best Interest applies to broker-dealers and
their associated persons when they make a recommendation to a retail
customer of any ``securities transaction or investment strategy
involving securities (including account recommendations).''
\77\According to the SEC, this language encompasses recommendations to
roll over or transfer assets in a workplace retirement plan account to
an IRA, and recommendations to take a plan distribution.\78\ However,
the SEC also stated that while Regulation Best Interest applies to
advice regarding a person's own retirement account such as a 401(k)
account or IRA, it does not cover advice to workplace retirement plans
themselves or to their legal representatives when they are receiving
advice on the plan's behalf.\79\
---------------------------------------------------------------------------
\77\ 17 CFR 240.15l-1(a)(1).
\78\ Regulation Best Interest Release, 84 FR 33318, 33337 (July
12, 2019).
\79\ Id. at 33343-44.
---------------------------------------------------------------------------
The SEC Investment Adviser Interpretation, published simultaneously
with Regulation Best Interest, reaffirmed and in some cases clarified
aspects of the fiduciary duty of an investment adviser under the
Advisers Act.\80\ The SEC stated that ``an investment adviser's
fiduciary duty under the Investment Advisers Act comprises both a duty
of care and a duty of loyalty.'' \81\ According to the SEC, ``[t]his
fiduciary duty is based on equitable common law principles and is
fundamental to advisers' relationships with their clients under the
Advisers Act.'' \82\ The fiduciary duty under the Federal securities
laws requires an adviser ``to adopt the principal's goals, objectives,
or ends.'' \83\ The SEC stated:
---------------------------------------------------------------------------
\80\ 84 FR 33669 (July 12, 2019).
\81\ Id. at 33671 (footnote omitted).
\82\ Id. at 33670.
\83\ Id. at 33671.
This means the adviser must, at all times, serve the best
interest of its client and not subordinate its client's interest to
its own. In other words, the investment adviser cannot place its own
interests ahead of the interests of its client. This combination of
care and loyalty obligations has been characterized as requiring the
investment adviser to act in the ``best interest'' of its client at
all times.\84\
---------------------------------------------------------------------------
\84\ Id. (footnote omitted).
The SEC further stated, ``[t]he investment adviser's fiduciary duty
is broad and applies to the entire adviser-client relationship.'' \85\
An investment adviser's fiduciary duty under the Advisers Act applies
to advice about whether to rollover assets from one account to another,
including rolling over from retirement accounts into an account that
will be managed by the investment adviser or an affiliate.\86\
---------------------------------------------------------------------------
\85\ Id at 33670. See also id. fn. 17 (citing authorities where
the Commission previously recognized the broad scope of section 206
of the Advisers Act in a variety of contexts).
\86\ Id. at 33674.
---------------------------------------------------------------------------
State Legislative and Regulatory Developments
Since the vacatur of the Department's 2016 Rulemaking, there have
also been legislative and regulatory developments at the State level
involving conduct standards. For instance, the Massachusetts Securities
Division amended its regulations to apply a fiduciary conduct standard
under which broker-dealers and their agents must ``[m]ake
recommendations and provide investment advice without regard to the
financial or any other interest of any party other than the customer.''
\87\
---------------------------------------------------------------------------
\87\ 950 Mass. Code Regs. 12.204 & 12.207 as amended effective
March 6, 2020; see Consent Order, In the Matter of Scottrade, Inc.,
No. E-2017-0045 (June 30, 2020); see also Enf't Section of
Massachusetts Sec. Div. of Office of Sec'y of Commonwealth v.
Scottrade, Inc., 327 F. Supp. 3d 345, 352 (D. Mass. 2018)
(discussing enforcement actions under Massachusetts securities and
other consumer protection laws). A challenge to the regulation was
rejected by the Massachusetts Supreme Judicial Court. See Robinhood
Fin. LLC v. Sec'y of Commonwealth of Mass, No. SJC-13381, 2023 WL
5490571 (Mass. Aug. 25, 2023).
---------------------------------------------------------------------------
Additionally, the NAIC Model Regulation, updated in 2020, provides
that insurance agents must act in the consumer's ``best interest,'' as
defined by the Model Regulation, when making a recommendation of an
annuity, and insurers must establish and maintain a system to supervise
recommendations so that the insurance needs and financial objectives of
consumers at the time of the transaction are effectively addressed.\88\
The NAIC Model Regulation also provides that it does not apply to
transactions involving contracts used to fund an employee pension or
welfare plan covered by ERISA.\89\ According to the NAIC, as of March
11, 2024, 45 jurisdictions have implemented the revisions to the model
regulation.\90\
---------------------------------------------------------------------------
\88\ Available at <a href="http://www.naic.org/store/free/MDL-275.pdf">www.naic.org/store/free/MDL-275.pdf</a>.
\89\ NAIC Model Regulation at section 4.B.(1).
\90\ See <a href="https://content.naic.org/sites/default/files/inline-files/275%20Final%20Map_2020%20Changes_March%2011%202024.pdf">https://content.naic.org/sites/default/files/inline-files/275%20Final%20Map_2020%20Changes_March%2011%202024.pdf</a>.
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The NAIC Model Regulation includes a best interest obligation
comprised of a care obligation, a disclosure obligation, a conflict of
interest obligation, and a documentation obligation, applicable to an
insurance producer.\91\ If these specific obligations are met, the
producer is treated as satisfying the overarching best interest
standard as expressed in the NAIC Model Regulation. The care obligation
states that the producer, in making a recommendation, must exercise
``reasonable diligence, care and skill'' to:
---------------------------------------------------------------------------
\91\ A producer is defined in section 5.L. of the NAIC Model
Regulation as ``a person or entity required to be licensed under the
laws of this state to sell, solicit or negotiate insurance,
including annuities.'' Section 5.L. further provides that the term
producer includes an insurer where no producer is involved.
(i) Know the consumer's financial situation, insurance needs and
financial objectives;
(ii) Understand the available recommendation options after
making a reasonable inquiry into options available to the producer;
(iii) Have a reasonable basis to believe the recommended option
effectively addresses the consumer's financial situation, insurance
needs and financial objectives over the life of the product, as
evaluated in light of the consumer profile information; and
(iv) Communicate the basis or bases of the recommendation.\92\
---------------------------------------------------------------------------
\92\ NAIC Model Regulation at section 6.A.(1)(a).
The NAIC conflict of interest obligation requires the producer to
``identify and avoid or reasonably manage and disclose material
conflicts of interest, including material conflicts of interest related
to an ownership interest.'' \93\ Further, under the NAIC Model
Regulation, insurers are required to ``establish and maintain
reasonable procedures to identify and eliminate any sales contests,
sales quotas, bonuses, and non-cash compensation that are based on the
sales of specific annuities within a limited period of time.'' \94\
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\93\ Id. at section 6.A.(3).
\94\ Id. at section 6.C.(2)(h).
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The NAIC Model Regulation's requirements regarding mitigation of
material conflicts of interest are not as stringent as either the
Department's approach under ERISA or the SEC's approach. This is made
clear in the NAIC Model Regulation's definition of a ``material
conflict of interest'' which expressly carves out all ``cash
compensation or non-cash compensation'' from treatment as sources of
conflicts of interest.\95\ ``Cash compensation'' that is excluded from
the definition of a material conflict of interest is broadly defined to
include ``any discount, concession, fee, service fee, commission, sales
charge, loan, override, or cash benefit received by a producer in
connection with the
[[Page 32130]]
recommendation or sale of an annuity from an insurer, intermediary, or
directly from the consumer,'' and ``non-cash compensation'' is also
broadly defined to include ``any form of compensation that is not cash
compensation, including, but not limited to, health insurance, office
rent, office support and retirement benefits.'' \96\
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\95\ Id. at section 5.I.
\96\ Id. at section 5.B. and J.
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Recent guidance from the SEC staff on broker-dealer and investment
adviser conflicts of interest, on the other hand, makes clear that
conduct standards in the securities market require a ``robust, ongoing
process that is tailored to each conflict.'' \97\ The SEC staff
guidance provides a detailed list of types of compensation that the SEC
staff believes are examples of common sources of conflicts of interest,
as follows:
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\97\ Staff Bulletin: Standards of Conduct for Broker-Dealers and
Investment Advisers Conflict of Interest, <a href="https://www.sec.gov/tm/iabd-staff-bulletin">https://www.sec.gov/tm/iabd-staff-bulletin</a>-conflicts-interest.
compensation, revenue or other benefits (financial or otherwise) to
the firm or its affiliates, including fees and other charges for the
services provided to retail investors (for example, compensation
based on assets gathered and/or products sold, including but not
limited to receipt of assets under management (``AUM'') or
engagement fees, commissions, markups, payment for order flow, cash
sweep programs, or other sales charges) or payments from third
parties whether or not related to sales or distribution (for
example, sub-accounting or administrative services fees paid by a
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fund or revenue sharing);
compensation, revenue or other benefits (financial or otherwise) to
financial professionals from their firm or its affiliates (for
example, compensation or other rewards associated with quotas,
bonuses, sales contests, special awards; differential or variable
compensation based on the product sold, accounts recommended, AUM,
or services provided; incentives tied to appraisals or performance
reviews; forgivable loans based upon the achievement of specified
performance goals related to asset accumulation, revenue benchmarks,
client transfer, or client retention);
compensation, revenue or other benefits (financial or otherwise)
(including, but not limited to, gifts, entertainment, meals, travel,
and related benefits, including in connection with the financial
professional's attendance at third-party sponsored trainings and
conferences) to the financial professionals resulting from other
business or personal relationships the financial professional may
have, relationships with third parties that may relate to the
financial professional's association or affiliation with the firm or
with another firm (whether affiliated or unaffiliated), or other
relationships within the firm; an
compensation, revenue or other benefits (financial or otherwise) to
the firm or its affiliates resulting from the firm's or its
financial professionals' sales or offer of proprietary products or
services, or products or services of affiliates.\98\
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\98\ Id.
The NAIC expressly disclaimed that its standard creates fiduciary
obligations, and the obligations in its Model Regulation differ in
significant respects from those applicable to broker-dealers in the
SEC's Regulation Best Interest or to investment advisers pursuant to
the Advisers Act's fiduciary duty.\99\ In addition to disregarding all
forms of compensation as a source of material conflicts of interest, as
discussed above, the NAIC Model Regulation's ``best interest'' standard
is satisfied by the four component obligations--the care, disclosure,
conflict of interest, and documentation obligations--but these
components do not expressly incorporate the best interest obligation
not to put the producer's or insurer's interests before the customer's
interests, even though compliance with the component obligations' terms
is treated as meeting the NAIC Model Regulation's ``best interest''
standard. Similarly, the NAIC Model Regulation's care obligation does
not repeat the ``best interest'' requirement but instead includes a
requirement to ``have a reasonable basis to believe the recommended
option effectively addresses the consumer's financial situation,
insurance needs and financial objectives . . . .'' \100\ Additionally,
the obligation to comply with the ``best interest'' standard is limited
to the individual producer, as opposed to the insurer responsible for
supervising the producer.
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\99\ Section 6.A.(1)(d) of the NAIC Model Regulation provides,
``[t]he requirements under this subsection do not create a fiduciary
obligation or relationship and only create a regulatory obligation
as established in this regulation.'' In recent insurance industry
litigation against the Department, plaintiff Federation of Americans
for Consumer Choice, Inc., stated that ``[t]here is a world of
difference'' between the NAIC Model Regulation and ERISA's fiduciary
regime. See Pls.' (1) Br. In Opp'n to Defs.' Cross-Motion to Dismiss
for Lack of Jurisdiction or, in the Alternative, for Summ. J., and
(2) Reply Br. in Supp. of Pls. Mot. for Summ. J, 40, Fed'n of Ams.
for Consumer Choice v. U.S. Dep't of Labor, No. 3:22-CV-00243-K-BT
(Nov. 7, 2022) (comparing ERISA's best interest requirement to NAIC
Model Regulation 275, sections 2.B and 6.A.(1)(d)).
\100\ NAIC Model Regulation at section 6.A.(1)(a)(iii).
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The State of New York took a different approach than the NAIC Model
Regulation in its NY Insurance Regulation 187, effective February 1,
2020. Under the New York regulation, an insurance producer acts in the
best interest of the consumer when, among other things,
the producer's . . . recommendation to the consumer is based on an
evaluation of the relevant suitability information of the consumer
and reflects the care, skill, prudence, and diligence that a prudent
person acting in a like capacity and familiar with such matters
would use under the circumstances then prevailing. Only the
interests of the consumer shall be considered in making the
recommendation. The producer's receipt of compensation or other
incentives permitted by the Insurance Law and the Insurance
Regulations is permitted by this requirement provided that the
amount of the compensation or the receipt of an incentive does not
influence the recommendation.
