Retirement Security Rule: Definition of an Investment Advice Fiduciary, 75890-75979 [2023-23779]

Download as PDF 75890 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2510 RIN 1210–AC02 Retirement Security Rule: Definition of an Investment Advice Fiduciary Employee Benefits Security Administration, Department of Labor. ACTION: Proposed rule. AGENCY: This document contains a proposed amendment to the regulation 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 proposal also would amend the parallel regulation defining for purposes of Title II of ERISA, a ‘‘fiduciary’’ of a plan defined in Internal Revenue Code (Code) section 4975, including an individual retirement account. The Department also is publishing elsewhere in today’s Federal Register proposed 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: Public Comments. Comments are due on or before January 2, 2024. Public Hearing. The Department anticipates holding a public hearing approximately 45 days following the date of publication in the Federal Register. Specific information regarding the date, location, and submission of requests to testify will be published in the Federal Register. ADDRESSES: You may submit written comments, identified by RIN 1210– AC02, by any of the following methods: • Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for sending comments. • Mail: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N–5655, U.S. Department of Labor, 200 Constitution Ave. NW, Washington, DC 20210, Attention: Definition of Fiduciary—RIN 1210–AC02. Instructions: All submissions must include the agency name and Regulatory lotter on DSK11XQN23PROD with PROPOSALS3 SUMMARY: VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Identifier Number (RIN) for this rulemaking. If you submit comments electronically, do not submit paper copies. Warning: Do not include any personally identifiable information or confidential business information that you do not want publicly disclosed. Comments are public records posted on the internet as received and can be retrieved by most internet search engines. Docket: For access to the docket to read background documents, including the plain-language summary of the proposed rule of not more than 100 words in length required by the Providing Accountability Through Transparency Act of 2023, or comments, go to the Federal eRulemaking Portal at https://www.regulations.gov. Comments will be available to the public, without charge, online at https:// www.regulations.gov and https:// www.dol.gov/agencies/ebsa and at the Public Disclosure Room, Employee Benefits Security Administration, Room N–1513, 200 Constitution Ave, NW, Washington, DC 20210. FOR FURTHER INFORMATION CONTACT: • For questions regarding the proposed rule: contact Luisa GrilloChope, Office of Regulations and Interpretations, Employee Benefits Security Administration (EBSA), 202– 693–8510. (Not a toll-free number). • For questions regarding the prohibited transaction exemptions: contact Susan Wilker, Office of Exemption Determinations, EBSA, 202– 693–8540. (Not a toll-free number). • For questions regarding the Regulatory Impact Analysis: contact James Butikofer, Office of Research and Analysis, EBSA, 202–693–8434. (Not a toll-free number). Customer Service Information: Individuals interested in obtaining information from the Department of Labor concerning Title I of ERISA and employee benefit plans may call the Employee Benefits Security Administration (EBSA) Toll-Free Hotline, at 1–866–444–EBSA (3272) or visit the Department of Labor’s website (https://www.dol.gov/agencies/ebsa). SUPPLEMENTARY INFORMATION: A. Executive Summary The Department of Labor is proposing a new regulatory definition of an investment advice fiduciary for purposes of Title 1 and Title II of the Employee Retirement Income Security Act (ERISA). As compared to the existing regulatory definition, which dates to 1975, the proposal better reflects the text and the purposes of the PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 statute and better protects the interests of retirement investors, consistent with the mission of the Department’s Employee Benefits Security Administration to ensure the security of the retirement, health, and other workplace-related benefits of America’s workers and their families. The Department proposes that a person would be an investment advice fiduciary under Title I and Title II of ERISA if they provide investment advice or make an investment recommendation to a retirement investor (i.e., a plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary); the advice or recommendation is provided ‘‘for a fee or other compensation, direct or indirect,’’ as defined in the proposed rule; and the person makes the recommendation in one of the following contexts: • The person either directly or indirectly (e.g., through or together with any affiliate) has discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities or other investment property for the retirement investor; • The person either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of their business and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or • The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations. The proposal is designed to ensure that ERISA’s fiduciary standards uniformly apply to all advice that retirement investors receive concerning investment of their retirement assets in a way that ensures that retirement investors’ reasonable expectations are honored when receiving advice from financial professionals who hold themselves out as trusted advice providers. The Department’s proposal fills an important gap in those advice relationships where advice is not currently required to be provided in the retirement investor’s best interest, and the investor may not be aware of that fact. Together with proposed amendments to administrative exemptions 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 E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules proposal is intended to protect the interests of retirement investors by requiring investment advice providers to adhere to stringent conduct standards and mitigate their conflicts of interest. The proposals’ compliance obligations are generally consistent with the best interest obligations set forth in the Securities and Exchange Commission’s (SEC’s) 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 proposals will stem from the uniform application of the ERISA fiduciary standard and exemption conditions to investment advice to retirement investors. Under the proposals, advice providers would be subject to a common fiduciary standard that would reduce retirement investor exposure to conflicted advice that erodes investment returns and would be obligated to adhere to protective conflict-mitigation requirements.1 Requiring advice providers to compete under a common fiduciary standard will be especially beneficial with respect to those transactions that currently are not uniformly covered by fiduciary protections consistent with ERISA’s high standards, including recommendations to roll over assets from a workplace retirement plan to an IRA (e.g., in those cases in which the advice provider is not subject to Federal securities law standards and, as is often the case, does not have an ongoing and preexisting relationship with the customer); investment recommendations with respect to many commonly purchased retirement annuities, such as fixed index annuities; and investment recommendations to plan fiduciaries. lotter on DSK11XQN23PROD with PROPOSALS3 B. Background 1. Title I and Title II of ERISA and the 1975 Rule ERISA2 is a ‘‘comprehensive statute designed to promote the interests of employees and their beneficiaries in employee benefit plans.’’ 3 Under the statutory framework, Title I of ERISA imposes duties and restrictions on individuals who are ‘‘fiduciaries’’ with respect to employee benefit plans. In particular, fiduciaries to Title I plans must adhere to duties of prudence and 1 The references in this document to a ‘‘fiduciary’’ are intended to mean an ERISA fiduciary unless otherwise stated. 2 29 U.S.C. 1001, et seq. 3 Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90 (1983). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 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 they also must discharge their duties with respect to a plan ‘‘solely in the interest of the participants and beneficiaries.’’ 4 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.’’ 5 These prohibitions broadly forbid a fiduciary from ‘‘deal[ing] with the assets of the plan in his own interest or for his own account,’’ and ‘‘receiv[ing] any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan.’’ 6 Congress also gave the Department authority to grant conditional administrative exemptions from the prohibited transaction provisions, but only if the Department finds that the exemption is (1) administratively feasible for the Department, (2) in the interests of the plan and of its participants and beneficiaries, and (3) protective of the rights of participants and beneficiaries of such plan.7 Title II of ERISA, codified in the Code,8 governs the conduct of fiduciaries to plans defined in Code section 4975(e)(1), which includes IRAs.9 Some plans defined in Code 4 ERISA section 404, 29 U.S.C. 1104. Trust Sav. Bank v. Salomon Smith Barney Inc., 530 U.S. 238, 241–42 (2000) (citation and quotation marks omitted). 6 ERISA section 406(b)(1), (3), 29 U.S.C. 1106(b)(1), (3). 7 ERISA section 408(a), 29 U.S.C. 1108(a). 8 This proposal 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 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. 9 For purposes of the proposed rule, the term ‘‘IRA’’ is defined as any account or annuity 5 Harris PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 75891 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.10 Under the Reorganization Plan No. 4 of 1978, which Congress subsequently ratified in 1984,11 the Department was generally granted authority to interpret the fiduciary definition and issue administrative exemptions from the prohibited transaction provisions in Code section 4975.12 Many of the protections, duties, and liabilities in both Title I and Title II of ERISA hinge on fiduciary status; therefore, the determination of who is a ‘‘fiduciary’’ is of central importance. ERISA includes a statutory definition of a fiduciary at section 3(21)(A), which provides that a person is a fiduciary with respect to a plan to the extent the person (i) exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or discretionary responsibility in the administration of such plan.13 The same 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 would apply only with respect to employee pension benefit plans and IRAs that are retirement savings vehicles. As discussed herein, the rule would apply with respect to plans as defined in Title I and Title II of ERISA that make investments. In this regard, see also proposed paragraph (f)(11) 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.’’ 10 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.’’ 11 Sec. 1, Public Law 98–532, 98 Stat. 2705 (Oct. 19, 1984). 12 5 U.S.C. App. (2018). 13 ERISA section 3(21)(A), 29 U.S.C. 1002(21)(A). E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 75892 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules definition of a fiduciary is in Code section 4975(e)(3).14 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 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, prohibitions on conflicts of interest, and 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 savers. In 1975, shortly after ERISA was enacted, the Department issued a regulation at 29 CFR 2510.3–21(c)(1) that defined the circumstances under which a person renders ‘‘investment advice’’ to an employee benefit plan within the meaning of section 3(21)(A)(ii) of ERISA, such that said person would be a fiduciary under ERISA.15 The regulation narrowed the plain and expansive language of 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. The Department of the Treasury issued a virtually identical regulation under Code section 4975(e)(3), at 26 CFR 54.4975–9(c)(1), which applies to plans defined in Code section 4975.16 U.S.C. 4975(e)(3). FR 50842 (Oct. 31, 1975). 16 40 FR 50840 (Oct. 31, 1975). The issuance of this regulation pre-dated The Reorganization Plan 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 themselves). In 1975, IRAs had only recently been created (by ERISA itself), and 401(k) plans did not yet exist. Retirement assets were principally held in pension funds controlled by large employers and professional money managers. Now, IRAs and participant-directed plans, such as 401(k) plans, have become more common retirement vehicles as opposed to traditional pension plans, and rollovers of employee benefit plan assets to IRAs are commonplace. Individuals, regardless of their financial literacy, have thus become increasingly responsible for their own retirement savings. 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 or be aware of and guard against the investment advice provider’s conflicts of interest. However, as a result of the five-part test in the 1975 rule, many investment professionals, consultants, and financial advisers have no obligation to adhere to the fiduciary standards in Title I of ERISA or to the prohibited transaction rules, despite the critical role they play in guiding plan and IRA investments. In many situations, this disconnect serves to undermine the reasonable expectations of retirement investors in today’s marketplace; a retirement investor may reasonably expect that the advice they are receiving is fiduciary advice even when 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 prohibited transaction exemption (PTE). Recently, other regulators have recognized the need for change in the 14 26 15 40 VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 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. PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 regulation of investment recommendations and have imposed enhanced conduct standards on financial professionals that 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, which addressed the conduct standards applicable to investment advisers under the Investment Advisers Act of 1940 (Advisers Act).18 As the SEC has repeatedly stated, ‘‘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 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 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 goal of the NAIC working group 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 17 Regulation Best Interest: The Broker-Dealer Standard of Conduct, 84 FR 33318 (July 12, 2019). 18 Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 84 FR 33669 (July 12, 2019). 19 Regulation Best Interest release, 84 FR 33318, 33330 (July 12, 2019). 20 Id. at 33318. 21 Available at www.naic.org/store/free/MDL– 275.pdf. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 interests above consumers’ interests.’’ 22 According to the NAIC, as of August 23, 2023, 43 jurisdictions have implemented the revisions to the model regulation.23 These regulatory efforts 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.24 After careful review of the existing regulatory landscape, the Department too has concluded that existing regulations should be revised to reflect current realities in light of the text and purposes of Title I of ERISA and the Code. In the current landscape, the existing 1975 regulation no longer serves ERISA’s purpose to protect the interests of retirement investors, especially 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 sophisticated 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, 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 22 See https://content.naic.org/cipr-topics/ annuity-suitability-best-interest-standard. 23 NAIC Annuity Suitability & Best Interest Standard web page, https://content.naic.org/ciprtopics/annuity-suitability-best-interest-standard. 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 6.5.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). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 their interest. Like these other regulators, the Department has concluded that it is appropriate to revisit the existing regulatory structure to ensure that it properly and uniformly 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 rules, 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 (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 five-part test had been created in a very different context and 25 Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice, 81 FR 20946 (Apr. 8, 2016). The Department issued its first proposal to amend the regulatory definition of an investment advice fiduciary in 2010. 75 FR 65263 (Oct. 22, 2010). The first proposed rulemaking provided for a 90-day comment period, from October 22, 2010, through January 20, 2011. The comment period was extended for 14 days. The Department held a public hearing in Washington, DC, on March 1–2, 2011, after which the Department welcomed public comment for 15 days in order for commenters to supplement hearing testimony or otherwise provide additional comments. That proposal was withdrawn, and the Department issued a second proposal in 2015 along with related proposed prohibited transaction exemptions and proposed amendments to existing exemptions. 80 FR 21928 (Apr. 20, 2015). The 2015 proposal and proposed related exemptions initially provided for 75-day comment periods, ending on July 6, 2015, but the Department extended the comment periods to July 21, 2015. Before finalizing the 2015 proposals, the Department held a public hearing in Washington, DC on August 10–13, 2015, at which over 75 speakers testified. The transcript of the hearing was made available on September 8, 2015, and the Department provided additional opportunity for interested persons to submit comments on the proposal and proposed related exemptions or on the transcript until September 24, 2015. A total of over 3,000 comment letters were received on the 2015 proposals. There were also over 300,000 submissions made as part of 30 separate petitions submitted on the proposals. These comments and petitions, which came from consumer groups, plan sponsors, financial services companies, academics, elected government officials, trade and industry associations, and others, were both in support of and in opposition to the 2015 proposals. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 75893 investment advice marketplace. 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. The Department identified the ‘‘regular basis’’ element 26 in the fivepart test as a particularly important example of the 1975 regulation’s shortcomings. 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 the Act’s protective purpose. The Department pointed to examples of transactions in which a 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. 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. 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. 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. In adopting the 2016 Final Rule, the Department presented an economic 26 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.’’ 29 CFR 2510.3– 21(c)(1)(ii)(B). E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 75894 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules analysis demonstrating that investment advice providers are compensated in ways that create conflicts of interest, which can bias investment advice and erode plan and IRA investment results.27 The Department noted that many of the consultants and advisers who provide investment-related advice and recommendations received compensation from the financial institutions whose investment products they recommend, and that this can give the consultants and advisers a strong bias, conscious or unconscious, to favor investments that provide them greater compensation rather than those that may be most appropriate for the retirement investors. The Department also found that consolidation of the financial services industry and developments in compensation arrangements multiplied the opportunities for self-dealing and reduced the transparency of fees. Most significantly, the Department explained in its analysis that, in the absence of the 2016 Final Rule, the underperformance associated with conflicts of interest in the mutual funds segment alone could have cost IRA investors between $95 billion and $189 billion over the following 10 years and between $202 billion and $404 billion over the following 20 years. While these projected losses were substantial, they represented only a portion of what IRA investors stood to lose as a result of conflicted investment advice. The Department expected that compliance with the 2016 Final Rule would deliver large gains for retirement investors by reducing these losses. The Department cited evidence that holding broker-dealer representatives to fiduciary standards at the State level does not impair access to their services. Additionally, the Department noted that financial services firms already were moving toward more fee-based advice models, considering flatter compensation models, and integrating technology. The Department anticipated that the rule would accelerate these types of innovations for the benefit of plan and IRA investors. The 2016 Final Rule defined an investment advice fiduciary for purposes of Title I or 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. The 2016 Final Rule generally covered: (1) 27 U.S. Department of Labor, Fiduciary Investment Advice Regulatory Impact Analysis (2016), available at https://www.dol.gov/sites/ dolgov/files/EBSA/laws-and-regulations/rules-andregulations/completed-rulemaking/1210-AB32-2/ ria.pdf. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 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. One main issue highlighted in the 2016 Final Rule involved the protection of retirement investors in the context of recommendations to roll over assets from workplace retirement plans to IRAs.28 As the Department noted, decisions to take a benefit distribution or engage in rollover transactions are among the most, if not the most, important financial decisions that plan participants and beneficiaries and IRA owners and beneficiaries are called upon to make. The Department explained that when an individual is a participant in a workplace retirement plan, their employer or other plan sponsor has both the incentive and the fiduciary duty to facilitate sound investment choices, while in an IRA, both good and bad investment choices are more numerous, and investment advice providers often operate under conflicts of interest. The Department illustrated the consequence of these rollovers to both individuals and investment advice providers, by pointing out that rollovers from employee benefit plans to IRAs were expected to approach $2.4 trillion cumulatively from 2016 through 2020.29 Investment advice providers have a strong economic incentive to recommend that investors roll over assets into one of their institutions’ IRAs, whether from a plan or from an IRA account at another financial institution, or even between different account types. 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.30 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) 31 and the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (Principal Transactions Exemption).32 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. The new exemptions included conditions designed to protect the interests of the retirement investors receiving advice. 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. In the case of IRAs and nonTitle 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. 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. 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.33 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 31 81 28 See 81 FR 20946, 20964 (Apr. 8, 2016). 29 Id. at 20949 fn. 7 (citing Cerulli Associates, ‘‘U.S. Retirement Markets 2015’’). 30 Id. PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 FR 21002 (Apr. 8, 2016). FR 21089 (Apr. 8, 2016). 33 81 FR 21139 (Apr. 8, 2016); 81 FR 21147 (Apr. 8, 2016); 81 FR 21181 (Apr. 8, 2016); 81 FR 21208 (Apr. 8, 2016). 32 81 E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 Columbia upheld the 2016 Rulemaking in the context of a broad challenge on multiple grounds.34 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.’ ’’ 35 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.36 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 37 and vacated the 2016 Rulemaking in toto, in Chamber of Commerce v. United States Department of Labor (Chamber).38 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 34 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). 35 NAFA, 217 F. Supp. 3d at 23, 27–28. 36 885 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). 37 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.’’). 38 See Chamber, 885 F.3d 360 (5th Cir. 2018). But see id. at 391 (‘‘Noting 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). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 relationship of trust and confidence— and nothing in the statute ‘requires’ departing from the touchstone.’’ 39 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.’’ 40 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.41 Under the Code, IRA investors do not have a private right of action.42 Instead, the primary remedy for a violation of the prohibited transaction provisions under the Code is the assessment of an excise tax.43 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.44 4. Field Assistance Bulletin No. 2018–02 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 39 Id. at 369 (citing Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322 (1992)); see id. at 376 (‘‘In short, whether one looks at DOL’s original regulation, the SEC, Federal and state legislation governing investment adviser fiduciary status vis-a`vis broker-dealers, or case law tying investment advice for a fee to ongoing relationships between adviser and client, the answer is the same: ‘investment advice for a fee’ was widely interpreted hand in hand with the relationship of trust and confidence that characterizes fiduciary status.’’). But see id. at 392 (‘‘One area in which Congress has departed from the common law of trusts is with the statutory definition of ‘fiduciary.’ ERISA does not define ‘fiduciary’ ‘in terms of formal trusteeship, but in functional terms of control and authority over the plan, . . . thus expanding the universe of persons subject to fiduciary duties . . .’’) (Stewart, C.J., dissenting) (quoting Mertens v. Hewitt Assocs., 508 U.S. 248, 262 (1993)). As discussed herein, in the period since the Fifth Circuit decision, the SEC and the National Association of Insurance Commissioners (NAIC) have moved forward with strengthened standards for recommendations provided by broker-dealers and insurance agents, respectively. 40 Id. at 384. 41 Id. 42 See id. 43 Code section 4975(a), (b). 44 Chamber, 885 F.3d 360, 384–85 (5th Cir. 2018); see Code section 4975. PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 75895 Transactions Rules Applicable to Investment Advice Fiduciaries (FAB 2018–02).45 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. In adopting the temporary enforcement policy, the Department cited uncertainty about fiduciary obligations and the scope of exemptive relief following the court’s opinion that could disrupt existing investment advice arrangements to the detriment of retirement plans, retirement investors, and financial institutions, as well as the significant resources some financial institutions had devoted towards compliance with the BIC Exemption and the Principal Transactions Exemption. 