By Robert R. Boeche, Partner of Shustak Reynolds & Partners, P.C. posted on Tuesday, August 27, 2024.

Robert R. Boeche II

Partner

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 122)
Direct: (619) 546-5502
Email: [email protected]

On April 25, 2024, with the enactment of the final version of its Retirement Security Rule (the "Final Rule"), the Department of Labor (“DOL”) imposed a fiduciary standard under the Employee Retirement Income Security Act of 1974 (“ERISA”) that it believes will "uniformly apply to all investment advice that is provided to [retirement investors], concerning the investment of their retirement assets.”

Under the DOL’s prior 1975 fiduciary rule (“1975 Rule”), a five-part test (the “1975 Test”) was used to determine when an investment advice provider is also an ERISA fiduciary. The 1975 Test became problematic as the marketplace evolved for retired investors and allowed investment professionals to bypass ERISA’s fiduciary safeguards. To address the 1975 Test’s problems and other exemptions, the DOL’s Final Rule provides an amended definition of “fiduciary” under Section 3(21)(a)(ii) of ERISA, as well as amendments to the prior Prohibited Transaction Exemptions 2020-20 (“PTE”),[1] PTE 84-24,[2] and eliminated the availability of other previously available exemptions.[3]

Expanding the Scope of Investment Advice Subject to ERISA’s Regulations

Among other things, the Final Rule replaces the old 1975 test and introduces an expanded definition of when a person is considered to be giving investment advice subject to ERISA regulations.[2][3] Under the Final Rule, a financial professional that provides investment advice to retired investors in exchange for compensation will be subject to ERISA’s new legislation if the advice is i) based on the particular needs or circumstances of the investors and ii) intended to be relied upon by the investor. Unlike the 1975 Rule, the Final Rule deems a financial professional as an ERISA fiduciary when he/she provides a retired investor with investment advice on one occasion, such as a recommendation to roll over workplace retirement plan savings into an IRA. Because of this, financial advisers must be prepared for retired investor clients by either complying with the PTE exemption (as further discussed below) or not working with retired investors. Otherwise, a financial adviser may run afoul of the ERISA fiduciary regulations and face legal consequences.  

Amended PTE

The PTE was enacted to provide investment advice fiduciaries with an exemption to the ERISA fiduciary regulations, and in turn, allow them to receive compensation for transactions that would otherwise be prohibited by law. The DOL’s PTE amendments provide additional exemptions to the Final Rule and other requirements for ERISA fiduciaries, such as:

• Drafting PTE 2020-02 with the intention of having it being the primary source of exemptive relief for eligible investment advice fiduciaries;
• Reducing the scope of PTE 84-24’s narrow exception to PTE 2020-02 in relation to recommendations of non-security annuity and insurance products; and
• Eliminating the requirement that financial institutions must make public disclosures of all third-party compensation arrangements under PTE 2020-02 and PTE 84-24. [4][5][6]

While the PTE amendments are important on their own, the Final Rule has made the PTE more important than ever for investment advice professionals by making many other previous exemptions unavailable to investment advice fiduciaries, and expanding the scope of persons considered to be investment advice fiduciaries under ERISA by:

• Classifying a person as an ERISA “fiduciary” when the person i) exercises discretionary authority or control of plan management or exercises authority with respect to management of plan assets, ii) renders plan asset investment advice for compensation or has the authority to do so, or iii) has any discretionary responsibility in the administration of the plan; and

• Re-defining a “recommendation” as either i) advising on acquiring, holding, disposing, or exchanging securities or other investment property as an investment strategy or how it should rollover, ii) management of investments such as recommendations on investment strategies, portfolio compensation, selecting personnel to provide investment advice or management services, account arrangements, or the voting of proxies, or iii) rolling over, transferring, or disturbing assets from a plan or IRA. [4]

What’s Next

The Final Rule and PTE take effect on September 23, 2024. But the DOL has provided a one-year transition period for certain PTE conditions. The transition period does not preclude investment professionals from receiving PTE exemptive relief so long as the Impartial Conduct Standards and fiduciary acknowledgment conditions of PTE are met. If you would like to review the DOL’s amendments in their entirety, please go to this website.

With September 23, 2024, being one month away, financial professionals should review and revise their policies and procedures regarding retired investor clients if they have not already done so. As discussed above, the amended PTE largely stands as the only available option for exemptive relief in many cases. Failure to comply with such exemptions are paramount as penalties for violating ERISA’s prohibited transaction rules are severe. While the amended regulations discussed in this article are complex, our firm is ready to help you prepare. With over 40 years of experience in the financial industry, our expertise in the field has made us a trusted source for financial professionals to turn to for guidance on how to comply with the many regulations applicable to them. With offices in San Diego, Irvine, Los Angeles, San Francisco, and New York, Shustak Reynolds & Partners, P.C. represents investment advisers, broker-dealers, registered representatives, and insurance companies across the country. If you need help understanding how these changes impact you, contact Shustak Reynolds & Partners, P.C. today for a confidential consultation.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney Robert R. Boeche can be reached in the firm’s San Diego office at (619) 696-9500.

[1] For more, please see our prior article title “Requirements of New Prohibited Transaction Exemption PTE 2020-02.”

[2] PTE 84-24 provides a narrow alternative to PTE 2020-02 for recommendations of non-securities annuity and insurance products by Independent Producers. A thorough discussion of this exemption is beyond the scope of this article.

[3] This includes amendments to PTEs 77-4, 75-1, 80-83, 83-1, and 86-128.

[4] “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” 29 C.F.R. § 2510.3-21(c); 89 FR 32122 (April 25, 2024).

[5] “Amendment to Prohibited Transaction Exemption 2020–02,” 29 C.F.R. § 2510; 89 FR 32260 (April 25, 2024).

[6] “Amendment to Prohibited Transaction Exemption 84–24,” 29 C.F.R. § 2510; 89 FR 32302 (April 25, 2024).

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