Thus, under New York law, insurance producers must act prudently in
making a recommendation and must not allow compensation or other
incentives to influence their recommendations. According to the
American Council of Life Insurers, out of 713 life insurers in the
United States, 81 were domiciled in New York in 2022, and annuity
direct premium receipts in New York in 2022 totaled $31.4 billion.\101\
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\101\ ACLI 2023 Life Insurers Fact Book, <a href="https://www.acli.com/-/media/public/pdf/news-and-analysis/publications-and-research/2023-fact-book-chapters/2023aclifactbook.pdf">https://www.acli.com/-/media/public/pdf/news-and-analysis/publications-and-research/2023-fact-book-chapters/2023aclifactbook.pdf</a>.
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The regulatory changes described above cover many, but not all, of
the assets held by ERISA retirement plans and IRAs. Further, the SEC's
Regulation Best Interest and the NAIC Model Regulation are each limited
in important ways in terms of their application to advice provided to
ERISA plan fiduciaries.\102\ For example, Regulation Best Interest does
not cover advice to workplace retirement plans or their representatives
(such as an employee of a small business who is a fiduciary of the
business's 401(k) plan).\103\ The NAIC Model Regulation specifically
states that it does not apply to transactions involving contracts used
to fund an employee pension or welfare plan covered by ERISA.\104\ And
there remain investments held by retirement investors in retirement
accounts that are not covered by securities laws or insurance laws,
including real estate, certain certificates of deposit and other
banking products, commodities, and precious metals. The Department
believes that retirement investors and the regulated community are best
served by ERISA fiduciary protections in Title I and Title II that
apply to all
[[Page 32131]]
investments that retirement investors may make with respect to their
retirement accounts when they receive recommendations from trusted
advice providers. Amendments to the ERISA regulation are necessary to
achieve that result.
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\102\ The fiduciary obligations of investment advisers under the
Advisers Act are not limited in this way, however.
\103\ Regulation Best Interest release, 84 FR 33318, 33343-44
(July 12, 2019). Regulation Best Interest would apply, however, to
retail customers receiving recommendations for their own retirement
accounts. Id.
\104\ NAIC Model Regulation at section 4.B.(1).
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6. Coordination With Other Agencies
Under Title I and Title II of ERISA, the Department has primary
responsibility for the regulation of ERISA fiduciaries' advice to
retirement investors. Because of the fundamental importance of
retirement investments to workers' financial security and the tax-
preferred status of plans and IRAs, Congress defined the scope of ERISA
fiduciary coverage broadly and imposed stringent obligations on ERISA
fiduciaries, including prohibitions on conflicted transactions that do
not have direct analogues under the securities and insurance laws. The
fiduciary protections and prohibited transaction rules set forth in
Title I and Title II of ERISA, as applicable, broadly apply to covered
fiduciaries, irrespective of the particular investment product they
recommend or their status as investment advisers under the Advisers
Act, broker-dealers, insurance agents, bankers, or other status. This
final rule is designed to ensure that the standards and rules
applicable under Title I and Title II of ERISA are broadly uniform as
applied to retirement investors receiving advice from a trusted advisor
across different categories of investment advice providers and advisory
relationships.
At the same time, many commenters stressed the need to harmonize
the Department's efforts with rulemaking activities by other
regulators, including the SEC's standards of care for providing
investment advice and the Commodity Futures Trading Commission's (CFTC)
business conduct standards for swap dealers (and comparable SEC
standards for security-based swap dealers). In addition, some
commenters have urged coordination with other agencies regarding IRA
products and services.
As the SEC has adopted regulatory standards for broker-dealers that
are based on fiduciary principles of care and loyalty also applicable
to investment advisers under the Advisers Act, and the NAIC has issued
a model law that includes a best interest standard, the Department
believes that it is possible to hew to the unique regulatory structure
imposed by the law governing tax-preferred retirement investments,
adopt a regulatory approach that provides a broadly uniform standard
for all retirement investors when they receive advice from a trusted
advisor, as contemplated by Title I and Title II of ERISA, and avoid
the imposition of obligations that conflict with financial
professionals' obligations under other applicable Federal and State
laws. In particular, in the Department's view, PTE 2020-02, as amended
and published elsewhere in today's Federal Register, is consistent with
the requirements of the SEC's Regulation Best Interest and the
fiduciary obligations of investment advisers under the Advisers Act.
Therefore, broker-dealers and investment advisers that have already
adopted meaningful compliance mechanisms for Regulation Best Interest
and the Advisers Act fiduciary duty, respectively, should be able to
adapt easily to comply with the amended PTE.
Nevertheless, to better understand whether the proposed rule and
proposed amendments to the PTEs would have subjected investment advice
providers to requirements that conflict with or add to their
obligations under other Federal laws, the Department has reached out to
and consulted with the staff of the SEC; other securities, banking, and
insurance regulators; \105\ the Department of the Treasury, including
the Federal Insurance Office; and the Financial Industry Regulatory
Authority (FINRA), a self-regulatory organization that oversees broker-
dealers.
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\105\ The Department acknowledges the comments from the NAIC
expressing disappointment that the Department coordinated with the
NAIC staff rather than with the NAIC members prior to the proposed
rule's publication and that the Department did not share its
intended approach in advance of public release of the proposal. As
the NAIC's comment acknowledged, however, the staff level
discussions focused on aspects of the NAIC Model Regulation.
Further, immediately after the release of the proposed rule, the
Department met with NAIC members and repeatedly offered additional
meetings before the rule was finalized. The NAIC also offered
substantive comments to the proposed rule after its release, which
the Department has carefully considered along with other commenters,
including the comments of many others in the insurance industry.
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The Department has also consulted and coordinated with the
Department of the Treasury and the Internal Revenue Service (IRS),
particularly on the subject of IRAs, and will continue to do so.
Although the Department of Labor has responsibility for issuing
regulations and prohibited transaction exemptions under section 4975 of
the Code, which applies to IRAs, the IRS maintains general
responsibility for enforcing the excise tax applicable to prohibited
transactions. The IRS' responsibilities extend to the imposition of
excise taxes on fiduciaries who participate in prohibited transactions.
As a result, the Department and the IRS share responsibility for
addressing self-dealing by investment advice fiduciaries to tax-
qualified plans and IRAs.
7. Proposed Retirement Security Rule
On October 31, 2023, the Department released the proposed
Retirement Security Rule: Definition of an Investment Advice Fiduciary,
along with proposed amendments to PTE 2020-02 and proposed amendments
to other administrative prohibited transaction exemptions available to
investment advice fiduciaries.\106\ The proposed rule was designed to
ensure that protections established by Titles I and II of ERISA would
apply to all advice that retirement investors receive from trusted
advice providers concerning investment of their retirement assets in a
way that ensures that retirement investors' reasonable expectations are
honored.\107\
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\106\ The proposals were released on the Department's website on
October 31, 2023. They were published in the Federal Register on
November 3, 2023, at 88 FR 75890, 88 FR 75979, 88 FR 76004, and 88
FR 76032.
\107\ Proposed Retirement Security Rule, 88 FR 75890 (Nov. 3,
2023).
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Under the proposal, a person would be an investment advice
fiduciary under Title I and Title II of ERISA if they provide
investment advice or make an investment recommendation to a retirement
investor (i.e., a plan, plan fiduciary, plan participant or
beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary); the
advice or recommendation is provided ``for a fee or other compensation,
direct or indirect,'' as defined in the proposed rule; and the person
makes the recommendation in one of the following contexts:
<bullet> The person either directly or indirectly (e.g., through or
together with any affiliate) has discretionary authority or control,
whether or not pursuant to an agreement, arrangement, or understanding,
with respect to purchasing or selling securities or other investment
property for the retirement investor;
<bullet> The person either directly or indirectly (e.g., through or
together with any affiliate) makes investment recommendations to
investors on a regular basis as part of their business and the
recommendation is provided under circumstances indicating that the
recommendation is based on the particular needs or individual
circumstances of the retirement investor and may be relied upon by the
retirement investor as a basis for investment decisions that are in the
retirement investor's best interest; or
[[Page 32132]]
<bullet> The person making the recommendation represents or
acknowledges that they are acting as a fiduciary when making investment
recommendations.\108\
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\108\ Id.
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The proposal's preamble highlighted developments in retirement
savings vehicles and in the investment advice marketplace since the
1975 regulation was adopted that have altered the way retirement
investors interact with investment advice providers.\109\ As noted
previously, in 1975, retirement plans were primarily defined benefit
plans, which were typically managed by sophisticated financial
professionals. IRAs were not major market participants and 401(k) plans
were not yet in existence. Today, however, plan participants, IRA
owners, and their beneficiaries exercise direct authority over their
investments, and depend upon a wide range of financial professionals,
including broker-dealers, investment advisers subject to the Advisers
Act, insurance agents, and others on how to make complex decisions
about the management of retirement assets.
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\109\ Id. at 75892-3, 75899-900.
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The Department expressed the view in the proposal that when a
financial professional satisfies all five parts of the 1975 regulation
with respect to a given instance of advice, the professional is
properly treated as an investment advice fiduciary in accordance with
the parties' reasonable understanding of the nature of their
relationship.\110\ However, the 1975 regulation, as applied to the
current marketplace, is underinclusive in assigning fiduciary status
because it fails to capture many circumstances in which an investor
would reasonably expect that they can place their trust and confidence
in the advice provider as acting in their best interest. The
Department's experience in the current marketplace is that the five-
part test--in particular, the ``regular basis'' requirement and the
requirement of ``a mutual agreement, arrangement or understanding''
that the investment advice will serve as ``a primary basis for
investment decisions''--too often works to defeat legitimate retirement
investor expectations of impartial advice and allows investment advice
providers to hold themselves out as offering individualized advice that
is intended to promote the best interest of the customer, when they, in
fact, have no such obligation under the 1975 regulation's
implementation of Title I or Title II of ERISA.
---------------------------------------------------------------------------
\110\ Id. at 75899.
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The proposal noted that these components of the five-part test are
not found in the statute's text, and in today's marketplace, undermine
legitimate investor understandings of a professional relationship
centered around the investor's best interest.\111\ In other words,
there are currently many situations where the retirement investor
reasonably expects that their relationship with the advice provider is
one in which the investor can (and should) place trust and confidence
in the recommendation, yet which are not covered by the 1975
regulation. The proposal was designed to reconcile the regulatory text
with both today's retirement investors' reasonable expectations, along
with the statutory text and purpose of ERISA.\112\
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\111\ Id.
\112\ Id.
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The Department stated in the proposal that an important premise of
Title I and Title II of ERISA is that fiduciaries' conflicts of
interest should not be left unchecked, but rather should be carefully
regulated through rules requiring adherence to basic fiduciary norms
and avoidance of prohibited transactions.\113\ The specific duties to
avoid conflicts of interest or comply with a prohibited transaction
exemption applicable to fiduciaries under Title I and Title II of ERISA
stem from Congress' judgment regarding the best way to protect the
public interest in tax-advantaged benefit arrangements that are
critical to workers' financial and physical health. In contrast to the
Federal laws and other regulatory regimes which can permit certain
conflicts if prescribed disclosure obligations are met, the statutory
prohibited transaction provisions in Title I and Title II of ERISA
contemplate a more stringent approach for the protection of these tax-
advantaged retirement savings. In this context, an appropriately
constructed regulatory definition of an investment advice fiduciary
under Title I and Title II of ERISA is essential.
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\113\ Id.
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C. Overview of the Comments Received on the Proposal
The Department received over 400 individual comments and just under
20,000 petition submissions as part of 14 separate petitions on the
proposal. These comments and petitions came from consumer groups,
financial services companies, academics, trade and industry
associations, and others, both in support of, and in opposition to, the
proposed rule and proposed amendments to the PTEs.\114\
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\114\ The 2023 proposed rule and proposed amendments to the PTEs
provided for a 60-day comment period which ended on January 2, 2024.
The Department held a virtual public hearing on December 12-13,
2023, at which over 40 witnesses testified. The Department posted a
video recording of the virtual public hearing on its website on
December 19, 2023, an unofficial hearing transcript on December 22,
2023, and the official hearing transcript on January 10, 2024.
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Commenters on the proposal generally agreed that as a result of the
shift from defined benefit plans to 401(k)-type individual account
retirement plans, retirement investors today face increased
responsibility for ensuring their own secure retirement.\115\
Commenters cited studies indicating that many Americans are concerned
that they will not have saved enough money to achieve that goal.\116\
Many commenters discussed the related importance of retirement
investors' access to professional investment advice. In connection with
these points, some commenters said the proposed update to the
investment advice fiduciary definition would provide important
protections that would support retirement investors' access to
investment advice intended to advance their interests. Other commenters
said the proposed update to the investment advice fiduciary definition
was not necessary and that the scope of the proposed definition
exceeded the Department's jurisdiction and could reduce access to
advice. These comments and the Department's responses are discussed in
this preamble Section C. Comments on specific provisions of the
proposal are discussed in preamble Section D.