5. Subsequent Actions by the Department On July 7, 2020, the Department proposed a new prohibited transaction class exemption under Title I and Title II of ERISA for investment advice fiduciaries with respect to employee benefit plans and IRAs, called ‘‘Improving Investment Advice for Workers & Retirees.’’ 46 The proposal stated it was in response to informal industry feedback seeking a permanent administrative class exemption based on FAB 2018–02.47 On the same day, 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.48 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. On December 18, 2020, the Department adopted the Improving 45 Available at https://www.dol.gov/agencies/ ebsa/employers-and-advisers/guidance/fieldassistance-bulletins/2018-02. 46 85 FR 40834 (July 7, 2020). 47 Id. at 40835. 48 85 FR 40589 (July 7, 2020). E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 75896 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules Investment Advice for Workers & Retirees exemption as PTE 2020–02.49 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. The exemption expressly covers prohibited transactions resulting from both rollover advice and advice on how to invest assets within a plan or IRA, and imposes new conditions on investment advice fiduciaries providing such advice. In particular, PTE 2020–02 mirrors the core of the BIC and Principal Transaction exemptions’ requirements of best interest standards of conduct and policies and procedures to ensure the advice is provided consistent with those standards. The preamble to PTE 2020–02 also included the Department’s interpretation of when advice to roll over assets from an employee benefit plan to an IRA would constitute fiduciary investment advice under the 1975 regulation’s five-part test. As in the 2016 Rulemaking, the Department again made clear in 2020 that rollover recommendations were a central concern in the regulation of fiduciary investment advice. Accordingly, the Department emphasized the importance to a retirement investor of the rollover decision, as well as the fact that investment advice providers may have a strong economic incentive to recommend that investors roll over assets into one of their institutions’ IRAs. 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 regulatory test, constitutes fiduciary investment advice. The preamble interpretation also discussed when a recommendation to roll over assets from an employee benefit plan to an IRA would satisfy the ‘‘regular basis’’ requirement. Additionally, the preamble set forth the Department’s interpretation of the 1975 regulation’s requirement of ‘‘a mutual agreement, arrangement, or understanding’’ that the investment advice will serve as ‘‘a primary basis for investment decisions.’’ In April 2021, the Department issued Frequently Asked Questions (FAQs) that, among 49 85 FR 82798 (Dec. 18, 2020). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 other things, summarized aspects of the preamble interpretation.50 The Department’s preamble interpretation and certain FAQs were challenged in two lawsuits filed after the issuance of PTE 2020–02.51 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 future proceedings.52 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 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.53 6. 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 investment 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 brokerdealers and investment advisers. The package included Regulation Best Interest, which established a best interest standard applicable to brokerdealers when making a recommendation of any securities transaction or investment strategy involving securities to retail customers.54 The SEC also issued its SEC Investment Adviser Interpretation regarding the conduct standards applicable to investment 50 New Fiduciary Advice Exemption: PTE 2020– 02 Improving Investment Advice for Workers & Retirees Frequently Asked Questions, https:// www.dol.gov/agencies/ebsa/about-ebsa/ouractivities/resource-center/faqs/new-fiduciaryadvice-exemption. 51 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). 52 Am. Sec. Ass’n. v. U.S. Dep’t of Labor, 2023 WL 1967573, at * 22–23. 53 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 proposal, the district court judge has not yet taken action regarding the magistrate judge’s report and recommendations. 54 84 FR 33318 (July 12, 2019). PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 advisers under the Advisers Act.55 As part of the package, the SEC adopted new Form CRS, which requires registered investment advisers under the Advisers Act and registered brokerdealers to provide retail investors with a short relationship summary with specified information (SEC Form CRS).56 According to the SEC, these actions were designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisers, help retail investors better understand and compare the services offered and make an informed choice of the relationship best suited to their needs and circumstances, and foster greater consistency in the level of protections provided by each regime, particularly at the point in time that a recommendation is made.57 The SEC’s Regulation Best Interest enhanced the broker-dealer standard of conduct ‘‘beyond existing suitability obligations.’’ 58 According to the SEC, this [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.59 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: • 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; • Have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that 55 84 FR 33669 (July 12, 2019). CRS Relationship Summary; Amendments to Form ADV, 84 FR 33492 (July 12, 2019). 57 Regulation Best Interest release, 84 FR 33318, 33321 (July 12, 2019). 58 Id. at 33318. 59 Id. 56 Form E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules 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 • 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.60 The Conflict of Interest Obligation requires the broker-dealer to establish, maintain and enforce written policies and procedures reasonably designed to: lotter on DSK11XQN23PROD with PROPOSALS3 • Identify and at a minimum disclose, or eliminate, all conflicts of interest associated with such recommendations; • 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; • 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; and • 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.61 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.’’ 62 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.’’ 63 The SEC 60 Id. at 33372. at 33476. 62 17 CFR 240.15l–1. 63 Regulation Best Interest release, 84 FR 33318, 33320 (July 12, 2019). 61 Id. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 emphasized that, ‘‘[i]mportantly, regardless of whether a retail investor chooses a broker-dealer or an investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the financial professional ahead of the interests of the retail investor.’’ 64 The SEC also noted that the standard of conduct cannot be satisfied through disclosure alone.65 The best interest standard in 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 an investment strategy involving securities (including account recommendations).’’ According to the SEC, this language encompasses recommendations to roll over or transfer assets in a workplace retirement plan account to an IRA, and recommendations to take a plan distribution.66 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.67 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 Investment Advisers Act.68 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.’’ 69 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.’’ 70 The fiduciary duty under the Federal securities laws requires an adviser ‘‘to adopt the principal’s goals, objectives, or ends.’’ 71 The SEC stated: 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 64 Id. at 33321. at 33390. 66 Id. at 33337. 67 Id. at 33343–44. 68 84 FR 33669 (July 12, 2019). 69 Id. at 33671 (footnote omitted). 70 Id. at 33670. 71 Id. at 33671. 65 Id. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 75897 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.72 The SEC further stated, ‘‘[t]he investment adviser’s fiduciary duty is broad and applies to the entire adviserclient relationship.’’ 73 The SEC also adopted a new required disclosure of a ‘‘Form CRS Relationship Summary,’’ under which registered investment advisers under the Advisers Act and broker-dealers must provide retail investors with certain information about the nature of their relationship with their financial professional. One of the purposes of the Form CRS is to help retail investors better understand and compare the services and relationships that investment advisers and brokerdealers offer in a way that is distinct from other required disclosures under the Federal securities laws.74 Form CRS also includes a link to a dedicated page on the SEC’s investor education website, Investor.gov, which offers educational information about broker-dealers and investment advisers, and other materials.75 State Legislative and Regulatory Developments Also, since the vacatur of the Department’s 2016 Rulemaking, there have been legislative and regulatory developments at the State level involving conduct standards. 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.’’ 76 72 Id. (footnote omitted). at 33670. See also id. n 17 citing authorities where the Commission previously recognized the broad scope of section 206 of the Advisers Act in a variety of contexts. 74 84 FR 33492, 33493 (July 12, 2019). 75 Id. SEC staff has since issued guidance on Regulation Best Interest, Form CRS, and related interpretations, including staff bulletins on care obligations, conflicts of interest, and account recommendations for retail investors, which are available at https://www.sec.gov/regulation-bestinterest. 76 950 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). 73 Id E:\FR\FM\03NOP3.SGM 03NOP3 75898 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules 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.77 According to the NAIC, as of August 23, 2023, 43 jurisdictions have implemented the revisions to the model regulation.78 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.79 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: • Know the consumer’s financial situation, insurance needs and financial objectives; • Understand the available recommendation options after making a reasonable inquiry into options available to the producer; • 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 • Communicate the basis or bases of the recommendation.80 lotter on DSK11XQN23PROD with PROPOSALS3 The 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.’’ 81 ‘‘Material conflict of interest’’ is defined as ‘‘a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation,’’ but the definition expressly carves out ‘‘cash compensation or non-cash 77 Available at www.naic.org/store/free/MDL275.pdf. 78 NAIC Annuity Suitability & Best Interest Standard web page, https://content.naic.org/ciprtopics/annuity-suitability-best-interest-standard. 79 A producer is defined in section 5.L. of the 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. 80 NAIC Model Regulation, at section 6(A)(1)(a). 81 Id. at section 6(A)(3). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 compensation’’ from treatment as sources of conflicts of interest.82 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.83 The NAIC expressly disclaimed that its standard creates fiduciary obligations, and the obligations in the Model Regulation differ in significant respects from those applicable to brokerdealers in the SEC’s Regulation Best Interest.84 For example, in addition to disregarding compensation as a source of conflicts of interest, the specific care, disclosure, conflict of interest, and documentation requirements do not expressly incorporate the obligation not to put the producer’s or insurer’s interests before the customer’s interests, even though compliance with their terms is treated as meeting the ‘‘best interest’’ standard. Similarly, the 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 . . . .’’ 85 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. These regulatory changes cover many, but not all, of the assets held by retirement plans. Further, the SEC’s Regulation Best Interest and the NAIC Model Regulation are each limited in important ways in terms of application to advice provided to ERISA plan fiduciaries although this is not the case with the Advisers Act fiduciary obligations. 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 82 Id. at section 5(I). at section 4(B)(1). 84 Section 6(d) of the 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)). 85 Id. at section 6(A)(1)(a)(iii). 83 Id. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 the business’s 401(k) plan).86 The NAIC Model Regulation does not apply to transactions involving contracts used to fund an employee pension or welfare plan covered by ERISA.87 The Department believes that retirement investors and the regulated community are best served by an ERISA fiduciary standard that applies uniformly to all investments that retirement investors may make with respect to their retirement accounts. Amendments to the ERISA regulation are necessary to achieve that result. 7. Coordination With Other Agencies Under Title I and Title II of ERISA, the Department has primary responsibility for the regulation of fiduciaries’ advice to retirement investors. Because of the fundamental importance of retirement investments to workers’ financial security and the taxpreferred status of plans and IRAs, Congress defined the scope of fiduciary coverage broadly and imposed stringent obligations on fiduciaries, including prohibitions on conflicted transactions that do not have direct analogues under the securities and insurance laws. The fiduciary standards 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 proposed regulatory approach 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 across different categories of investment advice providers and advisory relationships. At the same time, however, many stakeholders have stressed the need to harmonize the Department’s efforts with potential rulemaking and 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 securitybased swap dealers). In addition, commenters have urged coordination with other agencies regarding IRA products and services. As the SEC has adopted regulatory standards for broker-dealers that are 86 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. 87 NAIC Model Regulation, at section 4(B)(1). E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules based on fiduciary principles of care and loyalty also applicable to investment advisers under the Advisers Act, and the NAIC has adopted a model law that includes a best interest standard, the Department believes that it is possible to honor 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, as contemplated by Title I and Title II of ERISA, and avoid the imposition of obligations that conflict with investment professionals’ obligations under other applicable laws. In particular, in the Department’s view, PTE 2020–02 is consistent with the requirements of the SEC’s Regulation Best Interest and the fiduciary obligations of investment advisers under the Advisers Act. Therefore, brokerdealers 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 PTE. Nevertheless, to better understand whether the proposed rule and exemptions would subject investment advice providers to requirements that conflict with or add to their obligations under other Federal laws, the Department has continued consulting and coordinating with the SEC; other securities, banking, and insurance regulators; the Department of the Treasury, including the Federal Insurance Office; and the Financial Industry Regulatory Authority (FINRA), the independent regulatory authority of the broker-dealer industry. The Department has also continued consulting and coordinating with the Department of the Treasury and the Internal Revenue Service (IRS), particularly on the subject of IRAs, and will continue to do so through the rulemaking process. Although the Department 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’s 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 selfdealing by investment advice fiduciaries to tax-qualified plans and IRAs. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 C. Purpose of the Proposed Rule and Summary of the Major Provisions 1. Purpose of the Proposed Rule Since the 1975 rule was adopted, developments in retirement savings vehicles and in the investment advice marketplace have altered the way retirement investors interact with investment advice providers. In 1975, retirement plans were primarily defined benefit plans, which were typically managed by sophisticated investment 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 investment professionals, including broker-dealers, advisers subject to the Advisers Act, insurance agents, and others on how to make complex decisions about the management of retirement assets. These individual investors have far greater responsibility for decisions about their retirement savings than was true in 1975, when investment professionals directly managed plan investments. Individual investors routinely depend on the quality of the advice they receive from financial professionals who commonly hold themselves out as trusted advice providers. Because these professionals have inherent conflicts of interest, however, there is an ever-present danger that the investment advice the retirement investor receives will be driven, not by the best interest of the investor, but by the financial interests of the investment professional or firm whom they depend upon for advice that is in their interest. Certainly, when an investment professional satisfies all five conditions of the 1975 regulation with respect to a given instance of advice, the investment professional is properly treated as a fiduciary in accordance with the parties’ reasonable understanding of the nature of their relationship. However, the 1975 test, as applied to the current marketplace is underinclusive because it fails to capture many circumstances in which an investor would reasonably believe they were receiving advice from an investment professional who was rendering services to the investor based upon the investor’s 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 PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 75899 investment decisions’’—too often work to defeat legitimate retirement investor expectations of impartial advice and allow some advice relationships to occur where there is no best interest standard. 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. 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 current regulation. This proposal attempts to reconcile the regulatory text with the both the reasonable expectations of the retirement investor along with the statutory text and purpose. The proposed revised definition of an investment advice fiduciary under ERISA, as discussed in detail below, is consistent with the express text of the statutory definition and better protects the interests of retirement investors. The proposal 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 an investment professional who is acting in the investor’s best interest, rather than merely promoting their own competing financial interests at the investor’s expense. 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. The specific duties imposed on fiduciaries by Title I and Title II of ERISA stem from Congress’ judgment regarding the best way to protect the public interest in taxadvantaged benefit arrangements that are critical to workers’ financial and physical health. In contrast to the Federal securities 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 E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 75900 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules appropriately constructed regulatory definition of an investment advice fiduciary under Title I and Title II of ERISA is essential. While Congress enacted ERISA to give special protections to retirement investors based on the central importance of retirement assets to individuals’ financial security and the broader marketplace, ERISA’s regulation of advice has failed to keep up with changes in the marketplace, in marked contrast to other regulatory regimes. As noted above, the Department’s proposal follows the acts of other regulators who have similarly recognized the need to change the standards applicable to investment professionals to reflect current realities. It is appropriate that the Department, too, update its regulation to reflect the current marketplace, and to ensure that ERISA and the Code serve their protective purposes. 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. As many Courts have noted, ERISA’s obligations are the ‘‘highest known to the law.’’ 88 The 1975 rule as applied to current market conditions, however, undermines ERISA’s protective goals and defeats legitimate investor expectations of professional advice based upon their best interest. As discussed in more detail in the RIA, some retirement investors remain vulnerable to harm from conflicts of interest in the investment advice they receive because of the outdated 1975 regulation. The Department, as opposed to other regulators, remains uniquely positioned to create a regulatory definition of an investment advice fiduciary under ERISA that is uniformly applicable to all the types of investments that retirement investors make. For example, the Department’s proposal fills an important gap regarding advice to plans and plan fiduciaries. Advice from broker-dealers to plans and plan fiduciaries is not protected by the SEC’s Regulation Best Interest. And the NAIC Model Regulation does not apply to transactions involving contracts used to fund retirement plans covered by ERISA. The fiduciary advice definition in Title I and Title II of ERISA, however, extends more broadly to cover advice to plan and IRA fiduciaries as well as plan participants, beneficiaries, and IRA owners and beneficiaries. This provides important protections to the retirement investors saving through these plans. The proposed rule would apply uniformly to advice to retirement investors within the ambit of Title I and Title II of ERISA, as is consistent with the text of the statutory definition which draws no distinctions between these different categories of retirement investors. The proposal also takes on special importance in creating uniform standards for investment transactions that are not covered by the Federal securities laws. Some types of plan and IRA investments, such as real estate, fixed indexed annuities, certificates of deposit, and other bank products, may not be subject to the SEC’s Regulation Best Interest, and 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. An update to the regulatory definition of an investment advice fiduciary, for purposes of Title I and Title II of ERISA, will enhance protections of retirement investors. This approach reflects both the statutory text, which adopts a uniform approach to all assets held in tax-advantaged retirement plans, as well as sound public policy. When investment professionals hold themselves out to retirement investors as making recommendations based on the retirement investors’ best interests, their recommendations should be driven by a uniform fiduciary obligation, and not by perceptions that one category of investment product is subject to lower regulatory standards than another. Since ERISA’s enactment, the Department has been expressly given the authority under Title I of ERISA 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 1978,89 which Congress ratified in 1984,90 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.91 Thus, the Department has clear 89 5 U.S.C. App. 1 (2018). 1, Public Law 98–532, 98 Stat. 2705 (Oct. 19, 1984). 91 Sec. 102, 5 U.S.C. App. 1. 90 Sec. 88 Donovan v. Bierwirth, 680 F.2d 263, 272 n. 8 (2d. Cir. 1982), cert denied, 459 U.S. 1069 (1982). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 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 proposal to honor the text and purposes of Title I and Title II of ERISA. 2. Summary of the Major Provisions of the Proposed Rule The Department proposes that a person would be an investment advice fiduciary 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 provides the advice or makes the recommendation in one of the following contexts: • The person either directly or indirectly (e.g., through or together with any affiliate) has discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities or other investment property for the retirement investor; • The person either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of their business and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or • The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.92 92 This proposed rule is accompanied by proposals (published elsewhere in the Federal Register) related to prohibited transaction exemptive relief. The proposals would amend existing PTEs, including PTE 2020–02, that allow, subject to protective conditions, investment advice fiduciaries to receive compensation and engage in transactions that otherwise would be prohibited. Unlike the PTEs that were a part of the 2016 Rulemaking, these PTEs do not, and the amendments would not, include required contracts or warranties that the Fifth Circuit objected to. These prohibited transaction exemptions also do not exempt a party from status as a fiduciary, and therefore, the proposals do not affect the scope of the regulatory definition of an investment advice fiduciary. Rather, the exemption proposals involve an exercise of the statutory authority afforded to the Department by Congress to grant administrative relief from the strict prohibited transaction provisions in Title I and Title II of ERISA for beneficial transactions involving plans and IRAs. See section 408(a) of ERISA (requiring the Department to make findings before granting an exemption that the exemption is administratively feasible, in the interests of the plan or IRA and of its participants and beneficiaries, and protective of E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 It is important to note that each required component of the new proposed regulatory definition would have to be satisfied with respect to any particular recommendation for the recommendation to constitute fiduciary investment advice. In accordance with the statute, fiduciary status is determined on a transactional basis. Under the statutory text, a person is a fiduciary with respect to advice ‘‘to the extent . . . [they] render[] investment advice for a fee or other compensation, direct or indirect.’’ The proposed rule, like the statute, applies fiduciary status on a transaction-by-transaction basis. One is only a fiduciary ‘‘to the extent’’ the person making the recommendation meets the rule’s requirements with respect to the particular advice transaction at issue. The Department believes the test that it is proposing here better honors the statute and retirement investors’ legitimate expectations of impartial investment advice from trusted advice providers than the 1975 rule, while avoiding the danger of sweeping too broadly and covering recommendations that Congress might not have intended to cover. The Department’s proposal is also intended to be responsive to the Fifth Circuit’s emphasis on relationships of trust and confidence. The current proposal is much more narrowly tailored than the 2016 Final Rule, which treated as fiduciary advice, any compensated investment recommendation as long as it was directed to a specific retirement investor regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA. In contrast, the proposal provides that fiduciary status would attach only if compensated recommendations are made in certain specified contexts, each of which describes circumstances in which the retirement investor can reasonably place their trust and confidence in the advice provider. The Department believes the approach in this proposal is consistent with the statutory definition that applies fiduciary status on a functional (and therefore, transactional) basis.93 the rights of participants and beneficiaries of such plan or IRA); section 4975(c)(2) of the Code (same). 