---------------------------------------------------------------------------
\115\ References to ``comments'' and ``commenters'' in this
preamble generally include written comments, petitions, and hearing
testimony.
\116\ See, e.g., Board of Governors of the Federal Reserve
System, ``Economic Well-Being of U.S. Households in 2022'' 67 May
2023, available at <a href="https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf">https://www.federalreserve.gov/publications/files/2022-report-economic-well-being-us-households-202305.pdf</a>,
(``While most non-retired adults had some type of retirement
savings, only 31 percent of non-retirees thought their retirement
saving was on track, down from 40 percent in 2021.'')
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1. Comments Supporting the Proposal
Commenters supporting the proposal echoed many of the concerns
expressed by the Department in the proposal's preamble. These
commenters emphasized the need to update the 1975 regulation to better
align with retirement investor expectations in today's retirement
investment marketplace and to fill important gaps in advice
relationships where advice is not currently required to be provided in
the retirement investor's best interest
[[Page 32133]]
and the investor may not be aware of that fact.
Some commenters expressed specific support for applying ERISA
fiduciary protections to recommendations to roll over assets from a
workplace retirement plan to an IRA, in light of the significant
consequences of that decision. They also expressed support for applying
ERISA fiduciary protections to recommendations to plan fiduciaries
where, currently, advice regarding plan investment options may not be
considered to occur on a regular basis, and therefore would not be
considered ERISA fiduciary advice. Commenters said many employers, even
larger employers, are not necessarily knowledgeable about selecting
prudent investment options for the plans they sponsor.
Commenters also said an updated regulatory definition of an
investment advice fiduciary would protect retirement investors from
harm caused by conflicts of interest. They said conflicts of interest
can expose savers to higher costs, lower returns, and greater risk.
Some commenters emphasized that retirement investors with modest
balances are more vulnerable to harm from conflicted investment advice,
as the high fees would disproportionately diminish their savings. One
commenter, a State securities regulator, identified multiple examples
of abusive sales tactics impacting retirement investors and said more
protections are needed.
In this regard, Morningstar submitted a comment that quantified
potential benefits of the proposal in two areas. First, as a result of
the proposal's coverage of recommendations to plan fiduciaries about
the fund lineups in defined contribution plans, participants in
workplace retirement plans would save over $55 billion in the first 10
years and over $130 billion in the subsequent 10 years, in undiscounted
and nominal dollars, due to reductions in costs associated with
investing through their plans. Second, retirement investors rolling
over retirement funds into fixed indexed annuities would save over
$32.5 billion in the first 10 years and over $32.5 billion in the
subsequent 10 years, in undiscounted and nominal dollars, also due to
decreased pricing spreads.\117\
---------------------------------------------------------------------------
\117\ Available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/00290.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/00290.pdf</a>. Morningstar also suggested that the Department
should revise its Form 5500 to reduce gaps in the disclosures that
would provide additional transparency on fees and compensation.
Another commenter suggested that the Department should require plans
to provide a 404a-5 participant fee disclosure with cost details, as
with their annual reports on Form 5500. The Department acknowledges
these comments but notes they are outside the scope of this project.
---------------------------------------------------------------------------
Commenters supporting the proposal discussed the need for
application of ERISA fiduciary protections even in light of other
regulators' conduct standards. Some commenters said SEC Regulation Best
Interest had only limited reach in that it applies only to investments
that are securities and some commenters also said it had only limited
requirements for conflict mitigation at the financial institution
level. A commenter also said there are disparities in the degree to
which firms are implementing SEC Regulation Best Interest's
requirements. Commenters referenced a 2023 report by the North American
Securities Administrators Association on SEC Regulation Best Interest
implementation that found that even as firms have updated their
investor profile forms and policies and procedures to focus on
Regulation Best Interest obligations, many broker-dealers continue to
recommend complex products and rely on financial incentives instead of
lower cost, lower risk products.\118\ One commenter said alternative
assets, which they said included for example, precious metals, real
estate, private equity, and debt, may not be subject to standards set
by the SEC and that state laws vary and leave gaps in protections for
investors in these type of investments.
---------------------------------------------------------------------------
\118\ NASAA, Report and Findings of NASAA's Broker-Dealer
Section Committee: National Examination Initiative Phase II(B)
(Sept. 2023) at 2-3, <a href="https://www.nasaa.org/wp-content/uploads/2023/08/Reg-BI-Phase-II-B-Report-Formatted-8.29.23.pdf">https://www.nasaa.org/wp-content/uploads/2023/08/Reg-BI-Phase-II-B-Report-Formatted-8.29.23.pdf</a>.
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With respect to the insurance marketplace, several commenters
described significant conflicts of interest associated with large
commissions on some annuity sales, as well as abusive sales practices.
Commenters also noted that the terms of annuity contracts, including
surrender charges, may often be detrimental to retirement investors but
may not be well understood. One commenter said recommendations of
annuities for purchase inside retirement accounts deserve special
scrutiny because the annuities are often marketed based on purported
tax deferral advantages that would not be realized inside an already
tax-preferred retirement account.
Some commenters said these issues are not addressed by the NAIC
Model Regulation, which some described as providing a best interest
standard in name only, when in substance it remains a suitability
standard. One commenter presented a guide developed by the Certified
Financial Planner (CFP) Board comparing the CFP Board's Code and
Standards to the NAIC Model Regulation, which states, among other
things, that the NAIC Model Regulation appears to provide a care
obligation that does not rise to the level of a ``prudent professional
standard.'' The guide further states that the NAIC Model Regulation
does not effectively require the client's interests to come first.\119\
Even though the NAIC Model Regulation's best interest obligation
includes the requirement that the producer shall not place the
producer's or the insurer's financial interest ahead of the consumer's
interest, several commenters observed that none of the component
obligations include a specific requirement for the producer to act in
the best interest of the consumer. In other words, the NAIC Model
Regulation treats the best interest obligation as satisfied if the
producer meets specified component obligations, none of which require
the producer to put the client's interests first.
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\119\ Available at <a href="https://www.cfp.net/-/media/files/cfp-board/standards-and-ethics/compliance-resources/naic-comparison-guide.pdf">https://www.cfp.net/-/media/files/cfp-board/standards-and-ethics/compliance-resources/naic-comparison-guide.pdf</a>.
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Commenters also said the NAIC Model Regulation does not
sufficiently address compensation-related conflicts of interest, noting
that it does not include cash and non-cash compensation within the
definition of a material conflict of interest. As discussed above,
``cash compensation'' that is excluded from the definition of a
material conflict of interest is broadly defined to include ``any
discount, concession, fee, service fee, commission, sales charge, loan,
override, or cash benefit received by a producer in connection with the
recommendation or sale of an annuity from an insurer, intermediary, or
directly from the consumer,'' and ``non-cash compensation'' is also
broadly defined to include ``any form of compensation that is not cash
compensation, including, but not limited to, health insurance, office
rent, office support and retirement benefits.'' \120\ One commenter
expressed the view that an annuity producer that recommends an annuity
because that particular annuity pays a larger commission or will help
the producer meet a sales goal or ensure the producer wins an expensive
trip will meet the best interest standard in the NAIC Model Regulation
so long as the annuity is ``suitable'' for the retirement saver.
---------------------------------------------------------------------------
\120\ NAIC Model Regulation at section 5.B. and J.
---------------------------------------------------------------------------
Another commenter noted that there are abuses in life insurance
recommendations as well, and that the NAIC has not addressed
investment-oriented life insurance policies even
[[Page 32134]]
though regulators receive many thousands of customer complaints about
the policies.
Several commenters responded to arguments that disclosures are
sufficient for financial professionals to avoid conflicts of interest.
The commenters stated that, while disclosures are important components
of financial regulation and provide transparency, they are ineffective
in protecting investors. The commenters noted that the disclosures are
often long and full of technical language. The commenters stated that
studies showed that disclosures cause investors to trust and
increasingly rely on financial professionals, enhancing the ability of
financial professionals to provide information not in the investors'
best interest.
Overall, these commenters suggested that the proposal would benefit
retirement investors by ensuring that investment advice they receive
from trusted advice providers is consistent with ERISA's fiduciary
protections under Title I and Title II.
2. Comments Opposing the Proposal
Some other commenters said the Department should retain the 1975
regulation as the applicable regulatory definition of an investment
advice fiduciary. They said the five parts of the 1975 regulation are
needed to describe a relationship of trust and confidence, consistent
with the Fifth Circuit's Chamber opinion. Some of the commenters
further said that the Department had not provided sufficient evidence
of existing problems that would be solved by the updated investment
advice fiduciary definition.
Commenters also said the proposed rule exceeded the Department's
jurisdiction, for a variety of reasons, including in covering advice to
roll over from a workplace retirement plan to an IRA as advice under
Title I of ERISA. Many commenters said that the proposal suffered the
same legal flaws as the 2016 Final Rule and would be legally vulnerable
under the Chamber opinion. One commenter said that the statutory
language in ERISA section 3(21)(A) and Code section 4975(e)(3) provides
that a person is a fiduciary only ``to the extent'' they ``provide
investment advice for a fee or other compensation, direct or
indirect,'' which indicated there were limits on the breadth of what is
considered ERISA fiduciary investment advice.
Some commenters also said that financial professionals paid by
commission cannot satisfy the ERISA fiduciary duties under Title I
which require, among other things, fiduciaries to discharge their
duties with respect to the plan ``solely in the interests of the
participants and beneficiaries.'' \121\ These commenters said they
understood this standard to require a complete disregard of any
financial interest, which they said is incompatible with the business
of broker-dealers and insurance agents. Some commenters also said the
Department did not have jurisdiction to create a ``best interest''
standard, which they said has no basis in ERISA. Commenters also said
the Department should not rely on ``best interest'' standards of other
regulators to demonstrate trust and confidence required for ERISA
fiduciary status. Some commenters said the SEC in Regulation Best
Interest and the NAIC in its Model Regulation intentionally created
standards that were not fiduciary standards, and the Department should
not override those decisions.
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\121\ See ERISA section 404, 29 U.S.C. 1104.
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Many of these commenters also said an updated definition of an
investment advice fiduciary is unnecessary in light of the conduct
standards in SEC Regulation Best Interest and the adoption by many
States of the NAIC Model Regulation. Commenters described these
regulatory actions as establishing robust, effective, and workable best
interest standards while preserving the ability of retirement investors
to work with the financial professional of their choosing and to retain
choice as to how they pay for financial services and products.
Some commenters said the proposal's preamble discussion of the NAIC
Model Regulation reflected misunderstanding by the Department. They
said the NAIC Model Regulation sets forth a clear best interest
standard despite not restating the ``best interest'' requirement in the
component obligations. They also said that the NAIC Model Regulation
did require mitigation of compensation-related conflicts of interest in
the area of sales contests, sales quotas, bonuses, and non-cash
compensation that are based on the sales of specific annuities within a
limited period of time, and the decision to exclude compensation from
the definition of material conflicts of interest demonstrated a
conscious choice that the best way to address conflicts is through
disclosure.\122\ Commenters also identified other types of State
insurance laws that provide protection to retirement savers, such as
regulations governing insurance advertising. An insurance commissioner
commenter said the Department's proposal would displace the
requirements of the NAIC Model Regulation as adopted by the States.
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\122\ See NAIC Model Regulation at section 6.C.(2)(h).
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In sum, these commenters generally urged the Department to withdraw
the proposal and focus its resources on other priorities.
3. Comments About Preserving Access to Investment Advice and Products
in the Retail Market
Many commenters addressed the impact of the proposal on access to
investment advice and products in the retail market. Some commenters
believed that the rule would lead to advice providers imposing account
minimums or raising their fees. Commenters also said that imposing
ERISA fiduciary protections on advice and recommendations to retirement
investors would lead to a decrease in commission-based arrangements and
related access to certain investment products. They said this would be
the case because status as an investment advice fiduciary would expose
financial services providers to additional compliance costs and
litigation risk. Commenters further said that the proposal was
insufficiently specific about when ERISA fiduciary status would apply,
and uncertainty would result in some providers taking a conservative
approach and discontinuing serving retirement investors. Commenters
said commission-based arrangements provide a valuable source for
investment advice and information, and that a reduction in such
arrangements would negatively impact retirement investors who may not
be best suited for a fee-based investment advice arrangement.
A number of commenters said the proposal would have a negative
impact on access to annuities, which are generally sold on commission.