93 Mertens v. Hewitt Assocs., 508 U.S. 248 (1993). In this regard, the Department notes that the SEC’s Regulation Best Interest also applies on a transactional basis. As stated by the SEC, ‘‘the provision of recommendations in a broker-dealer relationship is generally transactional and episodic, and therefore the final rule requires that brokerdealers act in the best interest of their retail customers at the time a recommendation is made and imposes no duty to monitor a customer’s VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 The proposed regulatory definition of an investment advice fiduciary includes the following paragraphs, which are discussed in greater detail below. Paragraph (c) of the proposed 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. 3. Covered Advice and Recommendations Paragraph (c)(1) of the proposed regulation provides that a person renders ‘‘investment advice’’ with respect to moneys or other property of a plan or IRA if the person makes a recommendation of any securities or other investment transaction or any investment strategy involving securities or other investment property to the plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA fiduciary, subject to certain specified criteria. Paragraphs (c)(1)(i), (ii), and (iii) set forth three alternative contexts under which covered recommendations would constitute investment advice for purposes of the statutory definitions of an investment advice fiduciary in Title I and Title II of ERISA. As discussed herein, under each of these three contexts, the Department believes that retirement investors could reasonably place their trust and confidence in the advice provider. The proposal also makes clear that fiduciary status under Title I and/or Title II of ERISA may result from recommendations to any of the relevant plan actors, including not only the plan fiduciary, but also plan participants, IRA owners, and their beneficiaries. This is consistent with the Department’s longstanding position that advice to a plan participant or beneficiary is advice to the plan.94 Paragraph (c)(1)(i) In the first context, which is set forth in proposed paragraph (c)(1)(i), a person renders fiduciary ‘‘investment advice’’ within the meaning of ERISA section 3(21) if the person rendering advice account following a recommendation.’’ 84 FR 33318, 33331 (July 12, 2019). 94 IB 96–1, 29 CFR 2509.96–1. For purposes of this definition, a participant or beneficiary of the plan is not a ‘‘plan fiduciary’’ with respect to the plan. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 75901 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. This proposed provision is similar to a provision in the 1975 rule that provides for investment advice fiduciary status if a covered recommendation is made and the person making the recommendation either directly or indirectly has ‘‘discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities or property for the plan.’’ 95 The proposal would broaden this provision by referencing securities or other investment property of the retirement investor, not just an investment through a plan or IRA. Persons that have discretionary authority or control over the investment of a retirement investor’s assets necessarily are in a relationship of trust and confidence with respect to the retirement investor.96 Further, like the 1975 provision, the proposal would extend to circumstances in which the person making the recommendation ‘‘indirectly (e.g., through or together with any affiliate)’’ has discretionary authority or control over securities or other investment property; in this context, the use of ‘‘indirectly’’ generally refers to an arrangement in which an affiliate has discretionary authority or control. Paragraph (c)(1)(ii) The second context, in proposed paragraph (c)(1)(ii), sets forth that a person provides fiduciary ‘‘investment advice’’ if the person making the recommendation directly or indirectly (e.g., through or together with an affiliate) makes investment recommendations to investors on a 95 See 29 CFR 2510.3–21(c)(1)(ii)(A) and 26 CFR 54.4975–9(c)(1)(ii)(A) (emphasis added). See also paragraph (d) of the proposal, which provides that a person is not a fiduciary merely because they have certain specific discretion in connection with the execution of securities transactions. 96 As discussed below, the proposed rule would not impose on a fiduciary an automatic fiduciary obligation to continue to monitor an investment or a retirement investor’s activities to ensure the recommendations remain prudent and appropriate for the plan or IRA. The extent of a monitoring obligation would depend on whether the facts and circumstances indicate that the fiduciary has undertaken that responsibility. A fiduciary that assumes discretion over plan or IRA assets, however, would generally be viewed as assuming a monitoring obligation. E:\FR\FM\03NOP3.SGM 03NOP3 75902 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 regular basis as part of their business and the recommendation is provided under circumstances indicating 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. The proposed provision applies only to advice rendered by a person who makes investment recommendations to investors ‘‘on a regular basis as part of their business.’’ As compared to the ‘‘regular basis’’ prong of the 1975 regulation, which the Department believes can work to undermine the current reasonable expectations of retirement investors, this proposed provision is properly focused on whether the advice provider is in the business of providing investment recommendations. The proposal’s updated regular basis requirement avoids concerns that the rule could sweep so broadly as to cover, for example, the car dealer who suggests that a consumer finance a purchase by tapping into retirement funds. Retirement investors would not typically view such persons as making investment recommendations based on the retirement investors’ individual financial interests, and the rule would not treat them as fiduciaries. Similarly, the human resources employees of a plan sponsor would not be considered investment advice fiduciaries under the proposed regulatory definition, because they do not regularly make investment recommendations to investors as part of their business.97 However, the proposal’s regular basis requirement would not defeat legitimate investor expectations by automatically excluding one-time advice from treatment as fiduciary investment advice.98 For example, the proposed 97 The Department also would not consider salaries of human resources employees of the plan sponsor to be a fee or other compensation in connection with or as a result of the educational services and materials that they provide to plan participants and beneficiaries. Further, the proposed rule does not alter the principles articulated in ERISA Interpretive Bulletin 75–8, D– 2 (29 CFR 2509.75–8) (IB 75–8). IB 75–8 provides that persons who perform purely administrative functions for an employee benefit plan, within a framework of policies, interpretations, rules, practices and procedures made by other persons, but who have no power to make decisions as to plan policy, interpretations, practices or procedures, are not fiduciaries with respect to the plan by virtue of those purely ministerial functions. 98 As 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 VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 rule would treat an insurance agent’s recommendation to invest a retiree’s retirement savings in an annuity as fiduciary advice if the agent regularly makes investment recommendations to investors, and the circumstances indicate that the recommendation is based on the retiree’s particular needs and circumstances and may be relied upon for making an investment decision that is in the investor’s best interest. Similarly, if the agent told the retiree that they were rendering fiduciary advice, the proposal would treat the recommendation as fiduciary advice even if was one-time advice. Over time, the Department has become concerned that 1975 regulation’s regular basis test 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. By limiting the scope of those who may be an investment advice fiduciary to those who make investment recommendations as a regular part of their business, the Department believes that the proposed definition is appropriately tailored to those advice providers in whom retirement investors may reasonably place their trust and confidence. Whether someone gives investment recommendations on a regular basis as part of their business is an objective test based on the totality of facts and circumstances.99 The Department invites comment on this approach, including the extent to which the Department should consider the investor’s understandings as to whether the adviser regularly makes investment recommendations as part of their business. The Department seeks comment regarding examples of financial professionals who may be reasonably viewed by investors as 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). 99 The reference to ‘‘investment recommendations’’ here and elsewhere in the proposal does not indicate that the proposal is limited to broker-dealers, or parties who regularly provide advice or make recommendations in the securities or banking industries. The scope of the regulation would extend to recommendations involving securities or other investment property. Therefore, for example, insurance agents who regularly make recommendations to customers with respect to the purchase of annuity contracts would be considered to make investment recommendations to investors on a regular basis as part of their business. Proposed paragraph (f)(11) 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. PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 giving investment advice but would not in fact meet the requirements laid out in this provision. Proposed paragraph (c)(1)(ii) further provides that, to count as fiduciary advice, the recommendation must be 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.’’ This provision of the proposal is similar to, but improves upon, the parts of the 1975 regulation that require a ‘‘mutual agreement, arrangement or understanding’’ that the advice will serve as ‘‘a primary basis’’ for the retirement investor’s investment decisions. Instead of the ‘‘mutual agreement, arrangement, or understanding’’ requirement—which over time has encouraged investment professionals to hold themselves out as trusted advisers while disclaiming fiduciary status in the fine print—the proposal would focus on the objective ‘‘circumstances’’ surrounding the recommendation, including how the investment professional held themselves out to the retirement investor and described the services offered. The Department believes that the proposed language will better avoid loopholes and fine print disclaimers, while properly focusing on a reasonable understanding of the nature of their relationship. Further, the proposal does not include the 1975 regulation’s ‘‘primary basis’’ requirement, which has proved difficult to interpret and untethered from the extent to which the recommendation was presented as advice upon which the investor could rely in making a decision.100 Instead, the proposal has a requirement that the circumstances indicate that the recommendation ‘‘may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.’’ Recommendations that meet this test can be outcome-determinative for the investor and are appropriately treated as fiduciary advice when the elements of the proposed rule are satisfied. In determining whether proposed paragraph (c)(1)(ii) is satisfied, the Department intends to examine the 100 See Preamble to Prohibited Transaction Exemption 2020–02, Improving Investment Advice for Workers & Retirees, 85 FR 82798, 82808 (Dec. 18, 2020) (discussing comments on whether the test focuses on ‘‘a’’ primary basis or ‘‘the’’ primary basis). E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 ways investment advice providers market themselves and describe their services. For example, some stakeholders have previously expressed concern that investment advice providers that adopt titles such as financial consultant, financial planner, and wealth manager, are holding themselves out as acting in positions of trust and confidence while simultaneously disclaiming status as an ERISA fiduciary.101 In the Department’s view, an investment advice provider’s use of such titles routinely involves holding themselves out as making investment recommendations that will be based on the particular needs or individual circumstances of the retirement investor and may be relied upon as a basis for investment decisions that are in the retirement investor’s best interest. Of course, whether a recommendation is provided under circumstances indicating that it is based on the particular needs or individual circumstances of the retirement investor and that it may be relied upon as a basis for investment decisions that are in the retirement investor’s best interest is only part of the consideration. Even if a recommendation satisfies a portion of the definition, it is not fiduciary investment advice unless each aspect is satisfied (e.g., to satisfy paragraph (c)(1)(ii), the person must also (directly or indirectly) make investment recommendations on a regular basis as part of their business). The Department invites comments on the extent to which particular titles are commonly perceived to convey that the investment professional is providing individualized recommendations that may be relied upon as a basis for investment decisions in a retirement investor’s best interest (and if not, why such titles are used). The Department also requests comment on whether other types of conduct, communication, representation, and terms of engagement of investment advice providers should merit similar treatment. Paragraph (c)(1)(iii) The third context identified in the proposal, in proposed paragraph (c)(1)(iii), is if the person making recommendations represents or acknowledges that they are acting as a fiduciary when making investment recommendations. An investment advice provider that acknowledges fiduciary status has expressly agreed that the customer may place trust and confidence in them. Furthermore, as discussed in the Fifth Circuit’s opinion, 101 See id. at 82803. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 honesty is a general premise of a common law fiduciary relationship.102 This provision of the proposal would ensure that parties making a fiduciary representation or acknowledgment cannot subsequently deny their fiduciary status if a dispute arises, but rather must honor their words. For purposes of the proposal, paragraph (c)(1)(iii) is not limited to the circumstances in which the person specifically represents that they are a fiduciary for purposes of Title I or Title II of ERISA, or specifically cites any particular statutory provisions. It is enough that the investment advice provider told the retirement investor that the investment advice or investment recommendations were or will be made in a fiduciary capacity. As with the other contexts identified in proposed paragraph (c)(1), this is intended to align fiduciary status with the retirement investor’s reasonable expectations. A retirement investor who is told by a person that the person will be acting as a fiduciary reasonably and appropriately places their trust and confidence in such a person. In the retirement context, the Department has stressed the importance of clarity regarding the nature of an advice relationship and has encouraged retirement investors to ask advice providers about their status as an ERISA fiduciary with respect to retirement accounts and seek a written statement of the advice provider’s fiduciary status. The Department’s FAQs entitled Choosing the Right Person to Give You Investment Advice: Information for Investors in Retirement Plans and Individual Retirement Accounts state ‘‘A written statement helps ensure that the fiduciary nature of the relationship is clear to both you and the investment advice provider at the time of the transaction, and limits the possibility of miscommunication.’’ 103 Many retirement investors may receive a written fiduciary acknowledgment due to compliance obligations of an investment advice provider. For example, retirement investors that are plan fiduciaries entering into an investment advice services arrangement on behalf of the plan are likely to receive an acknowledgment of fiduciary status from the provider as part of the disclosure obligations under ERISA section 408(b)(2) and the regulations 102 Chamber, 885 F.3d 360, 370 (5th Cir. 2018) (citing George M. Turner, Revocable Trusts § 3:2 (Sept. 2016 Update)). 103 Available at https://www.dol.gov/agencies/ ebsa/about-ebsa/our-activities/resource-center/faqs/ choosing-the-right-person-to-give-you-investmentadvice. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 75903 thereunder.104 Further, an upfront written acknowledgment of fiduciary status is a requirement of several prohibited transaction exemptions available to investment advice fiduciaries, including the statutory exemption added by Congress at ERISA section 408(b)(14) 105 and the Department’s broad administrative exemption, PTE 2020–02.106 As discussed in the preamble to PTE 2020–02, the Department believes that parties seeking to provide investment advice to retirement investors and relying on the exemption should, at a minimum, make a conscious up-front determination of whether they are acting as fiduciaries; tell their retirement investor customers that they are rendering advice as fiduciaries; and, based on their conscious decision to act as fiduciaries, implement and follow the exemption’s conditions.107 Disclaimers Paragraph (c)(1)(v) of the proposal addresses the impact of disclaimers on parties’ status as investment advice fiduciaries. The proposed paragraph provides that written statements by a person disclaiming status as a fiduciary under the Act, the Code, or this regulation, or disclaiming any of the conditions set forth in paragraph (c)(1)(ii), will not control to the extent they are inconsistent with the person’s oral communications, marketing materials, applicable State or Federal law, or other interactions with the retirement investor. The Department’s intent in including this paragraph in the proposal is to permit parties to define the nature of their relationship, but also to ensure that any disclaimer be consistent with oral communications or actions, marketing material, State and Federal law, and other interactions based on all relevant facts and circumstances. When the disclaimer is at odds with the investment advice provider’s oral communications, marketing material, State or Federal law, or other interactions, the disclaimer is insufficient to defeat the retirement investor’s legitimate expectations.108 104 29 CFR 2550.408b–2(c)(1)(iv)(B). ERISA section 408(g)(6)(A)(vii), 29 U.S.C. 1108(g)(6)(A)(vii) (‘‘[T]he fiduciary adviser [must] provide[] to a participant or a beneficiary before the initial provision of the investment advice with regard to any security or other property offered as an investment option, a written notification (which may consist of notification by means of electronic communication) . . . that the adviser is acting as a fiduciary of the plan in connection with the provision of the advice . . . .’’). 106 Section II(b)(1). 107 85 FR 82798, 82827 (Dec. 18, 2020). 108 This discussion of disclaimers applies to the regulation proposed herein, defining an investment 105 See E:\FR\FM\03NOP3.SGM Continued 03NOP3 75904 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 4. Recommendations Regarding Securities Transactions or Other Investment Transactions or Investment Strategies The definition of ‘‘investment advice’’ in proposed paragraph (c)(1) requires that there be ‘‘a recommendation regarding securities transactions or other investment transactions or investment strategies.’’ Recommendation Whether a person has made a ‘‘recommendation’’ is a threshold element in establishing the existence of fiduciary investment advice. 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. The analysis would apply equally to a communication that is made orally or in writing and would include electronic communications. The determination of whether a recommendation has been made would be an objective rather than a subjective inquiry. In this regard, the more individually tailored the communication is to a specific retirement investor or investors about, for example, a security, investment property, or investment strategy, the more likely the communication will be viewed as a recommendation; however, the Department cautions that the fact that a communication is made to a group rather than an individual would not be dispositive of whether a recommendation exists. Additionally, 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. Furthermore, 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. Even if an action rises to the level of a recommendation, the advice is only fiduciary investment advice if the rest of the regulatory test is met. In evaluating whether a recommendation has been made under advice fiduciary, and would not extend to a circumstance in which a financial professional has investment discretion over a retirement investor’s assets. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 the proposal, the Department intends to take an approach similar to that taken by the SEC and FINRA in the brokerdealer context. In the SEC’s Regulation Best Interest, the SEC stated that it would apply the term as currently interpreted with respect to broker-dealer regulation for purposes of the suitability obligations, to achieve efficiencies for broker-dealers.109 The Department likewise believes that efficiencies will apply if it adopts a similar approach. In the Regulation Best Interest release, the SEC stated, [T]he determination of whether a brokerdealer 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.’’ 110 The SEC did not include a formal definition of a recommendation in Regulation Best Interest, based on its view that the concept of a recommendation is fact-specific and not conducive to an express definition.111 In drafting this proposal, the Department has worked to ensure alignment with the regulatory regimes of the SEC and other regulatory agencies, and is proposing a similar approach. In the Department’s view, the framework established by the SEC for broker-dealers is consistent with ordinary understandings of ‘‘advice’’ and familiar to the broker-dealers that are regulated by the SEC. Accordingly, the Department would consider a recommendation for purposes of the SEC’s Regulation Best Interest as a recommendation for purposes of this proposed regulation. The Department seeks comment on whether the approach taken in the proposal is sufficiently clear, or whether an express definition would be preferable. Definition of the phrase ‘‘recommendation of any securities transaction or other investment 109 Regulation Best Interest release, 84 FR 33318, 33335 (July 12, 2019); see id. at fn. 161 (providing citations to relevant FINRA guidance, including on the definition and contours of the term ‘‘recommendation’’). 110 Id. 111 Id. PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 transaction or any investment strategy involving securities or other investment property.’’ Proposed paragraph (f)(10) defines the phrase ‘‘recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property.’’ This phrase largely parallels the language in the SEC’s Regulation Best Interest, which applies to broker-dealers’ ‘‘recommendation of any securities transaction or investment strategy involving securities (including account recommendations).’’ 112 The phrase’s broader reference to ‘‘other investment property’’ reflects the differences in jurisdiction between the SEC and the Department. Under proposed paragraph (f)(10), the phrase ‘‘recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property’’ is defined as recommendations: • As to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, as to investment strategy, or as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA; • As to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., account types such as brokerage versus advisory) or voting of proxies appurtenant to securities; and • As to rolling over, transferring, or distributing assets from an employee benefit plan or IRA, including recommendations as to whether to engage in the transaction, and the amount, the form, and the destination of such a rollover, transfer, or distribution. Components of these proposed covered recommendations are discussed below. Recommendations Involving Securities, Other Investment Property, and Investment Strategy Paragraph (f)(10)(i) of the proposal describes, as covered recommendations, recommendations as to ‘‘the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, as to investment strategy, or as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or 112 17 E:\FR\FM\03NOP3.SGM CFR 240.15l–1(a)(1). 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules distributed from the plan or IRA.’’ Similar to the SEC and FINRA, the Department intends to interpret ‘‘investment strategy’’ broadly, to include ‘‘among others, recommendations generally to use a bond ladder, day trading . . . or margin strategy involving securities, irrespective of whether the recommendations mention particular securities.’’ 113 The reference to ‘‘other investment property’’ is intended to capture other investments made by plans and IRAs that are not securities. This includes, but would not be limited to, nonsecurities annuities, banking products, and digital assets (regardless of status as a security). The Department does not see any basis for differentiating advice regarding investments in CDs, including investment strategies involving CDs (e.g., laddered CD portfolios), from other investment products, and therefore would interpret paragraph (f)(10) to cover such recommendations. The Department proposes that the term investment property, however, not include health insurance policies, disability insurance policies, term life insurance policies, and other property to the extent the policies or property do not contain an investment component. This is confirmed in a proposed definition of ‘‘investment property’’ in paragraph (f)(11). Although there can be situations in which a person recommending group health or disability insurance, for example, effectively exercises such control over the decision that the person is functionally exercising discretionary control over the management or administration of the plan as described in ERISA section 3(21)(A)(i) or section 3(21)(A)(iii), the Department does not believe that the definition of investment advice in ERISA’s statutory text is properly interpreted or understood to cover a recommendation to purchase group health, disability, term life insurance, or similar insurance policies that do not have an investment component. lotter on DSK11XQN23PROD with PROPOSALS3 Recommendations as to How Securities or Other Investment Property Should Be Invested After Rollover, Transfer, or Distribution Proposed paragraph (f)(10)(i) also references recommendations ‘‘as to how securities or other investment property should be invested after the securities or other investment property are rolled 113 Regulation Best Interest release, 84 FR 33318, 33339 (July 12, 2019) (citing FINRA Rule 2111.03 and FINRA Regulatory Notice 12–25, available at https://www.finra.org/rules-guidance/notices/12-2). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 over, transferred, or distributed from the plan or IRA.’’ This proposed provision addresses an important concern of the Department that investment advice providers should not be able to avoid fiduciary responsibility for a rollover recommendation by focusing solely on the investment of assets after they are rolled over from the plan. In many or most cases, a recommendation to a plan participant or beneficiary regarding the investment of securities or other investment property after a rollover, transfer, or distribution involves an implicit recommendation to the participant or beneficiary to engage in the rollover, transfer, or distribution. Certainly, a prudent and loyal fiduciary generally could not make a recommendation on how to invest assets currently held in a plan after a rollover, without even considering the logical alternative of leaving the assets in the plan or evaluating how that option compares with the retirement investor’s likely investment experience postrollover. A fiduciary would violate ERISA’s 404 obligations if it recommended that a retirement investor roll the money out of the plan without proper consideration of how the money might be invested after the rollover. Moreover, even in those relatively rare circumstances in which there is no implicit rollover recommendation, advice to a plan participant on how to invest assets currently held in an ERISA-covered plan is ‘‘advice with respect to moneys or other property of such plan’’ within the meaning of section 3(21)(A)(ii) of ERISA, inasmuch as the assets at issue are still held by the plan. The Department requests comments on the proposed language, and on whether this approach will appropriately protect the interests of plan participants and beneficiaries, or whether another approach would be more protective. Recommendations on Strategies, Management of Securities or Other Investment Property, and Account Types Paragraph (f)(10)(ii) of the proposed rule describes, as covered recommendations, recommendations as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., account types such as brokerage versus advisory), or the voting of proxies appurtenant to securities. The statutory text broadly PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 75905 refers to ‘‘investment advice . . . with respect to any moneys or other property of such plan.’’ Recommendations as to investment management or strategy fall within the most straightforward reading of the statutory text. Accordingly, the proposed regulation makes clear that covered investment advice is not artificially limited solely to recommendations to buy, sell, or hold particular securities or investment property to the exclusion of all the other important categories of investment advice that investment professionals routinely provide. This provision of the proposed regulation also makes clear that recommendations as to the selection of investment account arrangements would be covered. Accordingly, a recommendation to move from a commission-based account to an advisory fee-based account (or vice versa) would be a covered recommendation. The provision is consistent with the SEC’s Regulation Best Interest and the Advisers Act’s fiduciary obligations.114 Recommendation on the Selection of Other Persons To Provide Investment Advice or Investment Management Proposed paragraph (f)(10)(ii) extends to recommendations as to ‘‘selection of other persons to provide investment advice or investment management services.’’ Consistent with the Department’s longstanding position, the proposed regulation would cover the recommendation of another person to be entrusted with investment advice or investment management authority over retirement assets. Such recommendations are often critical to the proper management and investment of those assets and are fiduciary in nature if the other conditions of the proposed definition are satisfied. Recommendations of investment advisers or managers are no different than recommendations of investments that the plan or IRA may acquire and are often, by virtue of the track record or 114 17 CFR 240.15l–1(a)(1) (‘‘A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer, shall 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, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.’’) (emphasis added); SEC Investment Adviser Interpretation, 84 FR at 33674 (‘‘An adviser’s fiduciary duty applies to all investment advice the investment adviser provides to clients, including advice about investment strategy, engaging a sub-adviser, and account type.’’). E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 75906 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules information surrounding the capabilities and strategies that are employed by the recommended fiduciary, inseparable from recommendations as to the types of investments that the plan or IRA will acquire. For example, the assessment of an investment fund manager or management is often a critical part of the analysis of which fund to pick for investing plan or IRA assets. Under this proposal, the Department does not intend to suggest, however, that a person could become a fiduciary merely by engaging in the normal activity of marketing themselves as a potential fiduciary to be selected by a plan fiduciary or IRA owner, without making a recommendation of a securities transaction or other investment transaction or any investment strategy involving securities or other investment property. Touting the quality of one’s own advisory or investment management services would not trigger fiduciary obligations. This view is made clear by the language in proposed paragraph (f)(10)(ii) that extends to recommendations of ‘‘other persons’’ to provide investment advice or investment management services. However, this discussion should not be read to exempt a person from being a fiduciary with respect to any of the investment recommendations covered by proposed paragraphs (c)(1) and defined in proposed paragraph (f)(10). There is a line between an investment advice provider making claims as to the value of its own advisory or investment management services in marketing materials, on the one hand, and making recommendations to retirement investors on how to invest or manage their savings, on the other. An investment advice provider can recommend that a retirement investor enter into an advisory relationship with the provider without acting as a fiduciary. But when the investment advice provider recommends, for example, that the investor pull money out of a plan or invest in a particular fund, that advice may be given in a fiduciary capacity even if part of a presentation in which the provider is also recommending that the person enter into an advisory relationship. As proposed, the complete facts and circumstances surrounding each piece of advice would be considered. The Department believes that this is consistent with the functional fiduciary test laid out in the statute in which an entity is an investment advice fiduciary to the extent that they satisfy the definition. Just because one piece of advice is not fiduciary investment advice (here, the ‘‘hire me’’ recommendation) does not mean that VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 the rest of the advice is necessarily excluded from the definition (here, the advice to pull money out of the plan and invest in a particular fund). The investment advice fiduciary could not prudently recommend that a plan participant roll money out of a plan into investments that generate a fee for the fiduciary but leave the participant in a worse position than if the participant had left the money in the plan. Thus, when a recommendation to ‘‘hire me’’ effectively includes a recommendation on how to invest or manage plan or IRA assets (e.g., whether to roll assets into an IRA or plan or how to invest assets if rolled over), that recommendation would need to be evaluated separately under the provisions in the proposed regulation.115 Proxy Voting Appurtenant to Ownership of Shares of Corporate Stock Proposed paragraph (f)(10)(ii) also extends to recommendations as to the ‘‘voting of proxies appurtenant to securities.’’ The Department has long viewed the exercise of ownership rights as a fiduciary responsibility; consequently, advice or recommendations on the exercise of proxy or other ownership rights are appropriately treated as fiduciary in nature if the other conditions of the regulation are satisfied.116 Similar to other types of broad, generalized guidance that would not rise to the level of investment advice, however, guidelines or other information on voting policies for proxies that are provided to a broad class of investors without regard to a client’s individual interests or investment policy and that are not directed or presented as a recommended policy for the plan or IRA to adopt, would not rise to the level of a covered recommendation under the proposal. Similarly, a recommendation addressed to all shareholders in an SEC-required proxy statement in connection with a shareholder meeting of a company 115 The Department believes this approach is consistent with the SEC’s approach in Regulation Best Interest. In FAQs, the SEC described a scenario involving broker-dealer communications with a prospective retail customer that would not rise to the level of a recommendation. However, the SEC cautioned that a recommendation made in the context of a ‘‘hire me’’ conversation or otherwise would be subject to Regulation Best Interest. See Questions on Regulation Best Interest, available at https://www.sec.gov/tm/faq-regulation-best-interest. 116 See Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, 85 FR 81658 (Dec. 16, 2020) (‘‘In connection with proxy voting, the Department’s longstanding position is that the fiduciary act of managing plan assets includes the management of voting rights (as well as other shareholder rights) appurtenant to shares of stock.’’). PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 whose securities are registered under Section 12 of the Exchange Act, for example, soliciting a shareholder vote on the election of directors and the approval of other corporate action, would not, under the proposed rule, constitute fiduciary investment advice from the person who creates or distributes the proxy statement. Recommendations on Rollovers, Benefit Distributions, or Transfers From Plan or IRA Proposed paragraph (f)(10)(iii) describes, as a category of covered recommendations, recommendations ‘‘as to rolling over, transferring, or distributing assets from an employee benefit plan or IRA, including recommendations as to whether to engage in the transaction, and the amount, the form, and the destination of such a rollover, transfer, or distribution.’’ This aspect of the proposal is consistent with the Department’s longstanding interest in protecting retirement investors in the context of a recommendation to roll over employee benefit plan assets to an IRA, as well as other recommendations to roll over, transfer, or distribute assets from a plan or IRA. The Department continues to believe that decisions to take a benefit distribution or engage in rollover transactions are among the most, if not the most, important financial decisions that plan participants and beneficiaries, and IRA owners and beneficiaries are called upon to make. The Department continues to believe that advice provided in connection with a rollover decision, even if not accompanied by a specific recommendation on how to invest assets, should be treated as fiduciary investment advice. A distribution recommendation involves either advice to change specific investments in the plan or to change fees and services directly affecting the return on those investments. Even if the assets would not be covered by Title I or Title II of ERISA when they are moved outside the plan or IRA, the recommendation to change the plan or IRA investments is investment advice under Title I or Title II of ERISA. Thus, recommendations on distributions (including rollovers or transfers into another plan or IRA) or recommendations to entrust plan assets to a particular IRA provider would fall within the scope of investment advice in this proposed regulation, and would be covered by Title I of ERISA, including the enforcement provisions of section 502(a). Further, in the Department’s view, the evaluation of whether a recommendation constitutes E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules fiduciary investment advice should be the same regardless of whether it is a recommendation to take a distribution or make a rollover to an IRA or a recommendation not to take a distribution or to keep assets in a plan. The proposal’s approach also aligns with the SEC’s Regulation Best Interest and Advisers Act fiduciary obligations, which extend to account recommendations generally as well as recommendations to roll over or transfer assets from one type of account to another.117 lotter on DSK11XQN23PROD with PROPOSALS3 5. Application of Paragraph (c)(1) The proposal provides a general rule under which investment advice providers could determine their status through application of the facts and circumstances surrounding their interactions with their customers. To aid parties in conducting the analysis, the Department provides the following discussion of the application of the general rule in certain common circumstances and requests comment on the discussion. The Department also seeks comment on whether any adjustment should be made to the regulatory text to address issues discussed herein. Sophisticated Retirement Investors The proposed regulation does not include any special provision for recommendations to sophisticated advice recipients. Rather, under the proposal, fiduciary status would turn on the application of proposed paragraph (c)(1). In the absence of investment discretion (see proposed paragraph (c)(1)(i)) or a fiduciary acknowledgment (see proposed paragraph (c)(1)(iii)), the investment advice provider’s fiduciary or non-fiduciary status would depend on the parties’ understandings under the particular facts and circumstances (see proposed paragraph (c)(1)(ii)). The Department acknowledges that some commenters in previous rulemakings have asserted that a specific ‘‘counterparty’’ provision is necessary to avoid limiting plan and IRA investors’ choices in investment transactions.118 Commenters have suggested that the Department should adopt certain metrics, such as wealth or income, as conclusively establishing that the retirement investor has sufficient expertise and sophistication 117 Regulation Best Interest release, 84 FR 33318, 33339 (July 12, 2019); SEC Investment Adviser Interpretation, 84 FR 33669, 33674 (July 12, 2019). 118 The 2016 Final Rule provided that, subject to specified conditions, certain transactions with independent fiduciaries with financial expertise would not constitute fiduciary investment advice. 81 FR 20946, 20980 (Apr. 8, 2016). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 to foreclose fiduciary status of an advice provider. The Department is unaware, however, of compelling evidence that wealth and income are strong proxies for financial sophistication or inconsistent with a relationship of trust and confidence.119 Moreover, and independently, nothing in the statute’s text suggests that Congress intended to categorically deny fiduciary protection to ‘‘sophisticated investors.’’ Instead of a specific ‘‘counterparty’’ provision or a provision for sophisticated plan- and IRA-level fiduciaries, proposed paragraph (c)(1)(ii) generally states an appropriate test for fiduciary status to apply to a covered recommendation, even if made to a plan or IRA fiduciary. To the extent counterparties wish to avoid fiduciary status, they can avoid structuring their relationships to fall within the circumstances described in that subparagraph. In the context of ‘‘wholesaling’’ activity, which involves communications by product manufacturers or other financial service providers to financial intermediaries who then directly advise plans, participants, beneficiaries, and IRA owners and beneficiaries, the Department believes that communications to financial intermediaries would typically fall outside the scope of proposed paragraph (c)(1)(ii) because they would not involve recommendations based on the particular needs or individual circumstances of the plan or IRA serviced by the intermediary. There may also be other circumstances in which application of proposed paragraph (c)(1)(ii) would not result in a covered recommendation being treated as fiduciary investment advice. In general, however, the Department envisions that proposed paragraph (c)(1)(ii) would apply broadly to recommendations to plan and IRA fiduciaries acting on behalf of plans and IRAs. More fundamentally, the Department rejects the purported dichotomy between a mere ‘‘sales’’ recommendation to a counterparty, on the one hand, and advice, on the other, in the context of the retail market for investment products. As reflected in recent regulatory developments from both the SEC and NAIC, financial service industry marketing materials, and the industry’s comment letters reciting the guidance they provide to investors, sales and advice typically go hand in hand in the retail market. 119 High net worth investors and sophisticated investors are not carved out of protections under the SEC’s Regulation Best Interest or the Advisers Act fiduciary duty. PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 75907 In the Department’s view, the updated conduct standards adopted by the SEC and the NAIC also reflect an acknowledgment of the fact that brokerdealers and insurance agents commonly provide paid investment and annuity recommendations to their customers. 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.’’ 120 The NAIC Model Regulation, section 6.5.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.’’ Further, ‘‘cash compensation’’ is defined 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.’’ 121 When retirement investors talk to investment advice providers about the investments they should make, they commonly pay for, and receive, advice within the meaning of the statutory definition. Platform Providers and Pooled Employer Plans Platform providers are entities that offer a platform or selection of investment alternatives to participantdirected individual account plans and their fiduciaries who choose the specific investment alternatives that will be made available to participants for investing their individual accounts. In connection with such offerings, platform providers may provide investment advice, or they may simply provide general financial information such as information on the historic performance of asset classes and of the investment alternatives available through the provider. In the case of a platform provider, application of the proposed regulation may often focus on whether the communications fall within the threshold definition of a ‘‘recommendation.’’ As discussed in section 4, whether a recommendation exists under the proposal will turn on the degree to which a communication is 120 84 FR 33318, 33319 (July 12, 2019). Model Rule section 5.B. (emphasis 121 NAIC added). E:\FR\FM\03NOP3.SGM 03NOP3 75908 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules ‘‘individually tailored’’ to the retirement investor or investors, 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. Therefore, the inquiry may turn on whether the provider presents the investments on the platform as having been selected for and appropriate for the investor (i.e., the plan and its participants and beneficiaries). In this regard, platform providers who merely identify investment alternatives using objective third-party criteria (e.g., expense ratios, fund size, or asset type specified by the plan fiduciary) to assist in selecting and monitoring investment alternatives, without additional screening or recommendations based on the interests of plan or IRA investors, would not be considered under the proposal to be making a recommendation. In the Department’s view, this same analysis is likely to apply in the context of pooled employer plans (PEPs), which are individual account plans established or maintained for the purpose of providing benefits to the employees of two or more employers, authorized in the Setting Every Community Up for Retirement Enhancement (SECURE) Act.122 PEPs are required to designate a pooled plan provider (PPP) who is a named fiduciary of the PEP.123 PPPs are in a unique statutory position in that they are granted full discretion and authority to establish the plan and all of its features, administer the plan, act as a fiduciary, hire service providers, and select investments and investment managers. When a PPP or another service provider interacts with an employer about investment options under the plan, whether they have made a recommendation under the proposal will turn, in part, on whether they present the investments as selected for, and appropriate for, the plan, its participants, or beneficiaries. lotter on DSK11XQN23PROD with PROPOSALS3 Swaps and Security-Based Swaps Swaps and security-based swaps are a broad class of financial transactions defined and regulated under amendments to the Commodity Exchange Act and the Securities Exchange Act of 1934 (Securities Exchange Act) by the Dodd-Frank Act. Section 4s(h) of the Commodity Exchange Act 124 and section 15F of the 122 ERISA section 3(43), 29 U.S.C. 1002(43). Section 3(43)(B), 29 U.S.C. 1002(43)(B). 124 7 U.S.C. 6s(h). 123 ERISA VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Securities Exchange Act 125 establish similar business conduct standards for dealers and major participants in swaps or security-based swaps. Special rules apply for swap and security-based swap transactions involving ‘‘special entities,’’ a term that includes employee benefit plans covered under ERISA. Under the business conduct standards in the Commodity Exchange Act as added by the Dodd-Frank Act, swap dealers or major swap participants that act as counterparties to ERISA plans must, among other conditions, have a reasonable basis to believe that the plans have independent representatives who are fiduciaries under ERISA.126 Similar requirements apply for securitybased swap transactions.127 The CFTC and the SEC have issued final rules to implement these requirements.128 In the Department’s view, when Congress enacted the swap and securitybased swap provisions in the DoddFrank Act, including those expressly applicable to ERISA-covered plans, it did not intend to broadly impose ERISA fiduciary status on the plan’s counterparty as it engaged in regulated conduct as part of the swap or securitybased swap transaction with the employee benefit plan. The Department conferred with both the CFTC and the SEC at the time of those agencies’ rulemakings, and assured harmonization of any change in the ERISA fiduciary advice regulation so as to avoid unintended consequences. The Department makes the same assurance with respect to this proposed regulation. The disclosures required of plans’ counterparties under the business conduct standards would not generally constitute a ‘‘recommendation’’ as defined in the proposal, or otherwise compel the dealers or major participants to act as fiduciaries in swap and security-based swap transactions conducted pursuant to section 4s of the Commodity Exchange Act and section 15F of the Securities Exchange Act. This includes disclosures regarding material risks, characteristics, incentives and conflicts of interest; disclosures regarding the daily mark of a swap or security-based swap and a counterparty’s clearing rights; disclosures necessary to ensure fair and balanced communications; and U.S.C. 78o–10(h). U.S.C. 6s(h)(5); 17 CFR 23.450. 127 15 U.S.C. 78o–10(h)(4), (5). 128 See 17 CFR 23.400–451; Business Conduct Standards for Swap Dealers and Major Swap Participants With Counterparties, 77 FR 9734 (Feb. 17, 2012); 17 CFR 240.15Fh–3–h–6; Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, 81 FR 29960 (May 13, 2016). disclosures regarding the capacity in which a swap or security-based swap dealer or major swap participant is acting when a counterparty to a special entity, as required by the business conduct standards. This is not to say that a dealer or major participant would necessarily fall outside the scope of the proposed regulation if, in addition to providing the disclosures mandated above, it also chose to make specific investment recommendations to plan clients. In that circumstance, a swap dealer could become a fiduciary by virtue of their voluntary decision to make individualized investment recommendations to an ERISA-covered plan if the subparagraph’s conditions were met.129 To the extent dealers wish to avoid fiduciary status under the proposal, however, they can structure their relationships to avoid making such investment recommendations to plans. Additionally, clearing firms would not be investment advice fiduciaries under the proposed rule merely as a result of providing such services as valuations, pricing, and liquidity information. As discussed in greater detail in the next section, the proposed rule does not include valuation and similar services as a category of covered recommendations. Valuation of Securities and Other Investment Property This proposed rule does not include valuation services, appraisal services, or fairness opinions as categories of covered recommendations. In this regard, the Department notes that the definition of ‘‘recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property’’ in proposed paragraph (f)(10) does not include reference to any of these functions. Accordingly, the provision of valuation services, appraisal services, or fairness opinions would not, in and of themselves, lead to fiduciary status under the proposed rule. The Department continues to believe issues related to valuation are best addressed through a separate rulemaking. 125 15 126 7 PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 129 The business conduct standards do not preclude a swap dealer from giving advice if it chooses to do so. See, e.g., 17 CFR 23.434 (imposing requirements on swap dealers that recommend a swap or trading strategy involving a swap to a counterparty); see also 17 CFR 240.15Fh–3(f) (similar provision applicable to security-based swap dealers). E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules 6. For a Fee or Other Compensation, Direct or Indirect Paragraph (e) of the proposal includes a definition of ‘‘for a fee or other compensation, direct or indirect,’’ for purposes of section 3(21)(A)(ii) of ERISA and section 4975(e)(3)(B) of the Code. The proposal provides: [A] person provides investment advice ‘‘for a fee or other compensation, direct or indirect,’’ if the person (or any affiliate) receives any explicit fee or compensation, from any source, for the advice or the person (or any affiliate) receives any other fee or other compensation, from any source, in connection with or as a result of the recommended purchase, sale, or holding of a security or other investment property or the provision of investment advice, including, though not limited to, commissions, loads, finder’s fees, revenue sharing payments, shareholder servicing fees, marketing or distribution fees, mark ups or mark downs, underwriting compensation, payments to brokerage firms in return for shelf space, recruitment compensation paid in connection with transfers of accounts to a registered representative’s new broker-dealer firm, expense reimbursements, gifts and gratuities, or other non-cash compensation. A fee or compensation is paid ‘‘in connection with or as a result of’’ such transaction or service if the fee or compensation would not have been paid but for the recommended transaction or provision of advice, including if eligibility for or the amount of the fee or compensation is based in whole or in part on the recommended transaction or the provision of advice. lotter on DSK11XQN23PROD with PROPOSALS3 This proposed definition is consistent with the preamble of the 1975 regulation, which states that ‘‘a fee or other compensation, direct or indirect’’ includes all fees or other compensation ‘‘incident to the transaction in which the investment advice to the plan has been rendered or will be rendered,’’ including, for example, brokerage commissions, mutual fund sales commissions, and insurance sales commissions.130 As the Department explained in the preamble when it proposed the exemption now at PTE 77–9: 131 [T]he Department and the [IRS] stated in the preamble sections of the notices announcing the adoption of the [1975 fiduciary definition] regulations that, until a more definitive statement is issued, the phrase ‘‘fee or other compensation, direct or indirect’’ for the rendering of investment advice for purposes of section 3(21)(A)(ii) of the Act and section 4975(e)(3)(B) of the Code should be deemed to include all fees or other compensation incidental to the transaction in which the investment advice to the plan has been rendered or will be rendered, and may therefore include insurance and mutual fund 130 40 FR 50842 (Oct. 31, 1975); 41 FR 56760, 56762 (Dec. 29, 1976). 