These commenters described annuities as an important option for
retirement investors seeking a guaranteed lifetime income stream as
part of their retirement plan. Some of these commenters said the
Department's proposal failed to recognize the value of these products
and was inconsistent with congressional intent to promote lifetime
income options, as evidenced by recent pension legislation in the
SECURE Act \123\ and the SECURE 2.0 Act.\124\ Commenters specifically
mentioned such features as protection
[[Page 32135]]
against volatility, longevity and inflation risk through guarantees.
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\123\ The Setting Every Community Up for Retirement Enhancement
(SECURE) Act of 2019, Public Law 116-94, Dec.20, 2019, Division O.
\124\ SECURE 2.0 Act of 2022, Public Law 117-328, Dec. 29, 2022,
Division T.
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In this regard, some commenters said the Department's proposal
would impose ERISA fiduciary duties on financial professionals who are
traditionally considered salespeople. The commenters said that when the
financial professional is paid on commission it should be clear to the
retirement investor that the professional is engaging in sales
activity, as opposed to providing advice. Commenters said that under
the Fifth Circuit's Chamber opinion, salespersons are generally not
considered to have a relationship of trust and confidence with their
customers. One commenter said: ``the fact that a broker-dealer or
insurance agent acts in a manner that is trustworthy and provides
guidance and recommendations in the investor's best interest does not
alter the sales relationship and does not implicate or confer fiduciary
status.''
Another commenter discussed the proposal in the context of
alternative investments, where the commenter said commissions are
relatively large. The commenter said applying ERISA's reasonable
compensation standard and the PTEs' conduct standards in this context
would likely chill willingness to recommend investment products with
higher-than-average commissions, including alternative investments that
the commenter said provide diversification, income, and other important
portfolio elements. They said that although the SEC in Regulation Best
Interest does require a focus on costs associated with an investment,
it does not employ a distinct inquiry into the broker-dealer's
compensation analogous to ERISA's reasonable compensation standard.
Therefore, they did not believe that the Department's proposal was
consistent with the SEC's approach in Regulation Best Interest or
workable for broker-dealers.
Other commenters generally urged the Department to be skeptical of
industry predictions of loss of access to advice and services. They
believed providers would remain available to serve retirement investors
irrespective of account balance size. They also said they were not
aware of any decrease in access to advice and products following the
recent adoption of other conduct standards including Regulation Best
Interest. Rather, they said, the experience with Regulation Best
Interest shows that financial professionals paid on commission can
comply with an explicit best interest standard that requires conflict
mitigation. A commenter also pointed to the fact that financial
professionals paid on commission are among the CFP professionals who
have adopted the CFP Board fiduciary duty.
These commenters disagreed that retirement investors are well aware
when they are receiving a sales pitch. They said retirement investors
generally do not understand how financial professionals are paid or the
differences in the regulatory requirements applicable to broker-
dealers, investment advisers, and insurance agents.
A number of these commenters also said commission-based financial
professionals commonly hold themselves out as trusted advice providers.
Commenters said that marketing slogans and titles such as ``financial
advisor,'' ``financial consultant,'' and ``wealth manager'' are
commonly and deliberately used to establish a sense of trust and
confidence. One commenter cited several examples of marketing
strategies employed in the insurance industry. One such example
described a ``Trusted Advisor Success Training Workshop'' showing
insurance agents how they ``can have endless streams of new, repeat,
and referral business'' by ``mak[ing] the move from a salesperson to a
`Trusted Advisor!'''
One commenter described a study that found that 25 of the largest
insurance companies and broker-dealers substantively market themselves
as offering advice services and using advice titles, even as they
continued to rely on the regulatory standards that apply to
salespersons.\125\ Another commenter provided examples, such as the
following statement they said was on the annuities page of an insurance
company: ``by working with a trusted financial professional, you can
discuss your unique circumstances and how best to prepare for the
challenges that may lie ahead.'' These commenters did not agree that
commission-based financial professionals should categorically be
excluded as investment advice fiduciaries or that such a categorical
exclusion was compelled by the Fifth Circuit's Chamber decision.
---------------------------------------------------------------------------
\125\ The commenter cited the following press release relating
to the study: ``Review of 25 Major Brokerage Firms & Insurance
Companies Find All Posing as Fiduciaries, Misleading Consumers,''
Consumer Federation of America press release, Jan. 18, 2017, <a href="https://consumerfed.org/press_release/review-25-major-brokerage-firms-insurance-companies-find-posing-fiduciaries-misleading-consumers">https://consumerfed.org/press_release/review-25-major-brokerage-firms-insurance-companies-find-posing-fiduciaries-misleading-consumers</a>.
---------------------------------------------------------------------------
A number of comments from financial professionals paid on
commission also indicated they did not think of themselves as
salespeople. One financial services provider who testified at the
Department's public hearing on the proposal and said that most of his
customers pay by commission, stated he was not a salesperson and agreed
that he did have a relationship of trust and confidence with his
customers.\126\ He described himself as ``[a]n advisor and somebody who
helps and serves my clients, that's my highest ethic and creed. . . . I
believe those individuals who are called to serve others gravitate
towards professions like ours.'' \127\
---------------------------------------------------------------------------
\126\ Testimony of Bryon Holz, National Association of Insurance
and Financial Advisors, Transcript of the Public Hearing on the
Retirement Security Rule: Definition of an Investment Advice
Fiduciary, December 12, 2023, at 176, 180, available at <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/hearing-transcript-day-1.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/hearing-transcript-day-1.pdf</a>.
\127\ Id.
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The witness represented the National Association of Insurance and
Financial Advisors (NAIFA), a large association representing the
interests of insurance professionals, and said ``NAIFA members are Main
Street advisors who primarily serve and maintain longstanding
relationships with individuals, families and small businesses in their
communities.'' \128\ In describing the process for deciding whether to
recommend an annuity to someone and determine what the right annuity
is, the witness said: ``basically we have a long-term relationship
where I get to know the client, get to know their needs, their
objectives, their risk tolerance and try to figure out what the best
products and services are to meet those needs.'' \129\ Other comments
similarly indicated that some financial professionals paid on
commission nevertheless view themselves as trusted advisers.\130\
---------------------------------------------------------------------------
\128\ Id.
\129\ Id. at 174.
\130\ See e.g., petition 4, with 3059 submitters (``Having a
relationship with a trusted financial advisor helps people save more
for retirement. I provide my clients with comprehensive financial
advice and as an independent financial advisor, I can recommend
products that are in their best interest. Currently, clients can
choose how to pay for financial advice by working with financial
advisors whose business model aligns with their goals. . . .
[C]ommissions are an important way that advisors are able to serve
those who may not otherwise be able to afford to work with an
advisor because they have less investable assets or because a
specific investment strategy with commissions is the most
economically available option.''), <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/petition-004.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/petition-004.pdf</a>.
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Other commenters said that the Department's proposal would lead to
a reduction in sales recommendations in the institutional market and
also in the provision of educational information. These comments are
discussed in Section E of the preamble. Access to advice in the retail
market is further
[[Page 32136]]
discussed in section 7 of the Regulatory Impact Analysis.
4. The Department's Decision to Issue the Final Rule
After careful consideration of the comments discussed in this
section, the Department has determined to issue a final rule updating
the regulatory definition of an investment advice fiduciary, with
changes reflecting input from the commenters. This decision reflects
the continued view that applying ERISA fiduciary protections under
Title I and Title II to trusted advice to retirement investors about
their retirement accounts is necessary and appropriate to protect the
retirement investors from conflicts of interest.
The Department's Jurisdiction
To begin with, as some commenters noted, when Congress enacted
ERISA, it chose to impose a uniquely protective regime on the
management and oversight of plan assets. The law's aim was to protect
the interests of plan participants and beneficiaries by imposing
especially high standards on those who exercise functional authority
over plan investments, including rendering investment advice for a
fee.\131\ As many courts have noted, ERISA's obligations are the
``highest known to the law.'' \132\ Thus, the Department has not
deferred completely to the Federal securities laws and State insurance
laws, as some commenters advocated, because such deference would not be
consistent with congressional intent or ERISA's purposes.
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\131\ One commenter provided following statement by the Chair of
the Senate Committee on Labor and Public Welfare upon introduction
of the Conference Report on ERISA:
Despite the value of full reporting and disclosure, it has
become clear that such provisions are not in themselves sufficient
to safeguard employee benefit plan assets from such abuses as self-
dealing, imprudent investing, and misappropriation of plan funds.
Neither existing State nor Federal law has been effective in
preventing or correcting many of these abuses. Accordingly, the
legislation imposes strict fiduciary obligations on those who have
discretion or responsibility respecting the management, handling, or
disposition of pension or welfare plan assets. The objectives of
these provisions are to . . . establish uniform fiduciary standards
to prevent transactions which dissipate or endanger plan assets. . .
.
Statement by Hon. Harrison A. Williams, Jr., Chairman, Senate
Committee on Labor and Public Welfare, 120 Congressional Record S
15737 at 11 (Aug. 22, 1974) (introducing the Conference Report on
H.R. 2).
\132\ Donovan v. Bierwirth, 680 F.2d 263, 272 n. 8 (2d. Cir.
1982), cert denied, 459 U.S. 1069 (1982).
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Under Title I of ERISA, the Department has express authority to
issue regulations defining terms in Title I and to grant administrative
exemptions from the prohibited transactions provisions. Pursuant to the
President's Reorganization Plan No. 4 of 1978,\133\ which Congress
ratified in 1984,\134\ the Department's authority was expanded to
include authority to issue regulations, rulings, and opinions on the
definition of a fiduciary with respect to Title II plans under the Code
(including IRAs) and to grant administrative prohibited transaction
exemptions applicable to them.\135\ Thus, the Department has clear
authority to promulgate the regulatory definition of a fiduciary under
both Title I and Title II of ERISA, and the Department has taken care
in this final rule to honor the text and purposes of Title I and Title
II of ERISA.
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\133\ 5 U.S.C. App. 752 (2018).
\134\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
\135\ Sec. 102, 5 U.S.C. App. 752 (2018).
---------------------------------------------------------------------------
The final rule is consistent with the express text of the statutory
definition and will better protect the interests of retirement
investors as compared to the 1975 regulation. It comports with the
broad language and protective purposes of the statute, while at the
same time limiting the treatment of recommendations as ERISA fiduciary
advice to those objective circumstances in which a retirement investor
would reasonably believe that they can rely upon the advice as rendered
by a financial professional who is acting in the investor's best
interest and on their behalf.
In today's market, the 1975 regulation's five-part test is
underinclusive in assigning fiduciary status as it fails to capture
many circumstances in which an investor would reasonably expect that
they can place their trust and confidence in the advice provider. As
noted above, the Department has become concerned that the 1975
regulation's regular basis test has served to defeat objective
understandings of the nature of the professional relationship and the
reliability of the advice as based on the investor's best interest. The
proposal noted that even a discrete instance of advice can be of
critical importance to the plan. As another example, under the 1975
regulation's ``regular basis'' requirement, which is not found in the
text of the statute, a financial professional could provide
recommendations on a regular basis for many years to an investor
regarding the investor's non-retirement accounts and yet still not be
considered an investment advice fiduciary with respect to a
recommendation to roll over all their retirement savings from the
investor's workplace retirement plan to an IRA if that is the first
instance of advice with respect to that plan account.
Therefore, the Department does not believe that the 1975
regulation's five-part test is the only test that can properly define
an investment advice fiduciary under the statute, and the Department
does not believe its authority to revisit the regulatory definition of
an investment advice fiduciary and depart from the 1975 five-part test
is foreclosed by the Chamber opinion. The discrete components of the
five-part test are not found in the text of the statute, and commenters
did not identify--and the Department's research did not uncover--any
common law cases predating enactment of ERISA that limited the
application of fiduciary status and obligations to those persons that
meet all five of the requirements created and imposed by the 1975
regulation. To the contrary, the Department notes that multiple cases
discuss how ERISA's statutory definition of ``fiduciary'' is
broad,\136\ with one such case indicating that the definition of
``fiduciary'' under ERISA is broader than the more restrictive approach
the Department articulated through the 1975 five-part test.\137\
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\136\ See Eaves v. Penn, 587 F.2d 453, 458 (10th Cir. 1978);
Farm King Supply, Inc. Integrated Profit Sharing Plan & Tr. v.
Edward D. Jones & Co., 884 F.2d 288, 293 (7th Cir. 1989); see also
Thomas, Head & Greisen Emps. Tr. v. Buster, 24 F.3d 1114, 1117 (9th
Cir. 1994) (``[T]he definition of fiduciary under ERISA should be
liberally construed.'' (citing Consolidated Beef Indus. Inc. v. New
York Life Ins. Co., 949 F.2d 960, 964 (8th Cir. 1991), cert. denied,
503 U.S. 985 (1992))); H. Stennis Little, Jr., & Larry Thrailkill,
Fiduciaries Under ERISA: A Narrow Path to Tread, 30 Vanderbilt L.
Rev. 1, 4-5 (1977) (referring to the ``broadness of the [statutory]
definition'' of ``fiduciary'' under ERISA, such that the definition
could cover ``insurance salesmen who recommend the purchase of
certain types of insurance and receive a commission on the sale of
such insurance'' and ``stock brokers or dealers who recommend
certain securities and then participate in the acquisition or
disposition of securities and receive a commission for their
services'').
\137\ See Farm King, 884 F.2d at 293 (discussing ``evidence of
the wide sweep given to the meaning of `fiduciary' under ERISA'' in
relation to the narrower definition codified in the 1975 test).
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The Department also does not agree with a commenter that said that
the proposal would render the ``to the extent'' language in the statute
a nullity.\138\ Under ERISA's functional test of fiduciary status, as
the courts have repeatedly recognized, a person is a fiduciary to the
extent the person engages in specified activities, and only
[[Page 32137]]
to that extent.\139\ Under both the proposed rule and the final rule,
therefore, a person renders fiduciary advice only to the extent they
meet the regulatory definition with respect to the particular
communication at issue. A person may be a fiduciary for purposes of one
advice transaction and not another, and the person must meet the
specific requirements of the final rule to be treated as a fiduciary
with respect to any given transaction. To the extent a person does not
meet the final rule's requirements (e.g., by not making a
recommendation, receiving a fee, providing individualized advice, or
purporting to act in the investor's best interest), they are not a
fiduciary with respect to that recommendation. The final rule fully
adopts the statute's functional and transactional approach to the
determination of fiduciary status.
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\138\ ERISA section 3(21)(A)(ii) provides: ``a person is a
fiduciary with respect to a plan to the extent . . . (ii) [t]he
[person] renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of
such plan, or has any authority or responsibility to do so . . . .''
\139\ See, e.g., Mertens v. Hewitt Associates, 508 U.S. 248, 264
(1993); John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. Bank,
510 U.S. 86, 98 (1993).
---------------------------------------------------------------------------
The final rule also does not base fiduciary status on firms' or
financial professionals' status under other laws, as some commenters
have asserted. Instead, the final rule is focused on defining those
circumstances in which the retirement investor has a reasonable
expectation that the recommendation reflects a professional or expert
judgment offered on their behalf and in their interest. In the
circumstances specified, a retirement investor would be entitled to
treat their relationship with the person making the recommendation as
one of trust and confidence. To the extent that a financial
professional satisfies the conditions, in part, based on compliance
with other regulators' conduct standards, that would merely be a
consequence of independent decisions made by other regulators. The
final rule does not override those regulators' decisions as to how to
characterize their conduct standards, require them to take any
particular approach to oversight of investment recommendations, or pin
fiduciary status on anything other than a reasonable understanding of
the nature of the relationship between the persons giving and receiving
the advice. The Department's regulation is based on its unique
authority to define a fiduciary for purposes of Title I and Title II of
ERISA, establish a uniform definition for all persons giving investment
advice to retirement investors under Title I and Title II of ERISA, and
fulfill the statute's investor-protective purposes in accordance with
the text of the statute.
Moreover, commission-based financial professionals are fully able
to satisfy ERISA's fiduciary standard of loyalty in Title I. The
Department has long interpreted the duty of loyalty, as set forth in
section 404(a)(1)(A) of ERISA (a fiduciary must discharge their duties
with respect to the plan ``solely in the interests of the participants
and beneficiaries'') as establishing a standard that prohibits a
fiduciary from ``subordinating the interests of participants and
beneficiaries in their retirement income to unrelated objectives.''
\140\ This standard properly applies section 404(a)(1)(A)'s duty of
loyalty in the context of advice arrangements. ERISA further permits
fiduciaries to receive reasonable compensation--including commission-
based compensation--for their services.\141\
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\140\ See, e.g., Advisory Opinion 2008-05A (June 27, 2008);
Letter to Harold G. Korbee (Apr. 22, 1981).
\141\ ERISA section 408(c)(2), 29 U.S.C. 1108(2); Code section
4975(d)(10).
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Indeed, the statute recognizes the impossibility of avoiding all
fiduciary conflicts of interest by giving the Department authority to
grant exemptions from the prohibited transaction rules. The mere
existence of a conflict is insufficient to defeat fiduciary status or
to establish a violation of the prohibited transaction rules. Instead,
the conflict of interest must be managed in accordance with a statutory
exemption or administrative exemption granted by the Department. This
does not prevent commission-based compensation arrangements, as some
commenters have asserted, so long as the advice provider does not
subordinate the interests of the retirement investor to their own
financial interests and does not charge more than ``reasonable
compensation,'' as expressly authorized by the statute.\142\ Indeed, in
many instances, such as those involving advice on ``buy and hold''
strategies, a commission-based model may be more appropriate for the
investor, and a prudent fiduciary may recommend the use of a
commission-based structure, rather than advise the investor to enter
into an arrangement that requires the payment of ongoing fees without a
commensurate need for ongoing advice. Nothing in the text of the
statute, the text of the 1975 regulation, or previous guidance draws a
distinction between commission-based compensation and other forms of
compensation in determining whether a person is a fiduciary when making
recommendations for direct or indirect compensation.
---------------------------------------------------------------------------
\142\ ERISA section 408(b)(2); 29 U.S.C. 1108(b)(2); Code
section 4975(d)(2).
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One commenter expressed concern that the rule could reduce access
to advice on alternative investments because of the relatively large
commissions paid in connection with alternative investments. The
commenter said the reasonable compensation requirement did not have an
analog in Regulation Best Interest and also would be unworkable for
broker-dealers. However, the obligation to pay no more than reasonable
compensation to service providers has been long recognized under Title
I and Title II of ERISA. The statutory exemptions in ERISA section
408(b)(2) and Code section 4975(d)(2) expressly require services
arrangements involving plans and IRAs to result in no more than
reasonable compensation to the service provider. Financial institutions
and investment professionals--when acting as service providers to plans
or IRAs--have long been subject to this requirement, regardless of
their fiduciary status. The reasonable compensation standard requires
that compensation not be excessive, as measured by the market value of
the particular services, rights, and benefits the financial institution
and investment professional are delivering to the retirement investor.
To the extent an investment advice fiduciary's receipt of
compensation would constitute a self-dealing type prohibited
transaction under ERISA section 406(b) and Code section 4975(c)(1)(E)
or (F), conditional relief for investment advice fiduciaries to receive
compensation that varies based on their investment advice is provided
pursuant to amended PTE 2020-02 and amended PTE 84-24. One such
condition in these PTEs is adherence to a loyalty obligation that the
Department has stated is consistent with the ``sole interest'' standard
in ERISA section 404.\143\ The use of the standard in the PTEs is an
appropriate exercise of the Department's exemptive authority under
ERISA section 408(a) and the Reorganization Plan No. 4 of 1978 to
provide an exemption that is protective of the interests of retirement
investors, not an improper conflation of the two standards, as
suggested by some commenters. Based on this discussion, the Department
disagrees with the commenter who said the proposal would be unworkable
for broker-dealers.\144\
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\143\ Improving Investment Advice for Workers & Retirees, 85 FR
82798, 82823 (Dec. 18, 2020).
\144\ The Department also notes that there are compensation
requirements applicable to broker-dealers, see e.g., FINRA rule 2121
(fair prices and commissions).
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[[Page 32138]]
Some commenters also sought to draw a bright line distinction
between recommendations made in a sales capacity and those made in a
fiduciary capacity, asserting that commission-based recommendations are
properly viewed as mere sales pitches that should not lead to ERISA
fiduciary status. This approach, however, is neither supported by the
text of the statute nor the Department's consistent views starting in
1975 that advice can be compensated through commissions.\145\ The text
of the statute does not draw a distinction between commissions and
other fee-based forms of compensation, but rather broadly refers to
``advice for a fee or other compensation, direct or indirect,'' which
the Department has consistently recognized includes commission-based
advice. Accordingly, the final rule properly focuses on the nature of
the relationship between the parties, rather than the specific mode of
compensation. Whether a firm or financial professional has held
themselves out as providing the sort of recommendation that may rightly
be relied upon as a fiduciary recommendation is a function of the test
set forth in the final rule, which requires compensation, but does not
draw a bright line between commissions and fee-based compensation. In
those circumstances where the final rule's definition is satisfied, the
firm or investment professional is doing much more than merely
executing a sale. They are offering a professional recommendation that
is purportedly based on the investor's best interest, and that
recommendation is central to the relationship and a key component of
the services offered to the investor.
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\145\ See e.g., U.S. Department of Labor Adv. Op. 83-60A (Nov.
21, 1983) (Rejecting the interpretation that fiduciary status under
ERISA section 3(21)(A)(ii) would not attach to broker-dealers unless
a broker-dealer provides investment advice for distinct, non-
transactional compensation), The Department stated that ``if . . .
the services provided by the broker-dealer include the provision of
`investment advice', as defined in regulation 2510 .3-21(c), it may
be reasonably expected that, even in the absence of a distinct and
identifiable fee for such advice, a portion of the commissions paid
to the broker-dealer would represent compensation for the provision
of such investment advice.'' Id. The statutory language broadly
encompasses any ``fee or other compensation,'' and even under the
five-part test promulgated in 1975, the Department rejected the
position that payment of compensation through commissions
categorically excluded a broker-dealer from being an investment-
advice fiduciary. See 40 FR 508842 (Oct. 31, 1975).
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In this connection, however, it is important to note that neither
the proposed rule nor the final rule assigns fiduciary status to a
party who merely engages in a sales transaction with a retirement
investor. Under the express terms of paragraph (d) of the final rule,
merely executing a sale does not give rise to fiduciary status.
Moreover, even if one makes a recommendation in connection with a
commission-based transaction, that recommendation will not amount to
fiduciary advice unless the recommendation meets the specific
conditions set forth in the final rule, all of which are aimed at
ensuring that the advice goes beyond a mere ``sales pitch,'' and
instead reflects the sort of relationship of trust and confidence that
should be afforded fiduciary status and protection. To that end, and in
response to comments, the Department narrowed the contexts that give
rise to fiduciary status, and included a new paragraph confirming that
mere sales recommendations devoid of the two covered contexts will not
result in ERISA fiduciary status and that investment information or
education, without an investment recommendation, will also not result
in ERISA fiduciary status.
Finally, some commenters said that the Chamber opinion indicated
that the Department's authority to regulate conduct in the financial
services industry has been limited by the Dodd-Frank Act. The
commenters said that under Dodd-Frank, Congress had authorized the SEC,
and not the Department, ``to promulgate enhanced, uniform standards of
conduct for broker-dealers and investment advisers who render
`personalized investment advice about securities to a retail customer.'
''
The Department's well-settled authority under ERISA to regulate
investment advice rendered by fiduciaries to retirement investors in
the context of certain annuity sales was not impaired by the Dodd-Frank
legislation. Rather, section 913 of the Dodd-Frank Act directed the SEC
to study the effectiveness of the rules applicable to investment advice
respecting securities by entities subject to SEC regulation ``and other
Federal and State legal or regulatory standards.'' The reference to
other standards demonstrates Congress' clear awareness that there are
overlapping Federal regulatory schemes. Moreover, this rulemaking is
closely aligned with the SEC's standards under both the Advisers Act
and under Regulation Best Interest, which was adopted subsequent to the
Chamber opinion and is rooted in fiduciary principles.\146\
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\146\ See Regulation Best Interest release, 84 FR 33318, 33330
(July 12, 2019) (noting that Regulation Best Interest ``draws from
key fiduciary principles underlying fiduciary obligations'' and that
the ``key elements of the standard of conduct that applies to
broker-dealers under Regulation Best Interest will be substantially
similar to key elements of the standard of conduct that applies to
investment advisers pursuant to their fiduciary duty under the
Advisers Act.''); see also, SEC Staff Bulletin: Standards of Conduct
for Broker-Dealers and Investment Advisers Care Obligation (``Both
[Regulation Best Interest] for broker-dealers and the [Advisers Act]
fiduciary standard for investment advisers are drawn from key
fiduciary principles that include an obligation to act in the retail
investor's best interest and not to place their own interests ahead
of the investor's interest.''), <a href="https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers">https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers</a>.
---------------------------------------------------------------------------
In addition, some commenters posited that section 989J of Dodd-
Frank limited regulation of fixed indexed annuities to States (provided
certain criteria are met). In making this assertion, commenters cited
language in the Chamber decision to the effect that ``[s]ection 989J .