131 41 FR 56760, 56762 (Dec. 29, 1976). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 sales commissions. The Department and the [IRS] have not modified or revised this position, notwithstanding the contrary views expressed in several of the applications for class exemption. This proposed definition is also consistent with, for example, guidance the Department provided just eight years after the 1975 regulation was finalized. Specifically, an association that represented broker-dealers asked the Department to ‘‘clarify the status of broker-dealers under ERISA.’’ 132 The association posited that fiduciary status under ERISA section 3(21)(A)(ii) (the ‘‘fee or other compensation, direct or indirect’’ provision) would not attach to broker-dealers ‘‘unless the broker-dealer provides investment advice for distinct, non-transactional compensation.’’ 133 The Department rejected this interpretation of ERISA section 3(21)(A)(ii). The Department stated that, based on the facts and circumstances presented by each case, if . . . the services provided by the brokerdealer 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.134 As the proposed regulation makes clear, however, there must be a link between the transaction-based compensation and the investment professional’s recommendation. Under the terms of the proposal, the compensation is treated as paid ‘‘in connection with or as a result of’’ the provision of advice only if it would not have been paid but for the recommended transaction or the provision of advice, or if the investment advice provider’s eligibility for the compensation (or its amount) is based in whole or part on the recommended transaction or the provision of advice. Under the proposed definition, any fee that is paid explicitly for the provision of investment advice would fall within the proposed definition of ‘‘for a fee or other compensation, direct 132 U.S. Department of Labor, Adv. Op. 83–60A (Nov. 21, 1983), available at https://www.dol.gov/ agencies/ebsa/about-ebsa/our-activities/resourcecenter/advisory-opinions/1983-60a. 133 Id. 134 Id.; see Letter from the Department of Labor to the Securities Industry Association (Mar. 1, 1984) (declining to modify this position); see also IB 96– 1, 61 FR 29586, 29589 at fn. 3 (June 11, 1996) (‘‘The Department has expressed the view that, for purposes of section 3(21)(A)(ii), such fees or other compensation need not come from the plan and should be deemed to include all fees or other compensation incident to the transaction in which the investment advise [sic] has been or will be rendered.’’ (citations omitted)). PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 75909 or indirect.’’ This would include, for example, a fee paid to an investment adviser under the Advisers Act based on the retirement investor’s assets under management. A fee or other compensation received in connection with an investment transaction also would fall within the proposed definition of ‘‘for a fee or other compensation, direct or indirect.’’ This treatment of investment compensation is in accord with the actions of other State and Federal regulators, and with the modern marketplace for investment advice in which brokers and insurance agents can do far more than merely execute transactions or close sales. Investment professionals are commonly compensated for their advice through the payment of transaction-based fees, such as commissions, which are contingent on the investor’s decision to engage in the recommended transaction. The SEC acknowledged this in the Regulation Best Interest release, noting that ‘‘there is broad acknowledgment of the benefits of, and support for, the continuing existence of the brokerdealer business model, including a commission or other transaction-based compensation structure, as an option for retail customers seeking investment recommendations. ’’135 The SEC discussion further contemplated that commissions compensate broker-dealers for their recommendations, and may be the preferred method of investment advice compensation with respect to certain transactions. As an example, the SEC stated that retail customers seeking a long-term investment may determine that ‘‘paying a one-time commission to a broker-dealer recommending such an investment is more cost effective than paying an ongoing advisory fee to an investment adviser merely to hold the same investment.’’ 136 The Department agrees that there are benefits to ensuring a wide range of compensation structures remain available to retirement investors. Likewise, the NAIC Model Regulation acknowledged that insurance agents make recommendations and might be compensated for their recommendations through commissions. The NAIC Model Regulation 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.’’ 137 The definition of ‘‘cash compensation’’ in the model regulation is: ‘‘any discount, concession, fee, service fee, 135 Regulation Best Interest release, 84 FR 33318, 33319 (July 12, 2019). 136 Id. 137 NAIC Model Regulation, at Section 6, 5. M. E:\FR\FM\03NOP3.SGM 03NOP3 75910 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules 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.’’ 138 When an investment professional meets the five-part test set out in the 1975 rule, or the fiduciary definition set forth in this proposal, the services rendered by the professional include individualized advice, and the compensation, including commission payments, is not merely for execution of a sale, but for the professional advice provided to the investor, as uniformly recognized by the Department’s previous guidance and by other State and Federal regulators.139 The statutory exemption for investment advice to participants and beneficiaries of individual account plans set forth in ERISA section 408(b)(14) similarly recognizes that compensation for advice often comes in the form of commissions and transaction-based compensation.140 Accordingly, the exemption applies to transactions ‘‘in connection with the provision of investment advice described in section 3(21)(A)(ii)’’ including ‘‘the direct or indirect receipt of fees or other compensation by the fiduciary adviser or an affiliate thereof . . . . in connection with the provision of the advice or in connection with an acquisition, holding, or sale of a security or other property available as an investment under the plan pursuant to the investment advice.’’ 141 As has been true since the Department first proposed regulations under this section in 1975 and as discussed above, the Department understands the phrase ‘‘for a fee or other compensation, direct or indirect’’ to encompass a broad array of compensation incident to the transaction.142 The Department requests comments on this portion of the proposal, including whether additional examples would be helpful. 138 Id. at Section 5. B. U.S. Department of Labor, Adv. Op. 83– 60A (Nov. 21, 1983), available at https:// www.dol.gov/agencies/ebsa/about-ebsa/ouractivities/resource-center/advisory-opinions/198360a. 140 29 U.S.C. 1108(b)(14). See Code section 4975(d)(17) (parallel statutory exemption). 141 29 U.S.C. 1108(b)(14) (emphasis added). 142 See Findings, Conclusions, and Recommendations of the United States Magistrate Judge, Federation of Americans for Consumer Choice v. U.S. Dep’t of Labor, No. 3:22–CV–00243– K–BT, 2023 WL 5682411, at *21 (N.D. Tex. June 30, 2023) (‘‘The expansive choice of investment advice ‘for other compensation’ indicates an intent to cover any transaction where the financial professional may receive conflicted income if they are acting as a trusted adviser.’’) lotter on DSK11XQN23PROD with PROPOSALS3 139 E.g., VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 7. Other Definitions in the Proposed Rule In addition to the definitions discussed above, proposed paragraph (f) would define a variety of other pertinent terms for purposes of the proposed rule. The definitions generally track other definitions within Title I and Title II of ERISA and the Federal securities laws. The definitions in proposed paragraph (f), not otherwise discussed above, are: ‘‘affiliate’’ (similar to that of paragraph (e)(1) of the 1975 rule); and ‘‘control’’ (similar to that of paragraph (e)(2) of the 1975 rule). ‘‘Plan’’ refers to any plan described under section 3(3) of ERISA and any plan described in section 4975(e)(1)(A) of the Code. For purposes of the proposal ‘‘IRA’’ refers to any account or annuity described in Code section 4975(e)(1)(B) through (F), including, for example, an individual retirement account described in section 408(a) of the Code and a health savings account described in section 223(d) of the Code.143 ‘‘Plan fiduciary’’ would use the same definition as described in section (3)(21)(A) of the Act and section 4975(e)(3) of the Code; for these purposes, a participant or beneficiary of the plan who is receiving advice is not a ‘‘plan fiduciary’’ with respect to the plan. Under the proposed rule ‘‘relative’’ refers to a person described in section 3(15) of the Act and section 4975(e)(6) of the Code and also includes a sibling, or a spouse of a sibling. ‘‘Plan participant’’ or ‘‘participant’’ (for a plan described in section 3(3) of ERISA), would be a person described in section 3(7) ERISA. 8. Scope of Investment Advice Fiduciary Duty Paragraph (c)(2) of the proposal confirms that a person who is a fiduciary with respect to a plan or IRA by reason of rendering investment advice is not deemed to be a fiduciary regarding any assets of the plan or IRA with respect to which that person does not have or exercise any discretionary authority, control, or responsibility or with respect to which the person does not render or have authority to render investment advice defined by the proposed rule. On the other hand, nothing in paragraph (c)(2) exempts such a person from the provisions of section 405(a) of the Act concerning 143 The definition of an IRA would also include an individual retirement annuity described in Code section 408(b), an Archer MSA described in Code section 220(d), and a Coverdell education savings account described in Code section 530. 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). PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 liability for violations of fiduciary responsibility by other fiduciaries or excludes such person from the definition of party in interest under section 3(14)(B) of the Act or section 4975(e)(2) of the Code. This provision is unchanged from the current 1975 regulation. The Department further notes that, if a person’s recommendations relate to the advisability of acquiring or exchanging securities or other investment property in a particular transaction, the proposed rule does not impose on the person an automatic fiduciary obligation to continue to monitor the investment or the retirement investor’s activities to ensure the recommendations remain prudent and appropriate for the plan or IRA. Instead, the obligation to monitor the investment on an ongoing basis would be a function of the reasonable expectations, understandings, arrangements, or agreements of the parties. Also, as has been made clear by the Department, there are a number of ways to provide fiduciary investment advice without engaging in transactions prohibited by Title I or Title II of ERISA because of the conflicts of interest they pose. For example, an investment advice provider can structure the fee arrangement to avoid a prohibited transaction (and the related conflicts of interest) by offsetting third party payments against direct fees agreed to by the retirement investor, as explained in advisory opinions issued by the Department.144 If there is not a prohibited transaction, then there is no need to comply with the terms of an exemption, though an investment advice fiduciary with respect to a Title I plan would still be required to comply with the statutory duties including prudence and loyalty. Proposed paragraph (d) of the regulation is identical to paragraph (d) of the 1975 regulation, apart from updated references. The paragraph specifically provides that the mere execution of a securities transaction at the direction of a plan or IRA owner would not be deemed to be fiduciary activity. The regulation’s scope remains limited to advice relationships, as delineated in its text, and does not cover transactions that are executed pursuant to specific direction in which no advice is provided. The Department seeks comment as to whether any updates to paragraph (d) are necessary. 144 U.S. Department of Labor, Adv. Op. 97–15A (May 22, 1997). E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 9. Interpretive Bulletin 96–1 The proposed regulation does not include a specific provision addressing investment education. Investment education is addressed in the Department’s IB 96–1, which was reinstated in 2020.145 IB 96–1 provides examples of four categories of information and materials regarding participant-directed individual account plans—plan information, general financial and investment information, asset allocation models, and interactive investment materials—that do not constitute investment advice. This is the case irrespective of who provides the information (e.g., plan sponsor, fiduciary, or service provider), the frequency with which the information is shared, the form in which the information and materials are provided (e.g., on an individual or group basis, in writing or orally, or via video or computer software), or whether an identified category of information and materials is furnished alone or in combination with other identified categories of information and materials. The IB states that there may be many other examples of information, materials, and educational services, which, if furnished to participants and beneficiaries, would not constitute ‘‘investment advice.’’ Although the Department issued IB 96–1 when the 1975 rule was in effect, the Department believes that the IB would continue to provide accurate guidance under the proposed regulation. If the proposed rule is finalized, the IB would continue to correctly describe the types of educational information and materials that should not be treated as ‘‘recommendations’’ subject to the fiduciary advice definition. Although the IB specifically applies in the context of participants and beneficiaries in participant-directed individual account plans, the Department believes that the analysis it presents is valid regardless of whether the retirement investor is a plan participant, beneficiary, IRA owner, IRA beneficiary, or fiduciary. One important example of investment education is the provision of information about the benefits of increasing contributions to an employee benefit plan. Under IB 96–1, the provision of information on ‘‘the benefits of plan participation’’ and the ‘‘benefits of increasing plan contributions’’ are both examples of ‘‘plan information.’’ The Department confirms that, for purposes of the proposal, the provision of such 145 85 FR 40589 (July 7, 2020). VerDate Sep<11>2014 21:24 Nov 02, 2023 information would not trigger fiduciary status. In the 2016 Final Rule, the Department incorporated the provisions of IB 96–1 into the regulatory text; as a result, certain provisions were specifically applicable to transactions involving IRAs. In addition, the Department made a few changes to the provisions. The Department clarified and expanded the category in IB 96–1 from ‘‘General Financial and Investment Information’’ to ‘‘General financial, investment, and retirement information.’’ The revised category included information on ‘‘[g]eneral methods and strategies for managing assets in retirement (e.g., systemic withdrawal payments, annuitization, guaranteed minimum withdrawal benefits).’’ This change was intended to improve retirement security by facilitating the provision of information and education relating to retirement needs that extend beyond a participant’s or beneficiary’s date of retirement. Such information would be considered nonfiduciary education as long as the provider did not recommend a specific investment or investment strategy.146 The Department cautions however, that to the extent a provider goes beyond providing education and gives investment advice on a specific investment or investment strategy, it is not appropriate to broadly exempt those communications from fiduciary liability. The Department believes that such an approach would be especially inappropriate in cases in which a service provider offers ‘‘educational’’ services that systematically exceed the boundaries of education. In such cases, when firms or individuals make specific investment recommendations to plan participants, they should adhere to basic fiduciary norms of prudence and loyalty and take appropriate measures to protect plan participants and beneficiaries from the potential harm caused by conflicts of interest. An employer or other plan sponsor would not, however, become an investment advice fiduciary under the proposal merely because the employer or plan sponsor engaged a service provider to provide investment advice or because a service provider engaged to provide investment education crossed the line and provided investment advice in a particular case. On the other hand, whether the service provider renders fiduciary advice or non-fiduciary education, the proposed rule does not change the well-established fiduciary obligations that arise in connection with the selection and monitoring of plan 146 81 Jkt 262001 PO 00000 FR 20946, 20977 (Apr. 8, 2016). Frm 00023 Fmt 4701 Sfmt 4702 75911 service providers.147 Even if the service provider crosses the line and makes investment recommendations that go beyond mere ‘‘education,’’ the service provider will only be treated as an investment advice fiduciary to the extent that the full proposed regulatory definition is satisfied. Depending on the facts and circumstances, whether a service provider is an investment advice fiduciary under the proposal may require an inquiry into whether that service provider has held itself out as a fiduciary, whether that service provider regularly provides investment advice as part of the provider’s business, whether such advice is individualized, and whether the service provider received a fee or compensation (directly or indirectly) in connection with the advice. The Department seeks comment on this discussion of investment education. Do commenters agree that the examples of investment education information and materials identified in IB 96–1 and in the provisions of the 2016 Final Rule regarding investment education do not constitute a ‘‘recommendation’’ as described under the proposed rule? Further, do commenters believe that IB 96–1 provides sufficient and appropriate guidance in conjunction with the provisions in this proposal, or do commenters support amending IB 96–1 or incorporating any of its provisions into the final regulation? 10. Application to Code Section 4975 Certain provisions of Title I of ERISA, such as those relating to participation, benefit accrual, and prohibited transactions, also appear in Title II of ERISA, codified in the Code. This parallel structure ensures that the relevant provisions apply to Title I plans, whether or not they are ‘‘plans’’ defined in section 4975 of the Code, and to tax-qualified plans and IRAs, regardless of whether they are subject to Title I of ERISA. With regard to prohibited transactions, the ERISA Title I provisions generally authorize recovery of losses from, and imposition of civil penalties on, the responsible plan fiduciaries, while the Title II provisions impose excise taxes on persons engaging in the prohibited transactions. The definition of fiduciary is the same in section 4975(e)(3)(B) of the Code as the definition in section 3(21)(A)(ii) of ERISA, and, as noted above, the Department’s 1975 regulation defining fiduciary investment advice is virtually identical to the regulation 147 See IB 96–1, Section (e) ‘‘Selection and Monitoring of Educators and Advisors.’’ E:\FR\FM\03NOP3.SGM 03NOP3 75912 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 defining the term ‘‘fiduciary’’ under the Code. To rationalize the administration and interpretation of the parallel provisions in Title I and Title II of ERISA, Reorganization Plan No. 4 of 1978 divided the interpretive and rulemaking authority for these provisions between the Secretaries of Labor and of the Treasury.148 Under the Reorganization Plan, which was prepared by the President and transmitted to Congress pursuant to the provisions of Chapter 9 of Title 5 of the United States Code, the Department of Labor has authority to interpret the prohibited transaction provisions and the definition of a fiduciary in the Code. ERISA’s prohibited transaction rules, sections 406 to 408,149 apply to Title I plans, and the Code’s corresponding prohibited transaction rules, 26 U.S.C. 4975(c), apply to tax-qualified pension plans, as well as other tax-advantaged arrangements, such as IRAs, that are not subject to the fiduciary responsibility and prohibited transaction rules in Title I of ERISA.150 In accordance with the above discussion, paragraph (g) of the proposal, entitled ‘‘Applicability’’ provides that the regulation defines a ‘‘fiduciary’’ both for purposes of ERISA section 3(21)(A)(ii) and for the parallel provision in Code section 4975(e)(3)(B). Proposed paragraph (g) explains the applicability of Title I of ERISA and the Code in the specific context of rollovers. As that paragraph explains, ‘‘a person who satisfies paragraphs (c)(1) and (e) of this section in connection with a recommendation to a retirement investor that is an employee benefit plan as defined in section 3(3) of the Act, a fiduciary of such a plan, or a participant or beneficiary of such a plan, including a recommendation concerning the rollover of assets currently held in a plan to an IRA, is a fiduciary subject to the provisions of Title I of the Act.’’ With this example, the Department intends to clarify the application of Title I to recommendations made regarding rollovers from a Title I plan under the proposal. As discussed above, the Department had earlier taken a contrary position in the Deseret Letter, which was withdrawn. 11. State Law Proposed paragraph (h) is entitled ‘‘Continued applicability of state law regulating insurance, banking, or 148 5 U.S.C. App. (2018). U.S.C. 1106–1108. 150 Reorganization Plan No. 4 of 1978 also transferred to the Secretary of Labor the authority to grant administrative exemptions from the prohibited transaction provisions in section 4975 of the Code. See section 4975(c)(2) of the Code. 149 29 VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 securities’’ and provides ‘‘[n]othing in this section shall be construed to affect or modify the provisions of section 514 of Title I of the Act, including the savings clause in section 514(b)(2)(A) for State laws that regulate insurance, banking, or securities.’’ This paragraph of the proposal acknowledges that ERISA section 514 expressly saves State regulation of insurance, banking, and securities from ERISA’s express preemption provision, and confirms that the regulation is not intended to change the scope or effect of ERISA section 514, including the savings clause in ERISA section 514(b)(2)(A) for State regulation of insurance, banking, or securities. D. Severability The Department is considering whether this proposal could continue to work even if certain aspects of the proposal were struck down by a court. In determining whether any aspects of this proposal could be severable the Department is focused on the text and purpose of ERISA. The Department requests comments regarding whether this proposal would be workable and appropriate if certain aspects were severed, or why it would not be workable or appropriate. Specifically, the Department is interested in hearing which aspects of the rule the public believes could or could not be severed, and the rationale behind those views. The Department expects to consider severability as it reviews comments and drafts a final rule. The Department generally intends discrete aspects of this regulatory package to be severable. For example, in the event that this regulatory package is finalized with both an updated regulatory definition of a fiduciary and amendments to the PTEs, the Department intends that the updated regulatory definition of a fiduciary would survive even if a court vacated any of the amendments to the PTEs leaving in place the previously granted versions of those PTEs. E. Effective Date The Department proposes to make the rule effective 60 days after publication of a final rule in the Federal Register. The Department requests comment on this proposed timeframe and whether parties believe that additional time is needed before the rule becomes applicable. F. Regulatory Impact Analysis This section analyzes the economic impact of the proposed rule and proposed amendments to the following class administrative exemptions (PTEs) providing relief from the prohibited PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 transaction rules that are applicable to fiduciaries under Title I of ERISA and the Code: PTEs 2020–02, 84–24, 75–1, 77–4, 80–83, 83–1, and 86–128. The Department is publishing the proposed amendments to the PTEs elsewhere in this issue of today’s Federal Register. Collectively, the proposed rule and amendments to the PTEs are referred to as ‘‘the proposal’’ for this section. Employment-based retirement plans and IRAs are critical to the retirement security of millions of America’s workers and their families. Because retirement investors often lack financial expertise, professional investment advice providers often play an important role in guiding their investment decisions. Prudent professional advice helps consumers set and achieve appropriate retirement savings and decumulation goals more effectively than consumers would on their own. For many years, the benefits of professional investment advice, however, have been persistently undermined by conflicts of interest that occur when financial services firms compensate individual investment advice providers in a manner that incentivizes them to steer consumers toward investments and transactions that yield higher profits for the firms. These practices can bias the investment advice that providers render to consumers and detrimentally impact their retirement savings by eroding plan and IRA investment results. Title I of ERISA imposes duties and restrictions on fiduciaries with respect to employee benefit plans. ERISA section 404 requires Title I plan fiduciaries to 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.’’ Further, fiduciaries must carry out their duties ‘‘solely in the interest of the participants and beneficiaries’’ of the plan. Title I of ERISA also includes prohibited transaction provisions that forbid fiduciaries from, among other things, self-dealing.151 The aim of the prohibited transaction provisions is to protect plans, their participants, and beneficiaries from dangerous conflicts of interest that threaten the safety and security of plan benefits.152 Title II of ERISA, codified in the Internal Revenue Code, governs the conduct of fiduciaries to tax-qualified 151 ERISA section 406, 29 U.S.C. 1106. Corp. v. Spink, 517 U.S. 882 (1996); Comm’r v. Keystone Consol. Indus, Inc., 508 U.S. 152 (1993). 152 Lockheed E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules plans and IRAs. Although Title II does not directly impose specific duties of prudence and loyalty on fiduciaries as ERISA section 404(a) does, it prohibits fiduciaries from engaging in conflicted transactions on many of the same terms as Title I.153 The proposal focuses on the provision of fiduciary investment advice to ERISA retirement plans, participants, and IRA owners and seeks to reduce or eliminate the impacts of conflicts of interest on advice they receive. The proposal amends the definition of a fiduciary such that an investment advice provider is a fiduciary if the person provides advice or makes a recommendation on any securities transaction or other investment transaction or any investment strategy involving securities or other investment property to the plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or IRA fiduciary (retirement investor), the advice or recommendation is provided ‘‘for a fee or other compensation, direct or indirect,’’ as defined by the proposed rule, and (i), (ii) or (iii) is satisfied: (i) 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; (ii) 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 its 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 (iii) The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making the investment recommendation. The proposed amendments to PTE 2020–02 expand the scope of the exemption to cover certain transactions involving PEPs and transactions involving ‘‘pure’’ robo-advice providers. The amendments would provide greater specificity as to what information must 153 Cf. 26 U.S.C. 4975(c)(1), Code section 4975(f)(5) defining ‘‘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.’’ VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 be disclosed to retirement investors under the exemption and clarify that fiduciary acknowledgements must clearly indicate whether the entity is a fiduciary with respect to investment recommendations and advice. Additionally, the amendments would require financial institutions to notify retirement investors of their right to obtain additional information upon request, free of charge. The proposed amendments would also provide more guidance for financial institutions and investment professionals complying with PTE 2020–02’s requirements related to financial institutions’ policies and procedures. The amendments would also expand on which parties can request and receive records under the exemption’s recordkeeping provisions. PTE 84–24 would be amended to limit relief for investment advice to independent insurance producers (i.e., independent insurance agencies) that recommend annuities from an unaffiliated financial institution to retirement investors on a commission or fee basis. Additionally, PTEs 75–1 Parts III and IV, 77–4, 80–83, 83–1, and 86– 128 would be amended to eliminate relief for transactions resulting from fiduciary investment advice, as defined under ERISA. Rather than look to an assortment of different exemptions with different conditions for different transactions, investment advice fiduciaries—apart from independent insurance producers—would generally be expected to rely solely on the amended PTE 2020–02 for exemptive relief for covered investment advice transactions. These amendments serve to give the same or similar requirement for the provision of retirement investment advice regardless of the market and investment product. The most significant benefits of the proposal are expected to result from (1) changing the definition of a fiduciary by amending the five-part test, (2) requiring advice given to a broader range of advice recipients, including plan fiduciaries and non-retail investors, to meet fiduciary standards under ERISA, (3) extending the application of the fiduciary best interest standard in the market for non-security annuities, creating a uniform standard across different retirement products, and (4) requiring that more rollover recommendations be in the retirement investor’s best interest. These proposed amendments generally align with the Investment Advisers Act of 1940 and the SEC’s Regulation Best Interest. In crafting this proposal, the Department has worked to align its proposed definition with PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 75913 Regulation Best Interest and the Advisers Act where it can. ERISA has a functional fiduciary test and imposes fiduciary status only to the extent the functional test is satisfied. The Department intends for the compliance obligations under this proposal to broadly align with the standards set by the SEC where practicable and has tried to accomplish such alignment in this proposal. The Department believes that by harmonizing the application of fiduciary duty for retirement investment advisers across regulatory regimes, retirement investors will benefit from more uniform protections from conflicted advice. While extending fiduciary duty to more entities will generate costs, the Department believes any new compliance costs will not be unduly burdensome as the proposal broadly aligns with those compliance obligations imposed under the Investment Advisers Act and the SEC’s Regulation Best Interest on investment advisers and broker-dealers, respectively, and simply expands them to larger portions of the retirement market. The Department of Labor has examined the effect of the proposal as required by Executive Order 13563,154 Executive Order 12866,155 the Regulatory Flexibility Act,156 section 202 of the Unfunded Mandates Reform Act,157 and Executive Order 13132.158 1. Executive Orders Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives. If regulation is necessary, agencies must choose a regulatory approach that maximizes net benefits, including potential economic, environmental, public health and safety effects; distributive impacts; and equity. Executive Order 13563 emphasizes the importance of quantifying costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. Under Executive Order 12866, ‘‘significant’’ regulatory actions are subject to review by the Office of Management and Budget (OMB). As amended by Executive Order 14094,159 entitled ‘‘Modernizing Regulatory Review’’, section 3(f) of Executive Order 12866 defines a ‘‘significant regulatory 154 76 FR 3821 (Jan. 21, 2011). FR 51735 (Oct. 4, 1993). 156 Public Law 96–354, 94 Stat. 1164 (Sept. 19, 1980). 157 Public Law 104–4, 109 Stat. 48 (Mar. 22, 1995). 158 64 FR 43255 (Aug. 9, 1999). 159 88 FR 21879 (Apr. 6, 2023). 155 58 E:\FR\FM\03NOP3.SGM 03NOP3 75914 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules action’’ as any regulatory action that is likely to result in a rule that may: (1) have an annual effect on the economy of $200 million or more (adjusted every three years by the Administrator of the Office of Information and Regulatory Affairs (OIRA) for changes in gross domestic product); or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, territorial, or tribal governments or communities; (2) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (3) materially alter the budgetary impacts of entitlement grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raise legal or policy issues for which centralized review would meaningfully further the President’s priorities or the principles set forth in the Executive order, as specifically authorized in a timely manner by the Administrator of OIRA in each case. It has been determined that this proposal is significant within the meaning of section 3(f)(1) of the Executive Order. Therefore, the Department has provided an assessment of the proposal’s potential costs, benefits, and transfers, and OMB has reviewed the proposal. lotter on DSK11XQN23PROD with PROPOSALS3 2. Need for Regulatory Action In preparing this analysis, the Department has reviewed recent regulatory and legislative actions concerning investment advice, market developments in industries providing investment advice, and research literature weighing in on investment advice. From this review, the Department believes there is compelling evidence that retirement investors remain vulnerable to harm from conflicts of interest in the investment advice they receive. Given this evidence, and the Department’s mission to ensure the security of retirement benefits of America’s workers and their families, the Department is proposing to amend the definition of fiduciary and certain exemption relief. Why Being a Fiduciary Matters As described above, fiduciaries under ERISA are subject to specific requirements. ERISA section 404 requires Title I plan fiduciaries to act with the ‘‘care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 like aims.’’ Further, fiduciaries must carry out their duties ‘‘solely in the interest of the participants and beneficiaries’’ of the plan. Title II of ERISA, codified in the Internal Revenue Code, governs the conduct of fiduciaries to tax-qualified plans and IRAs. Under both Title I and Title II, fiduciaries are subject to prohibited transactions that forbid them from, among other things, self-dealing.160 The aim of the prohibited transaction provisions is to protect plans, their participants, and beneficiaries from dangerous conflicts of interest that threaten the safety and security of plan benefits.161 This combination of a high standard of conduct and personal liability for violations of the standard of conduct for Title I fiduciaries, and restrictions on behavior for Title I and Title II fiduciaries functions to protect plans, participants, and beneficiaries from fiduciary misdeeds. Previously, the Department conducted an economic analysis162 (2016 Regulatory Impact Analysis (RIA)) of then-current market conditions and the likely effects of expanding the definition of fiduciary to include more individuals. It reviewed evidence that included: • statistical comparisons finding poorer risk-adjusted investment performance in more conflicted settings; • experimental and audit studies revealing questionable investment advice provider conduct, including recommendations to withdraw from low-cost, well diversified portfolios and invest in higher-cost alternatives likely to deliver inferior results; • studies detailing gaps in consumers’ financial literacy, errors in their financial decision-making, and the inadequacy of disclosure as a consumer protection; • federal agency reports documenting abuse and investors’ vulnerability; • a study by the President’s Council of Economic Advisers that attributed $17 billion in annual IRA investor losses to advisory conflicts; • economic theory, which predicts that when expert investment advice providers have conflicts of interest, nonexpert investors will be harmed; and 160 ERISA section 406, 29 U.S.C. 1106. Corp. v. Spink, 517 U.S. 882 (1996); Commissioner v. Keystone Consol. Industries, Inc., 508 U.S. 152 (1993). 162 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, (April 2016), https:// www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf. 161 Lockheed PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 • international experience with harmful advisory conflicts and responsive reforms. The Department’s analysis found that conflicted advice was widespread, caused serious harm to retirement investors, and that disclosing conflicts alone would fail to adequately mitigate the conflicts or remedy the harm. The analysis concluded that extending fiduciary protections to more advice would reduce advisory conflicts and deliver substantial net gains for retirement investors. Changes in Retirement Savings Since the 1975 Regulation While the 1975 regulation that established the five-part test has remained fixed, the private retirement savings landscape has changed dramatically. In the late 1970s, private retirement savings were mainly held in large employer-sponsored defined benefit plans. Under the terms of these plans and the governing legal structure, the plans and plan sponsors promised fixed payments to retirees, generally based on a percentage of their compensation and years of employment with the sponsoring employer. Plan sponsors hired professional asset managers, who were subject to ERISA’s fiduciary obligations, to invest the funds, and the employers or other plan sponsors shouldered the risk that investment returns were insufficient to pay promised benefits. Individual plan participants did not take direct responsibility for management of the assets held by the plan and did not depend on expert advice for the sound management of funds, which were directly controlled by investment professionals. Since then, much of the responsibility for investment decisions in employment-based plans has shifted from these large private pension fund managers to individual retirement account participants, many with low levels of financial literacy. Over time, the share of participants covered by defined contribution plans, in which benefits are based on contributions and earnings within an individual account, grew substantially, from just 26 percent in 1975 to 78 percent in 2020.163 By 2020, 94 percent of active participants in defined contribution plans had responsibility for directing the investment of some or all of their 163 Employee Benefits Security Administration, Private Pension Plan Bulletin Historical Tables and Graphs 1975–2020, (November 2022), Table E4, (November 2022), https://www.dol.gov/sites/dolgov/ files/ebsa/researchers/statistics/retirementbulletins/private-pension-plan-bulletin-historicaltables-and-graphs.pdf. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 account balances.164 The Department could not have foreseen such a dramatic shift when it issued the existing fiduciary investment advice regulation in 1975. The passage of ERISA authorized IRAs in 1974, and IRAs remained in their infancy when the 1975 rule was issued. The vast majority of consumers were not managing their own retirement savings, nor retaining investment advisers to do so, because 401(k) plans did not even exist in 1975. Though workers have assumed more of the responsibility for their investment decisions, they at least still receive some fiduciary oversight and protections provided by ERISA while participating in employer-sponsored plans. However, often workers who change jobs or retire roll over their retirement savings to an IRA, where they assume full responsibility for investing the assets in the larger marketplace without those protections. Not only is it very common for defined contribution plan participants to roll over their retirement savings to an IRA, but it is also increasingly common among defined benefit plan participants. Defined benefit plan participants have the option to perform a rollover if their plan allows them to take a lump-sum payment when they separate from service. About 36 percent of private industry workers in traditional defined benefit plans have a lump-sum payment available at normal retirement, as do virtually all private industry workers in non-traditional defined benefit plans, such as cash balance plans.165 In 1981, private defined benefit plans held more than twice the assets in private defined contribution plans, and roughly 10 times more than IRA assets. By the first quarter of 2022, the order had reversed: IRAs held $13.2 trillion in assets, private defined contribution plans held $9.2 trillion, and private defined benefit plans held $3.7 trillion in assets.166 This trend is expected to 164 Employee Benefits Security Administration, Private Pension Plan Bulletin: Abstract of 2020 Form 5500 Annual Reports, Table D5, (November 2022), https://www.dol.gov/sites/dolgov/files/EBSA/ researchers/statistics/retirement-bulletins/privatepension-plan-bulletins-abstract-2020.pdf. 165 U.S. Bureau of Labor Statistics, National Compensation Survey: Retirement Plan Provisions For Private Industry Workers in the United States, 2022, Table 6, (April 2023), https://www.bls.gov/ ebs/publications/retirement-plan-provisions-forprivate-industry-workers-2022.htm. 166 Board of Governors of the Federal Reserve System, Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts: Second Quarter 2022, Tables L.117 & L.118, (Sept. 9, 2022), https:// www.federalreserve.gov/releases/z1/20220909/ z1.pdf; Historical Series Z1/Z1/FL572000075.Q, Z1/ Z1/FL574090055.Q & Z1/Z1/LM893131573.Q. https://www.federalreserve.gov/datadownload/ Build.aspx?rel=z1. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 continue as retirement investors are projected to move $4.5 trillion from defined contribution plans to IRAs from 2022 through 2027.167 Moreover, workers have become more reliant on their retirement savings as Social Security benefits have eroded in recent decades. The age to receive full retirement benefits is gradually increasing from 65 to 67 between 2003 and 2027. Those who claim Social Security before reaching full retirement age—which in 2021 was approximately 60 percent of new retired-worker beneficiaries—receive reduced benefits.168 For a hypothetical medium wage earner who first claims benefits at age 65, their Social Security benefit, as a share of average career earnings, was more than 40 percent in 2005 but is projected to be only about 35 percent in 2025.169 Investment Advice and the 1975 Regulation As the nature of retirement savings has changed since 1975, investment advice has also evolved. Commercial relationships between corporate pension plan sponsors and fund managers and their consulting advisers have been supplanted by retail relationships between consumers and the trusted experts they turn to for help managing their 401(k) plan and IRA savings. Instead of ensuring that trusted advisers give prudent and unbiased advice in accordance with fiduciary norms, the 1975 regulation erected a multi-part series of technical impediments to fiduciary responsibility. The five-part test of the 1975 rule diverges from the express language of the statute and from its protective purposes by stating that advice must be on a ‘‘regular basis’’ and be ‘‘a primary basis for investment decisions’’ to confer fiduciary status. Without fiduciary status, the advice provider is free to disregard ERISA’s duties of prudence and loyalty and to engage in self-dealing transactions that would otherwise be flatly prohibited by ERISA and the Code because of the dangers they pose to plans and plan participants. While consumers often use financial advisers for investment advice related to their retirement savings, if an 167 Cerulli Associates, U.S. Retirement Markets 2022: The Role of Workplace Retirement Plans in the War for Talent, Exhibit 8.06, (2023). 168 Congressional Research Services, The Social Security Retirement Age, (July 6, 2022), https:// sgp.fas.org/crs/misc/R44670.pdf. 169 Social Security Administration, Office of the Chief Actuary, Replacement Rates for Hypothetical Retired Workers, Actuarial Note, 2021.9, Tables B & D, (August 2021), https://www.ssa.gov/oact/ NOTES/ran9/an2021-9.pdf. PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 75915 investment recommendation does not meet all five parts of the 1975 test, the adviser is not treated as a fiduciary under ERISA, no matter how complete the investor’s reliance on recommendations purported to be based on their best interest in light of their individual circumstances. For example, under the 1975 rule, if the advice is not given on a ‘‘regular basis,’’ it makes no difference if the person making the recommendation claims to make the recommendation based on the investor’s best interest and knows that the investor is relying on that recommendation. Thus, if a plan participant seeks advice on whether to roll over all their retirement savings, representing a lifetime of work, out of an ERISA-covered plan overseen by professional ERISA fiduciaries, to purchase an annuity, the person making the recommendation with respect to the purchase of the annuity has no obligation to adhere to a best interest standard unless they meet all prongs of the 1975 rule, including regularly giving advice to the plan participant. This is true even if the person giving the advice holds themselves out as an investment expert whose recommendation is based solely on a careful and individualized assessment of the investor’s needs, the plan participant has no investment expertise whatsoever, and both parties understand that the participant is relying upon the advice for the most important financial decision of their life. Because the advice was not rendered on a ‘‘regular basis,’’ the adviser has no obligation under ERISA to adhere to fiduciary standards, and thus would not be subject to ERISA’s prohibitions on disregarding the participants’ financial interests, recommending an annuity that is imprudent and ill-suited to the participant’s circumstances, and favoring the adviser’s own financial interests at the expense of the participant.170 An adviser who regularly 170 Investors have suffered significant losses when an investment professional does not act in the investor’s best interest. For example, in 2021, the SEC settled with Teachers Insurance and Annuity Association of America (TIAA) for $97 million, citing disclosure violations and failure to implement policies and procedures. See https:// www.sec.gov/litigation/admin/2021/33-10954.pdf. While the SEC was able to settle, the Southern District of New York recently dismissed a complaint by plaintiffs in this same TIAA plan who argued that TIAA acted as an ERISA fiduciary when advising plan participants to roll over assets from their employer-sponsored plan to a TIAA managed account product. Although TIAA represented in market materials that it ‘‘[met] a fiduciary standard’’ when providing investment recommendations, the court found that it did not provide this advice on a regular basis and therefore did not satisfy the fivepart test to be considered an ERISA fiduciary. See E:\FR\FM\03NOP3.SGM Continued 03NOP3 75916 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 had rendered trivial advice about small plan investments, and met the other prongs of the multi-part test, would appropriately be treated as a fiduciary if they met the other requirements of the 1975 rule, but not the person who on one occasion purported to give individualized advice to roll a lifetime of savings out of an ERISA-covered plan and place it in a fixed indexed annuity. This is not a sensible way to e draw distinctions in fiduciary status, and finds no support in the text of ERISA, which makes no mention of a ‘‘regular basis’’ requirement. When the Department issued PTE 2020–02, it sought to ameliorate some of the effects of the regular basis requirement by suggesting that rollover advice could be treated as falling within the 1975 rule, if it was rendered at the beginning of an ongoing advisory relationship. Accordingly, in an April 2021 FAQ, in the context of advice to roll over assets from an employee benefit plan to an IRA, the Department acknowledged that a single instance of advice would not satisfy the regular basis prong of the 1975 test 171 but explained that ‘‘advice to roll over plan assets can also occur as part of an ongoing relationship or as the beginning of an intended future ongoing relationship that an individual has with an investment advice provider.’’ 172 In other words, ‘‘when the investment advice provider has not previously provided advice but expects to regularly make investment recommendations regarding the IRA as part of an ongoing relationship, the advice to roll assets out of an employee benefit plan into an IRA would be the start of an advice relationship that satisfies the regular basis requirement.’’ 173 Carfora v. TIAA, 631 F. Supp. 3d 125, 138 (S. D. N. Y. 2022). 171 Employee Benefits Security Administration, New Fiduciary Advice Exemption: PTE 2020–02 Improving Investment Advice for Workers & Retirees Frequently Asked Questions, (April 2021), https://www.dol.gov/agencies/ebsa/about-ebsa/ouractivities/resource-center/faqs/new-fiduciaryadvice-exemption; Notably, although the Department does not think that a single instance of advice would satisfy the regular basis prong of the 1975 regulation, a single piece of advice can be sufficient to satisfy the language of the statute. See Findings, Conclusions, and Recommendations of the United States Magistrate Judge, Federation of Ams. for Consumer Choice v. U.S. Dep’t of Labor, 2023 WL 5682411, at *18, No. 3:22–CV–00243–K– BT, at 43 (N.D. Tex. June 30, 2023) (‘‘First-time advice may be sufficient to confer fiduciary status and is consistent with ERISA.’’) (emphasis added). 172 Employee Benefits Security Administration, New Fiduciary Advice Exemption: PTE 2020–02 Improving Investment Advice for Workers & Retirees Frequently Asked Questions, (April 2021), https://www.dol.gov/agencies/ebsa/about-ebsa/ouractivities/resource-center/faqs/new-fiduciaryadvice-exemption. 173 Id. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Ultimately, however, that policy interpretation was struck down as inconsistent with the text of the 1975 rule.174 In American Securities Association v. United States Department of Labor, the court found that ‘‘the scope of the regular basis inquiry is limited to the provision of advice pertaining to a particular plan.’’ 175 Further, the court held that, ‘‘[b]efore a rollover occurs, a professional who gives rollover advice does so with respect to an ERISAgoverned plan. However, after the rollover, any future advice will be with respect to a new non-ERISA plan, such as an IRA that contains new assets from the rollover. The professional’s one-time rollover advice is thus the last advice that he or she makes to the specific plan.’’ 176 Based on the court’s ruling, the only way for the Department to remedy the shortcomings of the ‘‘regular basis’’ test is through new rulemaking. Inexpert Customers Researchers have consistently found that many Americans demonstrate low levels of financial knowledge and lack basic understanding of investment strategies. In particular, households age 50 and older and nearing retirement, ‘‘fail to grasp essential aspects of risk diversification, asset valuation, portfolio choice, and investment fees.’’ 177 Such customers appear to be particularly vulnerable to receiving harmful advice. Egan et al. (2019) found that misconduct among investment advice professionals was higher in counties with populations that were less financially sophisticated, including those who are less educated and older.178 Retirement investors are in 174 ASA v. U.S. Dep’t of Labor, No. 8:22–CV– 330VMC–CPT, 2023 WL 1967573, at *14-*19 (M.D. Fla. Feb. 13, 2023). 175 Id. at *16 (emphasis added). 176 Id. at *17; id. (‘‘Because assets cease to be assets of an ERISA plan after the rollover is complete, any future provision of advice is, by nature, no longer to that ERISA plan.’’); Findings, Conclusions, and Recommendations of the United States Magistrate Judge, Federation of Americans for Consumer Choice v. U.S. Dep’t of Labor, No. 3:22–CV–00243–K–BT, 2023 WL 5682411, at *18 (N.D. Tex. June 30, 2023) (‘‘ERISA’s text defines Title I and Title II ‘plans’ distinctly. By utilizing these separate definitions, Congress indicated how each Title’s plans should be treated differently due to the nature of the relationship between financial professionals and retirement investors in Title I and Title II plans. As the New Interpretation purports to consider recommendations as to Title II plans when determining Title I fiduciary status, it conflicts with ERISA.’’) (internal citation omitted). 