. . provides that `fixed indexed annuities sold in states that adopted
the [NAIC's] enhanced model suitability regulations, or companies
following such regulations, shall be treated as exempt securities not
subject to federal regulation.' '' \147\ The quoted language, however,
was taken from an appellate brief, not section 989J. The statutory
language simply states that ``[t]he Commission [SEC] shall treat as
exempt'' such annuities from regulation as securities. By its express
terms, section 989J restricts regulation only by the SEC under the
securities laws.\148\ It does not address or limit the Department of
Labor's separate authority under ERISA or its separate obligations with
respect to retirement plans and IRAs. In accordance with its authority
under ERISA, the Department has determined that it is appropriate to
include investment advice regarding plan and IRA investments in fixed
indexed annuities within this scope of this rule.
---------------------------------------------------------------------------
\147\ 885 F.3d at 385 (citation omitted). The decision
incorrectly attributes the internally quoted language to the text of
Dodd-Frank. Id. This language is actually from an appellate brief by
the Indexed Annuity Leadership Council (IALC), one of the plaintiffs
that challenged the 2016 Rulemaking. Brief of Plaintiff-Appellant,
Chamber of Com. of United States of Am. v. U.S. Dep't of Lab., 885
F.3d 360 (5th Cir. 2018) (No. 17-10238), 2018 WL 3301737, at *8. The
statutory text itself provides no basis for the broad conclusion
that fixed indexed annuities sold in a State that follows the NAIC's
model suitability (or successor) regulations, among other criteria,
are exempt from Federal regulation.
\148\ 15 U.S.C. 77c Note (emphasis added).
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Need for an Updated Definition of an Investment Advice Fiduciary
The 1975 regulation makes it all too easy for financial
professionals and firms to hold themselves out as trusted advisers
acting in the individual investor's best interest and based on their
individual circumstances when, in fact, they have no obligation to act
in
[[Page 32139]]
the investor's best interest or otherwise adhere to the fiduciary
standards under Title I and Title II of ERISA. While the actions of
other regulators, particularly the SEC's adoption of Regulation Best
Interest, have partly addressed this concern, significant gaps remain,
and the current patchwork regulatory structure is neither uniform nor
sufficiently protective of retirement investors. As discussed in
greater detail in the Regulatory Impact Analysis, the Department has
determined that the final rule will provide additional benefits and
needed protections for retirement investors, even in light of other
regulators' recently enhanced conduct standards.\149\
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\149\ One commenter urged the Department to follow the Statement
on Standards in Personal Financial Planning Services implemented by
the American Institute of CPAs (AICPA). The commenter described the
standards as requiring CPAs to assess whether there are any
conflicts of interest related to client engagements. If a conflict
of interest exists, the CPA should determine if they can perform the
engagement objectively. If they can, they must disclose all known
conflicts of interest and obtain written consent. If they cannot,
the engagement must be terminated. The Department believes in the
context of ERISA fiduciary investment advice to retirement
investors, ERISA's prohibited transaction rules provide the
appropriate approach by requiring financial professionals to avoid
conflicts of interest or comply with a prohibited transaction
exemption.
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For example, commenters did not dispute the fact that certain
recommendations by broker-dealers to retirement investors are not
covered by SEC Regulation Best Interest, including recommendations to
plan fiduciaries such as the fiduciaries of small employer plans who
need assistance in constructing the lineup on a 401(k) plan menu.\150\
Several commenters expressed strong support for applying ERISA
fiduciary protections in this context, with Morningstar quantifying
potential benefits of the proposal's coverage of recommendations to
plan fiduciaries on the investment options in defined contribution
plans as saving participants over $55 billion in the next 10 years in
costs associated with investing through their plans. Other investments
that may not be subject to the Federal securities law include: real
estate, fixed indexed annuities, certain certificates of deposit and
other bank products, commodities, and precious metals. Furthermore,
there are a number of persons who provide investment advice services
that are neither subject to the SEC's Regulation Best Interest nor to
the fiduciary obligations in the Advisers Act. Additionally, some
commenters indicated that are disparities in the degree to which firms
have implemented Regulation Best Interest. The Department expects the
addition of ERISA remedies and the Department's enforcement resources
to enhance protection of retirement investors in Title I plans, and to
better ensure that advice providers compete on a level playing field
where recommendations are made pursuant to a common best interest
standard.
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\150\ One commenter noted that other securities law protections,
such as those under FINRA rules, would be applicable to broker-
dealers making recommendations to plan sponsors. However, the
commenter suggested that the protections lack a duty of loyalty of
comparable rigor to that in PTE 2020-02.
---------------------------------------------------------------------------
Applying ERISA fiduciary protections to the recommendations covered
by the rule will also result in increased protections in the insurance
market, even in those States that have adopted the 2020 revisions to
the NAIC Model Regulation. For example, commenters discussed
significant conflicts of interest associated with large commissions on
annuity sales, as well as abusive sales practices. Conflicted,
imprudent, and disloyal advice with respect to such annuity sales can
result in large investor losses. The dangers are compounded by the
complexity of the products, which makes sound advice critical.
For example, recommendations of fixed indexed annuities are
generally not covered by Regulation Best Interest, but typically are
complex products that depend upon careful and expert assessment of
myriad contract and investment features. Between 2005 and 2022, the
number of indexes available in the market grew from a dozen to at least
150. Many of these indexes are hybrids, including a mix of one or more
indexes, as well as a cash or bond component. More than 60 percent of
premium allocations for new fixed indexed annuity sales in mid-2022
involved hybrid designs. In addition, the determination of the right
annuity requires careful consideration of the method by which the index
is credited to the contract's value, charges associated with the
contract, potential surrender charges, and any limiting factors on the
crediting (such as cap rates, participation rates, or spread). Given
the complexity of the products, it is very easy for investors to
purchase products that have very different risks and benefits than they
thought they were purchasing, and that have considerably more downside
than they expected. For all these reasons, fixed indexed annuities have
been the subject of various regulatory alerts, warning investors of the
dangers associated with the products.\151\ Sound advice is critical. In
its comment, Morningstar estimates that the Department's proposal would
increase retirement investors' savings with respect to fixed indexed
annuities by approximately $32.5 billion over the next ten years.
---------------------------------------------------------------------------
\151\ See, e.g., SEC Office of Investor Education and Advocacy
Updated Investor Bulletin: Indexed Annuities (July 31, 2020),
<a href="https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_indexedannuities">https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_indexedannuities</a>; Iowa Insurance Division, Bulletin 14-02
(September 15, 2014), <a href="https://iid.iowa.gov/media/153/download?inline=">https://iid.iowa.gov/media/153/download?inline=</a>.
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The Department agrees with those commenters who concluded that the
NAIC Model Regulation is not as protective as Regulation Best Interest
and does not protect retirement investors to the same degree as the
fiduciary protections in Title I and Title II of ERISA.\152\ Although
the NAIC Model Regulation provides that insurers must ``establish and
maintain reasonable procedures to identify and eliminate any sales
contests, sales quotas, bonuses, and non-cash compensation that are
based on the sales of specific annuities within a limited period of
time,'' \153\ the Department believes that broader conflict mitigation
is needed to protect the interests of retirement investors. An
important premise of Title I and Title II of ERISA is that fiduciaries'
conflicts of interest should not be left unchecked, but rather should
be carefully regulated through rules requiring adherence to basic
fiduciary norms and avoidance of prohibited transactions.
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\152\ The exclusion of commission payments and other
compensation as well as non-cash compensation from the definition of
a material conflict of interest is in direct contrast to the SEC's
approach in Regulation Best Interest. See Regulation Best Interest
release, 84 FR 33318, 33319 (July 12, 2019)(``Like many principal-
agent relationships--including the investment adviser-client
relationship--the relationship between a broker-dealer and a
customer has inherent conflicts of interest, including those
resulting from a transaction-based (e.g., commission) compensation
structure and other broker-dealer compensation.'') see also Staff
Bulletin: Standards of Conduct for Broker-Dealers and Investment
Advisers Conflicts of Interest which specifically identifies
commissions as an example of a common source of a conflict of
interest, available at <a href="https://www.sec.gov/tm/iabd-staff-bulletin">https://www.sec.gov/tm/iabd-staff-bulletin</a>-
conflicts-interest.
\153\ NAIC Model Regulation at section 6.C.(2)(h).
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In particular, the Department is concerned about the NAIC Model
Regulation's definition of ``material conflicts of interest'' which
must be identified and avoided or reasonably managed and disclosed and
which excludes all ``cash compensation'' and ``non-cash compensation.''
As a result, the NAIC Model Regulation excludes ``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
[[Page 32140]]
directly from the consumer,'' as well as ``any form of compensation
that is not cash compensation'' despite their obvious potential to
drive recommendations that favor the financial professional's own
financial interests at the expense of the investor's interests. \154\
---------------------------------------------------------------------------
\154\ NAIC Model Regulation at section 5.B. and J.
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Although some commenters said that the NAIC's approach reflected
the view that the best way to address compensation conflicts is through
disclosure, the Department discusses in the Regulatory Impact Analysis
its view that disclosure without conflict mitigation is limited in its
effectiveness at protecting investors from the dangers posed by
conflicts of interest. The NAIC's approach also stands in marked
contrast to ERISA's treatment of such competing financial incentives as
material conflicts, which give rise to prohibited transactions that
require protective conditional exemptions. It also conflicts with the
SEC's approach with respect to broker-dealers and investment advisers,
in which the SEC staff provided a detailed list of types of
compensation that they believe are examples of common sources of
conflicts of interest, as follows:
compensation, revenue or other benefits (financial or otherwise) to
the firm or its affiliates, including fees and other charges for the
services provided to retail investors (for example, compensation
based on assets gathered and/or products sold, including but not
limited to receipt of assets under management (``AUM'') or
engagement fees, commissions, markups, payment for order flow, cash
sweep programs, or other sales charges) or payments from third
parties whether or not related to sales or distribution (for
example, sub-accounting or administrative services fees paid by a
fund or revenue sharing);
compensation, revenue or other benefits (financial or otherwise) to
financial professionals from their firm or its affiliates (for
example, compensation or other rewards associated with quotas,
bonuses, sales contests, special awards; differential or variable
compensation based on the product sold, accounts recommended, AUM,
or services provided; incentives tied to appraisals or performance
reviews; forgivable loans based upon the achievement of specified
performance goals related to asset accumulation, revenue benchmarks,
client transfer, or client retention);
compensation, revenue or other benefits (financial or otherwise)
(including, but not limited to, gifts, entertainment, meals, travel,
and related benefits, including in connection with the financial
professional's attendance at third-party sponsored trainings and
conferences) to the financial professionals resulting from other
business or personal relationships the financial professional may
have, relationships with third parties that may relate to the
financial professional's association or affiliation with the firm or
with another firm (whether affiliated or unaffiliated), or other
relationships within the firm; and
compensation, revenue or other benefits (financial or otherwise) to
the firm or its affiliates resulting from the firm's or its
financial professionals' sales or offer of proprietary products or
services, or products or services of affiliates.\155\
---------------------------------------------------------------------------
\155\ SEC Staff Bulletin: Standards of Conduct for Broker-
Dealers and Investment Advisers Conflicts of Interest, <a href="https://www.sec.gov/tm/iabd-staff-bulletin">https://www.sec.gov/tm/iabd-staff-bulletin</a>-conflicts-interest.
The Department also notes that the State of New York took a
different approach than the NAIC Model Regulation in its NY Insurance
Regulation 187. Under the New York regulation, ``[o]nly the interests
of the consumer shall be considered in making the recommendation. The
producer's receipt of compensation or other incentives permitted by the
Insurance Law and the Insurance Regulations is permitted by this
requirement provided that the amount of the compensation or the receipt
of an incentive does not influence the recommendation.'' (Emphasis
added.)
The NAIC Model Regulation also specifically disclaims creating
fiduciary obligations and differs in significant respects from the
protective standards applicable to broker-dealers and investment
advisers under Regulation Best Interest and the Advisers Act,
respectively, and this final rule. For example, in addition to
disregarding compensation as a source of material conflicts of
interest, the specific care, disclosure, conflict of interest, and
documentation requirements do not expressly incorporate the ``best
interest'' obligation not to put the producer's or insurer's interests
before the customer's interests, even though compliance with these
component obligations is treated as meeting the best interest standard.
Instead, the core conduct standard of care includes a requirement to
``have a reasonable basis to believe the recommended option effectively
addresses the consumer's financial situation, insurance needs, and
financial objectives.'' Additionally, the obligation to comply with the
``best interest'' standard is limited to the individual producer, as
opposed to the insurer responsible for supervising the producer. In
contrast, the standards in the amended PTEs mirror ERISA section 404's
standards of prudence and loyalty, and provide that the advice must:
<bullet> 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, and
<bullet> 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 their
own.
The amended PTE standards are aligned with the SEC's conduct
standards applicable to broker-dealers and investment advisers.\156\
Further, as noted above, the NY Insurance Regulation 187 includes a
similar standard of care, providing that ``an insurance producer acts
in the best interest of the consumer when, among other things, the
producer's . . . recommendation to the consumer is based on an
evaluation of the relevant suitability information of the consumer and
reflects the care, skill, prudence, and diligence that a prudent person
acting in a like capacity and familiar with such matters would use
under the circumstances then prevailing.''
---------------------------------------------------------------------------
\156\ See generally, Regulation Best Interest release, 84 FR
33318 (July 12, 2019); SEC Investment Adviser Interpretation, 84 FR
33669 (July 12, 2019).
---------------------------------------------------------------------------
In response to commenters who expressed concern that the
Department's rule would improperly displace State regulation in the
annuities market, it bears repeating that in enacting ERISA, Congress
imposed a uniquely protective regime on tax-preferred retirement
investments. The Department's final rule, which covers compensated
retirement recommendations under conditions where it is reasonable to
place trust and confidence in the advice, falls well within ERISA's
broad fiduciary definition, even if it is more protective of federally-
protected retirement investments than State insurance regulations. It
is also important to note the interaction between the NAIC Model
Regulation and the fiduciary protections under Title I and Title II of
ERISA is explicitly recognized in the NAIC Model Regulation's safe
harbor for the recommendations and sales of annuities in compliance
with comparable standards, including those applicable to fiduciaries
under Title I and Title II of ERISA.\157\
---------------------------------------------------------------------------
\157\ NAIC Model Regulation at section 6.E.
---------------------------------------------------------------------------
Although some commenters maintained the Department misunderstands
the NAIC Model Regulation, the Department's analysis is based on the
terms of the Model
[[Page 32141]]
Regulation and is consistent with that of other commenters, including
the CFP Board in their publication discussed above. There can be no
misunderstanding with respect to the fact that the NAIC Model
Regulation clearly and unambiguously excludes cash and non-cash
compensation from the definition of a material conflict of
interest.\158\ Because of this exclusion, the NAIC Model Regulation
does not provide that producers must identify and avoid or reasonably
manage material conflicts of interest arising from cash and non-cash
compensation. This leaves disclosure as the sole method of addressing
such conflicts other than the prohibition of sales contests, sales
quotas, bonuses, and non-cash compensation that are based on the sales
of specific annuities within a limited period of time, which are
prohibited. The Department's PTEs' more stringent requirements will
require insurance market participants not only to disclose but also to
more broadly mitigate conflicts of interest associated with commissions
and other cash and non-cash compensation to insurance producers
providing recommendations to retirement investors, resulting in
enhanced protections to consumers.\159\
---------------------------------------------------------------------------
\158\ NAIC Model Regulation at section 5.I.(2).
\159\ One commenter provided a summary of the differences
between the NAIC Model Regulation and ERISA's fiduciary
responsibilities. These differences highlight the additional
protection under ERISA in the insurance marketplace. See Federation
of Americans for Consumer Choice 6 (``The differences between NAIC
model regulation best interest and ERISA fiduciary duties include:
(i) ERISA has a duty of loyalty to act solely in the interest of the
client different from the NAIC model regulation requirement for
agents not to put their interests ahead of client interests, (ii)
ERISA contains a prudence requirement not considered applicable to
insurance producers, (iii) the NAIC model regulation establishes
four specified obligations deemed to satisfy the best interest
standard consisting of care, disclosure, conflict of interest, and
documentation, all of which comport with the sales function of an
agent, (iv) the NAIC model regulation requires neither ongoing
monitoring nor diversification of assets which may need to be
considered by ERISA fiduciaries, (v) the NAIC model regulation does
not define conflicts of interest as broadly as ERISA instead relying
on disclosure befitting insurance sales practices, (vi) the NAIC
model regulation contains no reasonable compensation restrictions
but limits certain forms of incentive compensation, and (vii) the
NAIC model regulation does not expose agents to common law fiduciary
liabilities, DOL oversight, or potential private right of action
under ERISA.''), <a href="https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/00345.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AC02/00345.pdf</a>.
---------------------------------------------------------------------------
The Chamber Opinion
Many commenters said the proposed regulation was essentially a re-
proposal of the 2016 Rulemaking and had the same legal vulnerabilities.
They generally said that, in Chamber, the court had approved the 1975
regulation's five-part test as defining a relationship of trust and
confidence and they objected to any revision of the five-part test as
inconsistent with both the statutory definition and the Fifth Circuit's
opinion. The Department disagrees and notes the various differences
between the 2016 Rulemaking and this final rule. In writing the
proposal and this final rule, the Department has been careful to craft
a definition that is consistent with both the statutory text and with
the Fifth Circuit's focus on relationships of trust and confidence. The
Department's authority to revisit the regulatory definition of an
investment advice fiduciary and depart from the 1975 five-part test is
not foreclosed by the Chamber opinion. In this regard, commenters did
not identify for the Department, and the Department's research did not
uncover, any common-law cases predating enactment of ERISA that limited
the application of fiduciary status and obligations to those persons
that meet all five of the requirements created and imposed by the 1975
regulation. Other courts that considered the Department's 2016 Final
Rule noted that it was the 1975 five-part test that was difficult to
reconcile with the statute, or that the elements of this test, such as
the ``regular basis'' prong, do not appear in the text of ERISA.\160\
To that end, the Department notes that other cases discuss how ERISA's
statutory definition of ``fiduciary'' is broad,\161\ with one such case
indicating that the definition of ``fiduciary'' under ERISA is broader
than the more restrictive approach the Department articulated through
the 1975 five-part test.\162\
---------------------------------------------------------------------------
\160\ National Association for Fixed Annuities v. Perez, 217 F.
Supp. 3d. 1, 23, 27 (D.D.C. 2016); FACC v. U.S. Dep't of Lab., No.
3:22-CV-00243-K-BT, 2023 WL 5682411, at *18 (N.D. Tex. June 30,
2023); see Chamber, 885 F.3d at 393 (Stewart, C.J., dissenting); see
generally also Market Synergy v. U.S. Dep't of Lab., 885 F.3d 676
(10th Cir. 2018) (affirming a district court's decision in which
several challenges to the 2016 Rulemaking, as it applied to fixed
indexed annuities, were rejected).
\161\ See Eaves v. Penn, 587 F.2d 453, 458 (10th Cir. 1978);
Farm King Supply, Inc. Integrated Profit Sharing Plan & Tr. v.
Edward D. Jones & Co., 884 F.2d 288, 293 (7th Cir. 1989); see also
Thomas, Head & Greisen Emps. Tr. v. Buster, 24 F.3d 1114, 1117 (9th
Cir. 1994) (``[T]he definition of fiduciary under ERISA should be
liberally construed.'' (citing Consolidated Beef Indus. Inc. v. New
York Life Ins. Co., 949 F.2d 960, 964 (8th Cir. 1991), cert. denied,
503 U.S. 985 (1992))); H. Stennis Little, Jr., & Larry Thrailkill,
Fiduciaries Under ERISA: A Narrow Path to Tread, 30 Vanderbilt L.
Rev. 1, 4-5 (1977) (referring to the ``broadness of the [statutory]
definition'' of ``fiduciary'' under ERISA, such that the definition
could cover ``insurance salesmen who recommend the purchase of
certain types of insurance and receive a commission on the sale of
such insurance'' and ``stock brokers or dealers who recommend
certain securities and then participate in the acquisition or
disposition of securities and receive a commission for their
services'').
\162\ See Farm King, 884 F.2d at 293 (discussing ``evidence of
the wide sweep given to the meaning of `fiduciary' under ERISA'' in
relation to the narrower definition codified in the 1975 test).
---------------------------------------------------------------------------
The final rule is far narrower than the previous rulemaking, which
treated all investment recommendations directed to a specific
retirement investor or investors regarding the advisability of a
particular investment or management decision as fiduciary in nature,
subject to a few carve-outs. By contrast, this rule specifically
focuses on whether the investment recommendation can be appropriately
treated as trust and confidence advice. Accordingly, and in response to
certain comments (which are discussed in greater detail below), the
final rule covers recommendations made in the following contexts:
<bullet> The person either directly or indirectly (e.g., through or
together with any affiliate) makes professional investment
recommendations to investors on a regular basis as part of their
business and the recommendation is made under circumstances that would
indicate to a reasonable investor in like circumstances that the
recommendation:
[cir] is based on review of the retirement investor's particular
needs or individual circumstances,
[cir] reflects the application of professional or expert judgment
to the retirement investor's particular needs or individual
circumstances, and
[cir] may be relied upon by the retirement investor as intended to
advance the retirement investor's best interest; or
<bullet> The person represents or acknowledges that they are acting
as a fiduciary under Title I of ERISA, Title II of ERISA, or both with
respect to the recommendation.
In these circumstances, the failure to treat the recommendation as
fiduciary advice would dishonor the investor's reasonable expectations
of professional advice that is offered to advance their best interest
and can be relied upon as rendered by a financial professional who
occupied a position of trust and confidence. When firms and financial
professionals meet the requirements of this definition, it would defeat
ERISA's plan-protective purposes and the investor's legitimate
expectations of trust and confidence to hold that the advice was not
fiduciary. Accordingly, this final rule is wholly consistent with the
Fifth Circuit's Chamber opinion and the broad language of the statute.
To the extent that the 1975 five-part test excluded such
recommendations, it would be underinclusive from the
[[Page 32142]]
standpoint of trust and confidence, as discussed above. For example,
under the 1975 rule, a recommendation to a plan participant to roll
over a lifetime of savings and invest them in a fixed indexed annuity
would not count as fiduciary advice if the person making the investment
recommendation had not regularly made recommendations to the investor
about plan assets. This would be true, even if the advice followed a
series of meetings about the particular financial circumstances and
needs of the investor; purported expert recommendations about how to
meet those needs and circumstances based upon consideration of the
investor's most intimate financial details; and a clear understanding
that the advice was being held out as based upon the best interest of
the investor. Moreover, the five-part test would defeat fiduciary
status even if the investor had relied upon the financial professional
for advice about all aspects of their financial life for a period of
many years encompassing many transactions, as long as that advice did
not relate to plan assets. It is hard to square such a result with a
trust and confidence test, and impossible to square the result with the
text of the statute, which contains no such limitation. The final rule
avoids such inequitable results, while limiting advice to those
circumstances in which the investor reasonably should expect fiduciary
advice.\163\ In this way, the Department believes that treating one-
time advice as fiduciary investment advice subject to ERISA is
consistent with a relationship of trust and confidence, provided that
all of the requirements of the regulatory test are satisfied.\164\
---------------------------------------------------------------------------
\163\ As also noted by the magistrate judge in Federation of
Americans for Consumer Choice v. United States Dept. of Labor, the
Fifth Circuit's opinion ``did not foreclose that Title I duties may
reach those fiduciaries who, as aligned with Title I's text, render
advice, even for the first time, `for a fee or other compensation.'
'' Findings, Conclusions, and Recommendations of the United States
Magistrate Judge, FACC, No. 3:22-CV-00243-K-BT, 2023 WL 5682411, at
*22 (N.D. Tex. June 30, 2023) (quoting ERISA section 3(21)(A)(ii),
29 U.S.C. 1002(21)(A)(ii)) (emphasis in original).
\164\ One commenter cited the Chamber opinion for the
proposition that a relationship of trust and confidence that
involves ``control and authority'' is necessary for investment
advice fiduciary status. The Department does not read the Chamber
opinion to state that ``control and authority'' is required, but
rather that the use of the terms ``control'' and ``authority'' in
the other parts of the statutory fiduciary definition (i.e., ERISA
section 3(21)(A)(i) and (iii) and Code section 4975(e)(3)(A) and
(C)) indicate that the investment advice part of the definition also
involves a ``special relationship.'' See 885 F.3d at 376-77. As
discussed herein, the final rule appropriately defines an investment
advice fiduciary to comport with reasonable investor expectations of
trust and confidence which is the special relationship described in
the Chamber opinion.
---------------------------------------------------------------------------
In the final rule, and in response to public comments, the
Department has also made changes designed to ensure that it did not
capture communications that were not properly viewed as fiduciary
advice. Thus, for example, the final rule includes a new paragraph
expressly declining fiduciary treatment for mere sales pitches that
fall short of meeting the test above. Similarly, the rule makes clear
that mere investment information or education, without an investment
recommendation, is not treated as fiduciary advice.
This rule is not only a very different rule from the one that was
before the Fifth Circuit in Chamber; it also addresses a very different
regulatory landscape. The regulatory actions taken by the SEC and NAIC
to update conduct standards reflect the understanding that broker-
dealers and insurance agents commonly make recommendations to their
customers for which they are compensated as a regular part of their
business; that investors rely upon these recommendations; and that
regulatory protections are important to ensure that the advice is in
the best interest of the retail customer, in the case of broker-
dealers, or consumers, in the case of insurance agents. In this regard,
also as discussed above, commenters informed the Department that it is
common for broker-dealers and insurance agents to hold themselves out
as trusted advisers and take deliberate steps to develop relationships
of trust and confidence with their customers.\165\ Moreover, as the SEC
has repeatedly noted, Regulation Best Interest ``draws from key
fiduciary principles underlying fiduciary obligations, including those
that apply to investment advisers'' under the Advisers Act.\166\ As a
result, the final rule is far more consistent with the SEC's regulation
of advice than was true of the 2016 Rulemaking, which represented a
significant departure from securities law regulation of broker-dealers
at the time.
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\165\ It is also worth noting that in the litigation surrounding
the 2016 Final Rule, there were affidavits from independent
insurance agents describing ongoing relationships with their
customers in which detailed personal financial information is
shared. One such affidavit filed by Donald E. Wales in Market
Synergy Group, Inc. v. United States Department of Labor stated, ``I
take great pride and care in developing deep familiarity with my
clients' individual financial circumstances, resources, and goals.
All my sales of life insurance and fixed annuities . . . are made
following a face-to-face meeting with my clients . . . . I also
attempt to have periodic meetings with my clients . . . to review
their financial state of affairs and recommend changes . . . to
their financial plans. I proudly use the same financial products
that I recommend to my clients . . . and often share my own personal
results with them.'' Memorandum of Plaintiff-Appellant in Support of
Motion for Preliminary Injunction at Exhibit 9, Mkt. Synergy Grp.,
Inc. v. United States Dep't of Lab., No. 5:16-CV-4083-DDC-KGS, 2017
WL 661592 (D. Kan. Feb. 17, 2017), ECF No. 11-9, aff'd, 885 F.3d 676
(10th Cir. 2018).
\166\ Regulation Best Interest release, 84 FR 33318 (July 12,
2019); see also SEC Staff Bulletin: Standards of Conduct for Broker-
Dealers and Investment Advisers Care Obligation, (``Both Reg BI for
broker-dealers and the IA fiduciary standard for investment advisers
are drawn from key fiduciary principles that include an obligation
to act in the retail investor's best interest and not to place their
own interests ahead of the investor's interest,'') <a href="https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers">https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers</a>.
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For all these reasons, both the final rule and the regulatory
context are far different than the 2016 Final Rule considered by the
Fifth Circuit in the Chamber opinion. In addition, there are other
important ways in which the final rule is different than the 2016
Rulemaking, above and beyond this final rule's clear focus on
relationships of trust and confidence:
<bullet> The final rule and associated exemptions, unlike the 2016
Rulemaking, contain no contract or warranty requirements. The 2016
Rulemaking required that advisers and financial institutions give their
customers enforceable contractual rights. This final rule and amended
PTEs do not create any such rights. The sole remedies for non-
compliance are precisely those set forth in ERISA and the Code, which
include only the imposition of excise taxes in the context of advice to
IRAs.
<bullet> The amended PTEs, unlike the 2016 Rulemaking, do not
prohibit financial institutions and advisers from entering into class-
wide binding arbitration agreements with retirement investors.
<bullet> PTE 2020-02, as finalized, specifically provides an
exemption from the prohibited transaction rules for pure robo-advice
relationships, unlike the 2016 Rulemaking.
<bullet> PTE 84-24, unlike the 2016 Rulemaking, does not require
insurance companies to assume fiduciary status with respect to
independent insurance agents, an important concern of insurers with
respect to the 2016 Rulemaking.
<bullet> Neither PTE 2020-02 nor PTE 84-24, as amended, require
financial institutions to disclose all their compensation arrangements
with third parties on a publicly available website, as was required by
the 2016 Rulemaking.
In sum, commenters err in asserting that this rulemaking is simply
a repeat of the 2016 Rulemaking, or in contending that the final rule
fails to take proper account of the nature of the relationship between
the advice provider and the advice recipient.
[[Page 32143]]
D. Discussion of the Final Rule
Under the final rule, a person is an investment advice fiduciary if
they provide a recommendation in one of the following contexts:
<bullet> The person either directly or indirectly (e.g., through or
together with any affiliate) makes professional investment
recommendations to investors on a regular basis as part of their
business and the recommendation is made under circumstances that would
indicate to a reasonable investor in like circumstances that the
recommendation:
[cir] is based on review of the retirement investor's particular
needs or individual circumstances,
[cir] reflects the application of professional or expert judgment
to the retirement investor's particular needs or individual
circumstances, and
[cir] may be relied upon by the retirement investor as intended to
advance the retirement investor's best interest; or
<bullet> The person represents or acknowledges that they are acting
as a fiduciary under Title I of ERISA, Title II of ERISA, or both with
respect to the recommendation.
The recommendation also must be made ``for a fee or other
compensation, direct or indirect'' as defined in the final rule.
The provisions of the final rule are organized into the following
paragraphs and discussed in greater detail below. Paragraph (c) of the
regulation defines the term ``investment advice.'' Paragraph (d)
retains the provision in the existing regulation regarding ``execution
of securities transactions.'' Paragraph (e) defines the phrase ``for
fee or other compensation, direct or indirect.'' Paragraph (f) sets
forth definitions used in the regulation. Paragraph (g) addresses
applicability of the regulation. Paragraph (h) confirms the continued
applicability of State law regulating insurance, banking, and
securities.
1. Covered Recommendations
Definition of a Recommendation
Whether a person has made a ``recommendation'' is a threshold
element in establishing the existence of fiduciary investment advice.
For purposes of the final rule, whether a recommendation has been made
will turn on the facts and circumstances of the particular situation,
including whether the communication reasonably could be viewed as a
``call to action.'' The more individually tailored the communication to
a specific customer or a targeted group of customers about a security
or other investment or group of securities or other investments, the
greater the likelihood that the communication may be viewed as a
recommendation. The determination of whether a recommendation has been
made is an objective rather than a subjective inquiry.
The Department intends that whether a recommendation has been made
will be construed in a manner consistent with the SEC's framework in
Regulation Best Interest. In the Regulation Best Interest release, the
SEC stated,
[T]he determination of whether a broker-dealer has made a
recommendation that triggers application of Regulation Best Interest
should turn on the facts and circumstances of the particular
situation and therefore, whether a recommendation has taken place is
not susceptible to a bright line definition. Factors considered in
determining whether a recommendation has taken place include whether
the communication ``reasonably could be viewed as a `call to action'
'' and ``reasonably would influence an investor to trade a
particular security or group of securities.'' The more individually
tailored the communication to a specific customer or a targeted
group of customers about a security or group of securities, the
greater the likelihood that the communication may be viewed as a
``recommendation.'' \167\
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\167\ Regulation Best Interest release, 84 FR 33318, 33335 (July
12, 2019)(footnote omitted).
Commenters generally supported the Department's statement in the
preamble for the proposal that it intended to take an approach that is
similar to the SEC and FINRA on the definition of a recommendation, and
some asked for confirmation that the Department would interpret the
definition consistent with the SEC's framework in Regulation Best
Interest. In this regard, some commenters identified the word
``suggestion'' in the following statement in the Department's preamble,
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and said this set too low a bar for fiduciary status:
For purposes of the proposed rule, the Department views a
recommendation as a communication that, based on its content,
context, and presentation, would reasonably be viewed as a
suggestion that the retirement investor engage in or refrain from
taking a particular course of action.\168\
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\168\ Proposed Retirement Security Rule, 88 FR 75890, 75904
(Nov. 3, 2023).
Commenters also said this was inconsistent with the SEC's approach,
although some commenters acknowledge this statement was consistent with
prior FINRA guidance--and, in fact, quoted that guidance.\169\ Based on
the word ``suggestion'' some commenters posed scenarios involving the
provision of information to a retirement investor and said those
communications would appear to be covered as recommendations under the
proposal.
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\169\ See FINRA Regulatory Notice 11-02 (``[S]everal guiding
principles are relevant to determining whether a particular
communication could be viewed as a recommendation for purposes of
the suitability rule. For instance, a communication's content,
context and presentation are important aspects of the inquiry. The
determination of whether a ``recommendation'' has been made,
moreover, is an objective rather than subjective inquiry. An
important factor in this regard is whether--given its content,
context and manner of presentation--a particular communication from
a firm or associated person to a customer reasonably would be viewed
as a suggestion that the customer take action or refrain from taking
action regarding a security or investment strategy. In addition, the
more individually tailored the communication is to a particular
customer or customers about a specific security or investment
strategy, the more likely the communication will be viewed as a
recommendation. Furthermore, a series of actions that may not
constitute recommendations when viewed individually may amount to a
recommendation when considered in the aggregate.'') (footnote
omitted), <a href="https://www.finra.org/rules-guidance/notices/11-02">https://www.finra.org/rules-guidance/notices/11-02</a>. See
also FINRA Notice to Members 01-23 (``The determination of whether a
`recommendation' has been made, moreover, is an objective rather
than a subjective inquiry. An important factor in this regard is
whether--given its content, context, and manner of presentation--a
particular communication from a broker/dealer to a customer
reasonably would be viewed as a ``call to action,'' or suggestion
that the customer engage in a securities transaction.''), <a href="https://www.finra.org/rules-guidance/notices/01-23">https://www.finra.org/rules-guidance/notices/01-23</a>.
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Commenters also identified other statements in the proposal's
preamble that they believed were not consistent with the SEC's approach
in Regulation Best Interest. These statements are: ``the fact that a
communication is made to a group rather than an individual would not be
dispositive of whether a recommendation exists'' and ``providing a
selective list of securities to a particular retirement investor as
appropriate for the investor would be a recommendation as to the
advisability of acquiring securities even if no recommendation is made
with respect to any one security.'' \170\
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\170\ Proposed Retirement Security Rule, 88 FR 75890, 75904
(November 3, 2023).
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The Department confirms that, for purposes of the final rule, the
Department intends that whether a recommendation has been made will be
construed consistent with the SEC Regulation Best Interest and the
inquiry will focus on whether there is a ``call to action.'' To the
extent a person provides information to a retirement investor that does
not rise to the level of a recommendation as defined in this way, the
communication would not lead to fiduciary status.
However, the Department does not believe that the statements
regarding communications to a ``group'' or
[[Page 32144]]
communications about ``a selective list of securities'' are
inconsistent with the SEC's approach. Both of those concepts appear in
the SEC's discussion in the Regulation Best Interest release quoted
above that indicates that both communications to a ``targeted group of
customers'' and communications about ``a group of securities'' may be
considered recommendations.
A commenter also said that the following statement made in the
Department's preamble described a concept of a recommendation that was
too expansive and unworkable: ``a series of actions, taken directly or
indirectly (e.g., through or together with any affiliate), that may not
constitute a recommendation when each action is viewed individually may
amount to a recommendation when considered in the aggregate.'' \171\
The commenter suggested that the Department withdraw that preamble
statement and include instead an ``anti-evasion'' provision such as:
``No person shall knowingly act in a manner that functions as an
unlawful evasion of the purposes of this regulation.''
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\171\ Id. at 75904.
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Although this quoted language is similar to language that appeared
in the previous FINRA guidance, the Department's proposal expanded it
to include the language ``directly or indirectly (e.g., through or
together with any affiliate).'' \172\ This language is not intended to
capture all actions of affiliates, however; rather, ``through or
together with'' is intended to describe circumstances in which an
advice provider, in its interactions with the retirement investor,
utilizes an affiliate to formally deliver the recommendation to that
investor. Therefore, the Department does not believe that this is
unworkable or difficult to monitor. For that reason, the Department
does not believe it is necessary to include an anti-evasion provision
instead of this preamble discussion. However, the Department cautions
that the description of ``indirectly'' is not limited to use of
affiliates and would extend to parties working around this provision
with non-affiliates.
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\172\ See FINRA Regulatory Notice 11-02.
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A few commenters suggested alternative definitions of a
recommendation. One commenter's proposed language focused on the nature
of a recommendation as an endorsement and expression of support for the
retirement investor making or refraining from making a specific
investment decision. Another commenter had an opposite view that the
Department should clarify that an endorsement or expression of opinion
would not rise to the level of a recommendation. The Department did not
adopt these suggestions, taking the view that it should remain
consistent with the SEC on this familiar and well-established
definitional term.
Commenters also asked the Depa
[…truncated; see source link]Indexed from Federal Register on April 25, 2024.
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