177 Annamaria Lusardi, Olivia Mitchell, & Vilsa Curto, Financial Literacy and Financial Sophistication in the Older Population, 13(4) Journal of Pension Economics and Finance 347– 366, (October 2014). 178 Mark Egan, Gregor Matvos, & Amit Seru, The Market for Financial Adviser Misconduct, 127(1) Journal of Political Economy, (2019). PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 a poor position to assess the quality of the advice they receive, and the advisers’ incentives are often misaligned with the investors’ interests.179 The dependence of inexpert clients on advisers with significant conflicts of interest creates a large risk of investment advice and investment decisions that are not in the best interest of retirement investors. The Department’s 2016 RIA180 demonstrated that the balance of research and evidence indicates that the aggregate harm from cases in which consumers received bad advice due to investment advice providers’ conflicts of interest is significant. The complex nature of financial markets alone, particularly for insurance products, creates information asymmetry that makes it difficult for inexpert investors to navigate savings for retirement. Multiple studies cited found that retirement investors often lack a basic understanding of investment fundamentals.181 A subsequent 2018 FINRA study of non-retired individuals age 25–65 found that those investors that only had retirement accounts through their employers routinely scored lower on financial literacy questions than active investors and that these workplace-only investors scored only two percentage points higher than the general population (32 percent versus 30 percent) on a composite question regarding interest, inflation and risk diversification.182 In addition to lacking rudimentary financial knowledge, many retirement investors do not understand the roles of different players in the investment industry and what those players are obligated to do. The SEC has commissioned several studies on whether investors can differentiate between different types of 179 Mark Egan, Brokers vs. Retail Investors: Conflicting Interests and Dominated Products, 74(3) Journal of Finance 1217–1260, (June 2019). 180 2016 RIA in this document refers to Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, (April 2016), https://www.dol.gov/ sites/dolgov/files/EBSA/laws-and-regulations/rulesand-regulations/completed-rulemaking/1210-AB322/ria.pdf. 181 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 108–109 & 136– 137, (April 2016), https://www.dol.gov/sites/dolgov/ files/EBSA/laws-and-regulations/rules-andregulations/completed-rulemaking/1210-AB32-2/ ria.pdf. 182 Jill E. Fisch, Andrea Hasler, Annamaria Lusardi, & Gary Mottolo, New Evidence on the Financial Knowledge and Characteristics of Investors (October 2019), https://gflec.org/wpcontent/uploads/2019/10/FINRA_GFLEC_Investor_ FinancialIlliteracy_Report_FINAL.pdf?x20348. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 investment service providers. A 2005 study considered four focus groups in different geographic locations and found that investors were generally unclear about distinctions between brokerdealers, financial advisers, investment advisers, and financial planners and often used the terms indistinguishably.183 A 2008 household survey found that while most of the survey respondents had ‘‘a general sense of the difference in services offered by brokers and by investment advisers but that they are not clear about their specific legal duties.’’ 184 A 2018 study also evaluated four focus groups and found that participant understanding of the distinction between broker-dealers and investment advisers was low, even among those who were provided information describing the classifications of the two categories.185 If investors are unable to distinguish between types of advisers, they cannot be expected to understand legal distinctions of the standard to which that advice is held. Confusion regarding the different types of advice providers and the different standards of conduct to which they must adhere is often made worse by industry marketing and other practices.186 To attempt to address this, the SEC adopted as part of its 2019 Rulemaking a new required disclosure of a ‘‘Form CRS Relationship Summary,’’ under which registered investment advisers and broker-dealers must provide retail investors with certain information about the nature of their relationship with the firm and its financial professionals in plain English.187 One of the purposes of the Form CRS is to help retail investors better understand and compare the services and relationships that 183 Siegel & Gale, LLC, & Gelb Consulting Group, Inc, Results of Investor Focus Group Interviews About Proposed Brokerage Account Disclosures: Report to the Securities and Exchange Commission, (March 2005). 184 Angela Hung, Noreen Clancy, Jeff Dominitz, Eric Talley, Claude Berrebi, & Farrukh Suvankulov, Investor and Industry Perspectives on Investment Advisers and Broker-Dealers, RAND Institute for Civil Justice, (October 2008), https://www.sec.gov/ news/press/2008/2008-1_randiabdreport.pdf. 185 Brian Scholl, & Angela A. Hung, The Retail Market for Investment Advice, (October 2018), https://bit.ly/3hGGNj4. 186 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 108, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/lawsand-regulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf. 187 Securities and Exchange Commission, Form CRS Relationship Summary: Amendments to Form ADV, (September 19, 2019). https://www.sec.gov/ info/smallbus/secg/form-crs-relationship-summary. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 investment advisers and broker-dealers offer in a way that is distinct from other required disclosures under the securities laws. In order for disclosures to be effective, however, investors must both review and understand them. Many disclosures, however, suffer from complexity, so investors overlook or misunderstand them and gloss over the information presented to them. A 2017 survey of private-sector workers with retirement plans found only one-third had read any investment fee disclosure in the past year and only 25 percent of all respondents had both read and understood the information.188 Many investors also cannot effectively assess the quality of investment advice they receive. Research suggests that, in general, consumers often fail to fully comprehend the quality of professional services they receive, including services from doctors, lawyers, and banks in addition to investment advice providers.189 The 2016 RIA cited evidence that advice from providers often encouraged investors’ cognitive biases, such as return chasing, rather than correcting such biases. It cited research showing that payments made to broker-dealers influenced the advice provided to clients and that funds distributed through more conflicted broker channels tend to perform worse.190 Research also suggests that investors’ opinions of adviser quality can be manipulated. For instance, Agnew et al. (2014) found that if an adviser first provides good advice on a financial decision that is easy to understand, the client will subsequently trust bad advice on a more difficult or complicated topic.191 Investors who are unable to discern when they are receiving bad advice are at risk of being persuaded to make investment decisions that are not in their best interest. 188 Pew Charitable Trusts, Many Workers have Limited Understanding of Retirement Plan Fees, (November 2017), https://www.pewtrusts.org/en/ research-and-analysis/issue-briefs/2017/11/manyworkers-have-limited-understanding-of-retirementplan-fees. 189 William Rogerson, Reputation and Product Quality, 14(2) The Bell Journal of Economics 508– 516 (1983). 190 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 145–158, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. 191 Julie Agnew, Hazel Bateman, Christine Eckert, Fedor Iskhakov, Jordan Louviere, & Susan Thorp, Individual Judgment and Trust Formation: An Experimental Investigation of Online Financial Advice, Australian School of Business Research Paper No. 2013 ACTL21, (2014). PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 75917 Overall, evidence demonstrates that the combination of inexpert customers and conflicted advisers results in investment underperformance and negative outcomes for investors. According to a 2015 report by the Council of Economic Advisers, approximately $1.7 trillion of IRA assets were invested in products with a payment structure that generates conflicts of interests.192 A substantial body of research has shown that IRA holders receiving conflicted investment advice can expect their investments to underperform by approximately 50 to 100 basis points per year.193 As discussed in the 2016 RIA, the Department estimated that a 50 to 100 basis point performance gap of brokersold funds would result in retirees losing $9 to $17 billion each year (or between 0.5 and 1 percentage point of return each year for $1.7 trillion in assets), $95 to $189 billion over 10 years, and $202 and $404 billion over 20 years. That means a retiree spending their savings down over 30 years would have 6 to 12 percent less to spend.194 If a retiree encounters conflicts of interest and experiences a 100-basis point reduction in performance, but still spends as though they were not encountering conflicts of interest, they would run out of retirement savings more than five years early.195 192 Council of Economic Advisors, The Effects of Conflicted Investment Advice on Retirement Savings, (2015), https://obamawhitehouse. archives.gov/sites/default/files/docs/cea_coi_ report_final.pdf. 193 Ibid. 194 For example, an ERISA plan investor who rolls $200,000 into an IRA, earns a 6 percent nominal rate of return with 2.3 percent inflation, and aims to spend down her savings in 30 years, would be able to consume $11,034 per year for the 30-year period. A similar investor whose assets underperform by 0.5, 1, or 2 percentage points per year would only be able to consume $10,359, $9,705, or $8,466, respectively, in each of the 30 years. The 0.5 and 1 percentage point figures represent estimates of the underperformance of retail mutual funds sold by potentially conflicted brokers. These figures are based on a large body of literature cited in the 2015 NPRM RIA, comments on the 2015 NPRM RIA, and testimony at the Department’s hearing on conflicts of interest in investment advice in August 2015. The 2 percentage point figure illustrates a scenario for an individual where the impact of conflicts of interest is more severe than average. See Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, p. 4, (April 2016), https:// www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf. 195 Council of Economic Advisors, The Effects of Conflicted Investment Advice on Retirement Savings, (2015), https://obamawhitehouse. archives.gov/sites/default/files/docs/cea_coi_ report_final.pdf. E:\FR\FM\03NOP3.SGM 03NOP3 75918 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules Pervasiveness of Conflicts of Interest in Investment Advice In recent years, consolidation of the financial industry and innovations in products and compensation practices have multiplied opportunities for selfdealing and made fee arrangements less transparent to clients and regulators. The existence of safeguards in only certain markets, such as the recent adoption of Regulation Best Interest by the SEC regarding recommendations of securities transactions or investment strategies involving securities, creates incentives for agents to recommend conflicted products in less regulated markets. While the relative newness of Regulation Best Interest makes it challenging to quantify instances of these effects, there is research demonstrating similar impacts from other policies addressing financial conflicts of interest or misconduct that varied across markets. Bhattacharya et al. (2020) found that higher fiduciary standards are associated with the sale of higher quality annuity products.196 Honigsberg et al. (2022) showed that variation in regulatory oversight regimes leads to a situation where the worst financial advisers are operating in the most lightly regulated regimes.197 Charoenwong et al. (2019) found that under lighter regulation, advisers were more likely to receive complaints, particularly advisers with past complaints or with conflicts of interest.198 This proposal would extend protections associated with fiduciary status under ERISA, regardless of advice model, and reduce the gap in protections with respect to ERISAcovered investments. lotter on DSK11XQN23PROD with PROPOSALS3 Conflicts of Interest After the SEC’s Regulation Best Interest Regulation Best Interest under the Securities Exchange Act of 1934 created a ‘‘best interest’’ standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendation of types of accounts. While Regulation Best Interest does 196 Vivek Bhattacharya, Gaston Illanes, & Manisha Padi, Fiduciary Duty and the Market for Financial Advice, Working Paper 25861 National Bureau of Economic Research (2020), https://www.nber.org/ papers/w25861. 197 Colleen Honigsberg, Edwin Hu, & Robert J. Jackson, Jr., 74 Regulatory Arbitrage and the Persistence of Financial Misconduct, Stanford Law Review 797, (2022). 198 Ben Charoenwong, Alan Kwan, & Tarik Umar, Does Regulatory Jurisdiction Affect the Quality of Investment-Adviser Regulation, 109(10) American Economic Review (October 2019), https:// www.aeaweb.org/articles?id=10.1257/aer.20180412. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 overlap with ERISA’s fiduciary standard, and reduces conflicts, the two standards do not align perfectly: Regulation Best Interest does not apply fiduciary accountability to all parties that provide investment advice to Retirement Investors and does not cover advice to non-retail investors. Moreover, Regulation Best Interest generally does not apply to recommendations of investment products that are not regulated as securities, such as many annuity products. Similarly. while there is a large overlap in the substance of the different regulatory regimes, in enacting ERISA, Congress provided special protections for tax-advantaged retirement savings that don’t apply more broadly. For example, Congress prohibited transactions (absent an exemption) that were determined to raise significant risk to retirement plan participants and beneficiaries. The SEC began conducting limited scope broker-dealer examinations and risk-based inspections in June 2020 to assess whether firms established written policies and procedures to comply with Regulation Best Interest and had made reasonable progress in implementing those policies and procedures. In their reviews, staff identified instances of deficient disclosure obligations, care obligations, periodic review and testing, and conflict of interest obligations.199 FINRA has identified similar deficiencies in its Report on Examination and Risk Monitoring Program.200 The SEC’s Division of Examination notes that in response to deficiency letters identifying these issues, many broker-dealers modified their practices, policies and procedures.201 In addition, the SEC released additional guidance in April 2023 focused on the Care Obligation to continue to improve compliance with Regulation Best Interest.202 In the first year after the SEC’s compliance deadline for Regulation Best Interest, the North American Securities 199 Securities and Exchange Commission, Risk Alert: Observations from Broker-Dealer Examinations Related to Regulation Best Interest, (Jan. 30, 2023), https://www.sec.gov/file/exams-regbi-alert-13023.pdf. 200 FINRA, 2023 Report on FINRA’s Examination and Risk Monitoring Program, (Jan. 2023), https:// www.finra.org/sites/default/files/2023-01/2023report-finras-examination-risk-monitoringprogram.pdf. 201 Securities and Exchange Commission, Risk Alert: Observations from Broker-Dealer Examinations Related to Regulation Best Interest, (Jan. 30, 2023), https://www.sec.gov/file/exams-regbi-alert-13023.pdf. 202 Securities and Exchange Commission, Staff Bulletin: Standards of Conduct for Broker Dealers and Investment Advisers Care Obligation, (Apr. 20, 2023), https://www.sec.gov/tm/standards-conductbroker-dealers-and-investment-advisers. PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 Administrators Association (NASAA) conducted a survey of 443 FINRA firms.203 The survey found that many broker-dealer firms were still utilizing the compliance programs they had in place prior to Regulation Best Interest, when the standard for retail advice was to recommend investments that were ‘‘suitable’’ for the client.204 In addition, the percentage of broker-dealer firms surveyed that were offering complex, costly, and risky products increased by 11 percent after Regulation Best Interest took effect. About 65 percent of brokerdealer firms did not discuss lower-cost or lower-risk products with their customers when they recommended complex, costly, and risky products. The survey also found that 24 to 30 percent of broker-dealer firms were still using conflicted forms of compensation, including sales contests, differential or variable compensation, and other extra forms of compensation.205 In the first year after Regulation Best Interest took effect, only 35 percent of those brokerdealer firms recommending complex, costly, and risky products had ‘‘reduced the financial reward associated with these products by capping agent sales credits.’’ 206 In other words, the majority of broker-dealer firms that offered complex, costly and risky products had not restructured their financial reward structure in response to conflict mitigation requirements in SEC’s Regulation Best Interest. NASAA’s Broker-Dealer Section Committee concluded a subsequent review of over 200 examinations evaluating broker-dealers’ compliance of Regulation Best Interest by state examiners in 25 states, under its second and third year of implementation.207 This review revealed steady implementation progress, including that firms had been updating investor profile forms and policies and procedures; that firms recommending complex, costly or risky products were imposing restrictions based on ages, income/net worth and risk profiles; and that firms were utilizing cost-comparison tools to better consider reasonable investment 203 North American Securities Administrators’ Association, Report and Findings of NASAA’s Regulation Best Interest Implementation Committee: National Examination Initiative Phase II (A), (Nov. 2021). 204 Kenneth Corbin, Reg BI Isn’t Working So Far. Exams Are Coming, Says NASAA, Barron’s (Nov. 5, 2021). 205 James Langton, New Conduct Rules, Same Old Conflicts: NASAA, Advisor’s Edge (Nov. 4, 2021). 206 Melanie Waddell, Reg BI Report Zooms in BDs’ Lack of Compliance, Think Advisor, (Nov. 5, 2021). 207 North American Securities Administrators’ Association, Report and Findings of NASAA’s Broker-Dealer Section Committee: National Examination Initiative Phase II (B), (Sept. 2023). E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 alternatives. The report noted, however, that firms still struggle with considering reasonably available alternatives and conflict mitigation; ignoring lower cost and risk products when recommending complex, costly risk products and relying on financial incentives to sell them; and that firms have not enhanced point of sale disclosures. The SEC and FINRA have subsequently released additional guidance designed to clarify and strengthen compliance with Regulation Best Interest’s Consumer Protective conditions.208 The SEC announced in January 2023 that it intends to incorporate compliance with Regulation Best Interest into retail-focused examinations of broker-dealers 209 and both the SEC and FINRA have begun enforcement actions related to Regulation Best Interest.210 In June 2022, the SEC charged a firm and five brokers for violating Regulation Best Interest and selling high-risk bonds to retirees and other retail investors.21 Meanwhile, FINRA levied its first Regulation Best Interest-related fine in October 2022 and suspended two New York-based brokers in February 2023.212 208 See Securities and Exchange Commission, Regulation Best Interest: A Small Entity Compliance Guide, (September 23, 2019), https://www.sec.gov/ info/smallbus/secg/regulation-bestinterest#Disclosure_Obligation; Securities and Exchange Commission, Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors, (Mar. 20, 2022), https://www.sec.gov/tm/ iabd-staff-bulletin; Securities and Exchange Commission, Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflict of Interest, (Aug. 2, 2022), https://www.sec.gov/tm/ iabd-staff-bulletin-conflicts-interest; Securities and Exchange Commission, Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligation, (Apr. 20, 2023), https:// www.sec.gov/tm/standards-conduct-broker-dealersand-investment-advisers. 209 Securities and Exchange Commission, Risk Alert: Observations from Broker-Dealer Examinations Related to Regulation Best Interest, p. 1, (Jan. 30, 2023), https://www.sec.gov/file/examsreg-bi-alert-13023.pdf. 210 See Securities and Exchange Commission, Press Release: SEC Charges Broker-Dealer with Violations of Regulation Best Interest and Fraud for Excessive Trading in Customer Accounts, (Sept. 28, 2023), https://www.sec.gov/enforce/34-98619-s; SEC Charges Broker-Dealers with Violations of Regulation Best Interest and Form CRS Rules for Failing to Effect Delivery of Required Disclosures, (Sept. 28, 2023), https://www.sec.gov/enforce/3498609-s; and SEC Charges Wisconsin Broker-Dealer with Violations of Regulation Best Interest, (Sept. 22, 2023), https://www.sec.gov/enforce/34-98478-s. 211 Securities and Exchange Commission, Press Release: SEC Charges Firm and Five Brokers with Violations of Reg BI, (June 16, 2022), https:// www.sec.gov/news/press-release/2022-110. 212 Melanie Waddell, FINRA Fines Long Island BD Over Reg BI, Think Advisor, (Feb. 13, 2023), https://www.thinkadvisor.com/2023/02/13/finrafines-long-island-bd-over-reg-bi/. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Conflicts of Interest in Advice Given to Plan Fiduciaries Concerns regarding investment advice extend to that received by ERISA plan fiduciaries. Pool et al. (2016) found that while mutual fund companies involved in plan management for 401(k) plans included both funds from their own family as well as unaffiliated funds in the menu of investment options, poor performing funds were less likely to be removed and more likely to be added to the menu if they were affiliated with the plan trustee.213 In 2005, the SEC found evidence that some pension consultants do not adequately disclose their conflicts and may steer plan fiduciaries to hire money managers based partly on the consultants’ own financial interests.214 The U.S. Government Accountability Office (GAO) found these inadequately disclosed conflicts were associated with substantial financial losses. GAO’s study found that between 2000 and 2004, plans associated with pension consultants without adequate disclosure of their conflicts of interest saw annual rates of return 1.2 to 1.3 percentage points lower than plans associated with pension consultants with adequate disclosure of conflicts of interest.215 In another study, GAO found that ERISA plan sponsors often are confused as to whether the advice they receive is fiduciary advice, and small plans in particular may suffer as a result.216 This confusion leaves plan participants vulnerable to lower returns due to conflicted advice. Conflicts of Interest in Rollover Recommendations or Advice The treatment of rollover recommendations or advice under the 1975 rule has been a central concern in the Department’s regulation of fiduciary investment advice. The decision to roll over assets from a plan to an IRA is often the single most important financial decision a plan participant makes, involving a lifetime of retirement savings. Most IRA assets are attributable to rollover contributions, and the amount 213 Veronika K. Pool, Clemens Sialm, & Irina Stefanescu, It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) Plans, 71(4) Journal of Finance 1779–1812, (2016). 214 The report’s findings were based on a 2002 to 2003 examination of 24 pension consultants. See SEC, SEC Staff Report Concerning Examination of Select Pension Consultants, (May 16, 2005), https:// www.sec.gov/news/studies/pensionexamstudy.pdf. 215 GAO Publication No. GAO–09–503T, Private Pensions: Conflicts of Interest Can Affect Defined Benefit and Defined Contribution Plans, (2009), https://www.gao.gov/assets/gao-09-503t.pdf. 216 GAO Publication No. GAO–11–119, 401(K) Plans: Improved Regulation Could Better Protect Participants from Conflicts of Interest, (2011), https://www.gao.gov/products/GAO-11-119. PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 75919 of assets rolled over to IRAs is large and expected to increase substantially. In 2021, IRA rollovers from defined contribution plans increased by 4.9 percent. Cerulli Associates estimates that aggregate rollover contributions to IRAs from 2022 to 2027 will surpass $4.5 trillion.217 The decision to roll over one’s retirement savings from an ERISAcovered employer-based plan into an IRA or other plan has significant consequences, and for many investors is the single most consequential advice they will receive and affects a lifetime of savings. About 57 percent of traditional IRA-owning households indicated that their IRAs contained rollovers from employer-sponsored retirement plans and of those households, 85 percent indicated they had rolled over their entire account balance in their most recent rollover.218 In 2020 more than 95 percent of the dollars flowing into IRAs came from rollovers, while the rest came from regular contributions.219 Retiring workers must decide how best to invest a career’s worth of 401(k) savings, and many look to an investment advice provider for guidance. Financial institutions face an innate conflict of interest, in that a financial institution that provides a recommendation or advice concerning a rollover to a retirement investor may expect to earn transaction-based compensation such as commissions and/or receive an ongoing advisory fee that it likely would not receive if the assets were to remain in an ERISAcovered plan. Further, under the 1975 rule, if an investment advice provider makes a one-time recommendation that the worker move the entire balance of their retirement plan into an IRA and invest it in a particular annuity, then the advice provider has no fiduciary obligation under ERISA to honor the worker’s best interest unless this recommendation is part of an ‘‘ongoing’’ advice relationship. The resulting compensation represents a significant revenue source for investment advice providers. 217 Cerulli Associates, U.S. Retirement Markets 2022: The Role of Workplace Retirement Plans in the War for Talent, Exhibit 8.06, (2023). Note that these numbers include public sector plans. 218 Investment Company Institute, The Role of IRAs in US Households’ Savings for Retirement, 2021, 28(1) ICI Research Perspective, (Jan. 2022), https://www.ici.org/system/files/2022-01/per2801.pdf. 219 Internal Revenue Service, SOI Tax Stats— Accumulation and Distribution of Individual Retirement Arrangement (IRA), Table 1: Taxpayers with Individual Retirement Arrangement (IRA) Plans, By Type of Plan, Tax Year 2020, (2023). E:\FR\FM\03NOP3.SGM 03NOP3 75920 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 In the preamble to PTE 2020–02, the Department provided an interpretation of when advice or a recommendation to roll over assets from an employee benefit plan to an IRA would constitute fiduciary investment advice under the 1975 regulation’s five-part test. The preamble interpretation confirmed the Department’s view that advice or 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 five-part test, constitutes fiduciary investment advice. The preamble interpretation also discussed when a recommendation to roll over employee benefit plans to an IRA would satisfy the ‘‘regular basis’’ requirement and the Department’s interpretation of the requirement of ‘‘a mutual agreement, arrangement, or understanding’’ that the investment advice will serve as ‘‘a primary basis for investment decisions.’’ Regarding the regular basis prong, the Department explained that ‘‘advice to roll assets out of a Title I Plan into an IRA where the investment advice provider has not previously provided advice but will be regularly giving advice regarding the IRA in the course of a lengthier financial relationship would be the start of an advice relationship that satisfies the regular basis prong.’’ 220 As discussed above, however, this interpretation of the 1975 rule was rejected by the court in American Securities Association v. United States Department of Labor,221 and in the case of Federation of Americans for Consumer Choice v. United States Department of Labor,222 the magistrate judge has recommended that the district court also reject this interpretation. In their view, the 1975 rule does not permit the Department to treat one-time rollover recommendations as ‘‘regular basis’’ advice based on the expectation of future advice on the management of the assets rolled out of the ERISA plan and into the IRA. Any change to the ‘‘regular basis’’ requirement requires a new rule.223 While PTE 2020–02 mitigates some of these concerns by requiring investment advice fiduciaries to render advice in their customer’s best interest in order to 220 85 FR 82798, 82805, (Dec. 18, 2020). Securities Association v. U.S. Dep’t of Labor, No. 8:22–CV–330–VMC–CPT, 2023 WL 1967573, at *14–*19, (M.D. Fla. Feb. 13, 2023) [hereinafter ASA]. 222 Conclusions, and Recommendations of the United States Magistrate Judge, FACC v. U.S. Dep’t of Labor, No. 3:22–CV–00243–K–BT, 2023 WL 5682411, at *18-*19 (N.D. Tex. June 30, 2023) 223 See id. at *22–23. 221 American VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 receive certain types of compensation from otherwise prohibited transactions resulting from rollover advice, the limitations of the existing five-part test for fiduciary status still result in significant portions of the retirement investment market operating outside of the PTE’s protections. Uniformity Across Markets and Product Types The current regulatory approach to investment advice results in standards that vary by advice market and investment product.224 As a result, retirement investors cannot rely on a single protective standard, and their exposure to risk is not only based on the types of products they invest in but also by who gives that advice or makes that recommendation and in what capacity they are acting. This creates investor confusion and makes room for regulatory arbitrage, where investment advice providers can use more favorable rules in one market to circumvent less favorable regulations elsewhere. The Department identifies the following nuances of the regulatory landscape as sources of investor confusion: • Regulation Best Interest only applies to recommendations made by broker-dealers to retail customers. As a result of this limitation, broker-dealers’ recommendations of securities transactions, investment strategies, plan design, and plan investment options to plan fiduciaries, fall outside its scope. This may be particularly confusing for small plan fiduciaries. • Securities laws (i.e., the Investment Advisers Act and Regulation Best Interest) may not apply to advice on investments such as real estate, fixed indexed annuities, commodities, certificates of deposit, and other bank products. • Variable annuities and some indexed annuities are considered securities and are subject to securities laws, while fixed annuities, including fixed indexed annuities, are subject to state law. As discussed in the Regulatory Baseline section, these laws vary significantly from state to state. This list is not exhaustive but provides a sense of how many seemingly similar investments are subject to widely different regulators and protective standards. Honigsberg et al. (2022) identified associated persons of broker-dealers who had been registered with FINRA between 2010 and 2020 but were no longer registered with the regulatory 224 For more information on the different regulatory regimes, Refer to the Regulatory Baseline section in this analysis. PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 authority. Of those that exited, roughly a third continued providing financial advice under a different regulatory regime, of which eight percent had a history of serious misconduct while registered with FINRA. This share increased to 12 percent when you looked at those that were still providing financial advice as an insurance producer registered with the NAIC and 13 percent when you looked at the National Futures Association members. The authors argued that the existing framework for regulating adviser misconduct creates incentives for the worst advisers to migrate to more poorly regulated state regimes.225 The risk posed by non-uniform regulatory environments is exemplified by the annuity market. A recent survey of insurers reported that 58 percent of insurers thought the SEC’s Regulation Best Interest had improved protections for consumers.226 However, as discussed above, generally only annuities considered securities are under the jurisdiction of the SEC. The remaining annuities are covered by state regulations that potentially hold those selling such insurance products to a lower standard. In crafting this proposal, the Department strove to craft a definition that hews to both the text and purpose of ERISA. An investor’s retirement account may hold a wide range of investment products, those products may touch multiple regulatory regimes, and the retirement investor may not be aware of the different standards. Once the investment products are held in a taxadvantaged retirement account, however, ERISA requires a uniform standard, applicable regardless of the type of investment product. This range of investment products held in retirement plans means that the regulatory definition of an investment advice fiduciary for purposes of Title I of ERISA and the Code takes on special importance in creating uniform standards for investment advice, particularly when a retirement investor may not realize the investment product is not covered by another regulatory regime such as federal securities laws. Need for Uniformity Concerning Rollovers The difference between types of products, such as securities subject to regulation by the SEC and non225 Colleen Honigsberg, Edwin Hu, & Robert J. Jackson, Jr., 74 Regulatory Arbitrage and the Persistence of Financial Misconduct, Stanford Law Review 797, (2022). 226 Cerulli Associates, U.S. Annuity Markets 2021: Acclimating to Industry Trends and Changing Demand, Exhibit 1.06, The Cerulli Report, (2022). E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 securities annuities subject to regulation by state insurance departments, creates problematic incentives for financial professionals to recommend certain products. Under the Investment Advisers Act and Regulation Best Interest, investment advisers and broker-dealers must have a reasonable basis to believe both the rollover itself and the account being recommended are in the retail investor’s best interest.227 SEC staff guidance recognizes that it would be difficult to have such a reasonable basis if, ‘‘you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan, where that is an option.’’ 228 Moreover, broker-dealers and investment advisers are instructed to generally consider certain factors when making rollover recommendations to retail investors, specifically and without limitation, ‘‘costs; level of services available; features of the existing account, including costs; available investment options; ability to take penalty-free withdrawals; application of required minimum distributions; protection from creditors and legal judgments; and holdings of employer stock.’’ 229 As such, the SEC’s regulatory framework is likely to mitigate some of the aforementioned harms to retirement investors, but only in markets where it applies. In contrast, the NAIC Model Regulation #275, which is the basis for much of the state regulation on insurers,230 makes no direct reference to rollovers, and imposes a less stringent obligation on annuity recommendations than the best interest standard imposed on securities recommendations and investment advice by the SEC. Given the average rollover contribution to a traditional IRA in 2019 was $112,000,231 the variation in regulatory standards regarding rollover advice can result in widely disparate outcomes among similarly situated retirement investors 227 In addition to staff guidance, the Commission recognized in Regulation Best Interest that, ‘‘as part of determining whether a broker-dealer has a reasonable basis to believe that a recommendation is in the best interest of the retail customer, a broker-dealer generally should consider reasonably available alternatives offered by the broker-dealer’’ which the Commission viewed as ‘‘an inherent aspect of making a ‘best interest’ recommendation.’’ See Reg BI Adopting Release at 33381. 228 SEC, Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors, (March 30, 2022), https://www.sec.gov/tm/iabd-staff-bulletin. 229 Ibid. 230 For more information, refer to the discussion in the Regulatory Baseline section on state legislation and regulation. 231 Matched file of Forms 1040, 1099–R, and 5498 for Tax Year 2019. IRS, Statistics of Income Division, Individual Retirement Arrangements Study, February 2022. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 based solely on who they sought for advice and whether that adviser was required to put the investor’s interests above their own. An update to the regulatory definition of an investment advice fiduciary, for purposes of Title I of ERISA and the Code, is necessary to enhance protections of retirement investors. This approach both reflects ERISA’s and the Code’s statutory text, which adopts a uniform approach, as well as sound public policy. Investment recommendations should be consistently governed solely by the best interest of retirement investors, rather than adviser perceptions that advice on one category of investment product is subject to different regulatory standards than another. How the Proposed Rule Addresses the Need for Regulatory Action The proposed amendments to the 1975 rule would better reflect the text and purposes of the statute and would address inadequacies that the Department has observed during its decades of experience in implementing the 1975 rule. This proposal would honor the broad statutory definition of fiduciary by amending the five-part test to create a uniformly protective fiduciary standard for retirement investors, subject to firm-level oversight, designed to mitigate and eliminate the harmful effects of biased advice. The amendments to the 1975 rule and related exemptions would also eliminate the risk of regulatory arbitrage, in which an investment advice provider may operate in a particular market to evade more stringent regulation. For instance, under the current regulation, an independent producer selling an indexed annuity, a financial professional giving a retirement investor one-time advice to roll investments into an IRA, or a financial professional giving advice on one transaction, could portray themselves as serving the best interest of the investor while being held to lower care standard than financial professionals subject to the Investment Advisers Act of 1940 or the SEC’s Regulation Best Interest or the Department’s fiduciary standard. In contrast, the amended rule would broadly align the standard of care required of all financial professionals giving retirement investment advice with retirement investors’ reasonable expectations that those recommendations are trustworthy. This would in turn create a retirement market where all advisers compete under a uniform fiduciary standard, reducing PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 75921 investor exposure to harms from conflicted advice. The fiduciary standard, as buttressed by the protective conditions of PTE 2020–02 and PTE 84–24, protects investors from getting investment recommendations that are improperly biased because of the advisers’ competing financial interests. It requires firms and advisers to put the interests of Retirement Investors first and to take appropriate action to mitigate and control conflicts of interest. These conditions should go a long way to redressing the dangers posed by biased advice. In addition, the proposed exemptions also give inexpert investors important information on the scope, severity, and magnitude of conflicts of interest. Moreover, by imposing a uniform fiduciary standard on conflicted advisers in the retirement marketplace, the proposed rule and exemptions reduce investor confusion about the standards governing advice. Retail investors who rely on expert advice are unlikely to have a sound understanding of differences in standards across various categories of investments and investment professionals.232 The SEC Investor Advisory Committee, when considering a uniform adoption of a standard of duty for investment advisers and broker-dealers in 2013, found that ‘‘investors do not distinguish between broker-dealers and investment advisers, do not know that broker-dealers and investment advisers are subject to different legal standards, do not understand the difference between a suitability standard and a fiduciary duty, and expect broker-dealers and investment advisers alike to act in their best interest when giving advice and making recommendation.’’ 233 While these issues have been mitigated to a considerable degree by the imposition of a common ‘‘best interest’’ standard for broker-dealers governed by Regulation Best Interest and investment advisers subject to the Investment Advisers Act or state law, significant differences remain with respect to the standards governing investments that are not securities, such as fixed indexed annuities. Investor confusion is exacerbated by different 232 Angela A. Hung, Noreen Clancy, Jeff Emmett Dominitz, Eric Talley, Claude Berrebi, & Farrukh Suvankulov, Investor and Industry Perspectives on Investment Advisers and Broker-Dealers, RAND Corporation, (2008), https://www.rand.org/pubs/ technical_reports/TR556.html. 233 Securities and Exchange Commission. ‘‘Recommendation of the Investor as Purchaser Subcommittee Broker-Dealer Fiduciary Duty,’’ November 1, 2013. https://www.sec.gov/spotlight/ investor-advisory-committee-2012/fiduciary-dutyrecommendation.pdf. E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 75922 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules regulatory regimes referencing a ‘‘best interest standard’’ while defining what that means and the protections that entails differently. Although the proposal will enhance disclosures of conflicts of interest, the Department stresses that disclosure alone is limited in its effectiveness at protecting investors from the dangers posed by conflicts of interest, as detailed in the RIA for the fiduciary rule the Department promulgated in 2016.234 As that document explained, there are myriad reasons to doubt that disclosure alone could effectively mitigate conflicts of interest, and available data support a finding that disclosure is not a reliable corrective for conflicts of interest: • Even with relatively clear disclosures, investors routinely ignore them and are hard pressed to understand them. Investors often lack the requisite financial expertise, disregard the materials they receive, and have trouble following the disclosures or parsing their significance. These problems can be compounded for older and more vulnerable retirement-age investors. • Merely disclosing a conflict of interest does not give the investor a working model on how to determine the impact of the conflict of interest on the advice they are receiving or of how to use the disclosure to make a better investment decision. While now on notice of the conflict, the inexpert customer remains dependent on the expert’s advice. • Disclosure can even exacerbate the harmful impacts of conflicts of interest, as when an adviser feels morally licensed to indulge the conflict of interest because they can now treat the customer as duly warned or as when they press harder to make the sale to offset possible concerns about disclosed conflicts. • Without a working model on how to take account of conflicts of interest, investors may overweight the advice based on the adviser’s perceived honesty for having disclosed the conflict, or unduly discount the advice and take a contrarian approach because of discomfort about the advice’s reliability. Investors may also feel pressure not to question the adviser’s integrity or deprive them of their livelihood. 234 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 268–271, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 While disclosure of conflicts could, in some cases, change the adviser’s behavior for the better,235 mitigating or removing conflicts and requiring the adviser to adhere to a strong conduct standard with a mechanism for overseeing and enforcing compliance, when necessary, provides stronger incentives for advisers to provide investment advice that is in the best interest of the investor. These are the key components of the Department’s proposals, and the primary ways the Department expects the rule to address the problems posed by conflicted advice. While the SEC has addressed many of the Department’s concerns about conflicted advice, the impact is limited to advice in the SEC’s regulatory jurisdiction. This situation would be alleviated by the introduction of a uniform fiduciary standard for the broad range of retirement investment transactions in all regulatory spheres. Additional regulatory action is warranted due to the pervasiveness of conflicts of interest in this marketplace and the complexity of investing assets for retirement. The growing body of evidence underscores that best interest fiduciary standards play an important role in protecting retirement investors.236 One of the Department’s objectives in issuing this proposal is to abate these and similar harms in areas outside of SEC jurisdiction, to ensure that retirement investors’ assets outside the securities space are also protected from conflicted advice. This proposal would extend the fiduciary best interest standard to additional markets and investment product, including annuities and other non-securities. This proposal would apply to advice given to plan fiduciaries as well as plan participants. In addition, for retirement investors who already receive the protections in the Investment Advisers Act of 1940, Regulation Best Interest, and PTE 2020– 02 under the regulatory baseline, this proposal would provide even stronger protections. Standards for mitigating conflicts under this proposal would be more rigorous and well-defined. 235 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 268–271, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. 236 For more information on the relationship of best interest fiduciary standards and the protection of retirement investors, refer to the Benefits section of the RIA. PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 3. Baseline Since the Department first took on the issues of fiduciary advice and conflicts of interest, there have been numerous developments in the regulatory environment and the financial markets in which they operate. Regulatory Baseline The problems of conflicted advice and supervisory structures for advice have received increased regulatory attention, resulting in action from the Department, the SEC, individual states, and the National Association of Insurance Commissioners (NAIC). The major actions are summarized below. Regulatory Baseline, the Department of Labor Many financial institutions undertook efforts to adapt to the Department’s 2016 Final Rule. As such, the intended improvements in retirement investor outcomes appear to have been on track prior to the Fifth Circuit’s vacatur of the 2016 Final Rule.237 Research suggests that the Department’s prior efforts produced positive changes in advice markets, even without fully taking effect, which were reinforced by the SEC’s actions. For instance, several studies found that the Department’s 2016 Final Rule had a positive effect on conflicts of interest and that some categories of conflicts, such as bundled share classes of mutual funds and highexpense variable annuities, were reduced even after the DOL rule was struck down.238 The nature of the conflicts associated with bundled share classes and high-expense variable annuities are discussed later in this document. In 2020, the Department issued a technical amendment to the CFR to reinsert the 1975 rule and published PTE 2020–02. The exemption is available to registered investment advisers, broker dealers, banks, and insurance companies and their individual employees, agents, and 237 See Chamber, 885 F.3d 360 (5th Cir. 2018). Szapiro & Paul Ellenbogen, Early Evidence on the Department of Labor Conflict of Interest Rule: New Share Classes Should Reduce Conflicted Advice, Likely Improving Outcomes for Investors, Morningstar, (April 2017); Jasmin Sethi, Jake Spiegel, & Aron Szapiro, Conflicts of Interest in Mutual Fund Sales: What Do the Data Tell Us?, 6(3) The Journal of Retirement 46–59, (2019); Lia Mitchell, Jasmin Sethi, & Aron Szapiro, Regulation Best Interest Meets Opaque Practices: It’s Time to Dive Past Superficial Conflicts of Interest, Morningstar, (November 2019), https://ccl.yale.edu/ sites/default/files/files/wp_Conflicts_Of_Interest_ 111319%20FINAL.pdf; Mark Egan, Shan Ge, & Johnny Tang, Conflicting Interests and the Effect of Fiduciary Duty—Evidence from Variable Annuities, 35(12) Review of Financial Studies 5334–5386 (December 2022). 238 Aron E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 representatives that provide fiduciary investment advice to retirement investors. However, the exemption explicitly excluded investment advice solely generated by an interactive website, referred to as ‘‘pure roboadvice.’’ 239 Under the exemption, financial institutions and investment professionals can receive a wide variety of payments that would otherwise violate the prohibited transaction rules. The exemption’s relief extends to prohibited transactions arising as a result of investment advice to roll over assets from a plan to an IRA, under certain conditions. This exemption conditions relief on the investment professional and financial institution investment advice fiduciaries providing advice in accordance with the Impartial Conduct Standards. The Impartial Conduct Standards include a best interest standard, a reasonable compensation standard, and a requirement to make no misleading statements about investment transactions and other relevant matters. The best interest standard in the exemption is broadly aligned with the federal securities laws. In addition, the exemption requires financial institutions to acknowledge in writing the institution’s and their investment professionals’ fiduciary status under Title I and the Code, as applicable, when providing investment advice to the retirement investor, and to describe in writing the services to be provided and the financial institutions’ and investment professionals’ material conflicts of interest. Financial institutions must document the reasons that a rollover recommendation is in the best interest of the retirement investor and provide that documentation to the retirement investor.240 Financial institutions are required to adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and conduct a retrospective review of compliance. In order to ensure that financial institutions provide reasonable oversight of investment professionals 239 ‘‘Hybrid robo-advice,’’ or advice that combines combine features of robo-advice and traditional investment advice, is included under the existing PTE 2020–02. 85 FR 82798, 82830 (Dec. 18, 2020). 240 The PTE 2020–02 preamble says: This requirement extends to recommended rollovers from a Plan to another Plan or IRA as defined in Code section 4975(e)(1)(B) or (C), from an IRA as defined in Code section 4975(e)(1)(B) or (C) to a Plan, from an IRA to another IRA, or from one type of account to another (e.g., from a commissionbased account to a fee-based account). The requirement to document the specific reasons for these recommendations is part of the required policies and procedures, in Section II(c)(3).’’ VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 and adopt a culture of compliance, the exemption provides that financial institutions and investment professionals will be ineligible to rely on the exemption if, within the previous 10 years, they were convicted of certain crimes arising out of their provision of investment advice to retirement investors. They can also become ineligible if they engage in systematic or intentional violation of the exemption’s conditions or provided materially misleading information to the Department in relation to their conduct under the exemption. At the time PTE 2020–02 was finalized, the Department left in place other administrative exemptions that could be used to provide investment advice in place of PTE 2020–02, including the other PTEs being amended in this proposal. Leaving the other PTEs in place allowed for a varied landscape of conditions that could be used by different types of financial institutions to provide investment advice for different types of assets and financial products. The varied landscape of conditions allows for regulatory arbitrage where investment advice providers can use more favorable rules in one market to circumvent less favorable regulations elsewhere. Regulatory Baseline, the Securities and Exchange Commission The Investment Advisers Act of 1940, ‘‘establishes a fiduciary duty for [investment advisers] roughly analogous to the fiduciary duties of care and loyalty established by ERISA for investment advisers to plans and plan participants.’’ 241 In an interpretation of the conduct standards applicable to investment advisers, the SEC wrote: An investment adviser’s fiduciary duty under the Advisers Act comprises a duty of care and a duty of loyalty. This fiduciary duty requires an adviser ‘‘to adopt the principal’s goals, objectives, or ends.’’ 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.242 In June 2019, the SEC adopted a package of rulemakings and interpretations designed to enhance the quality and transparency of retail investors’ relationships with investment 241 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 30, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/lawsand-regulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf. 242 Commission Interpretation Regarding Standard of Conduct for Investment Advisers, 84 FR 33669 (July 12, 2019). PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 75923 advisers and broker-dealers.243 The package included Regulation Best Interest, the Form CRS, and publication of two separate interpretations under the Investment Advisers Act. Regulation Best Interest establishes a standard of conduct for broker-dealers and associated persons (unless otherwise indicated, together referred to as ‘‘broker-dealers’’) when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities.244 In adopting Regulation Best Interest, the SEC made findings consistent with the underlying premise of DOL’s recent rulemakings: that financial services firms’ conflicts of interest are harmful to investors. Specifically, in the Regulation Best Interest preamble, the SEC stated that: [l]ike 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 brokerdealer compensation.245 These and other conflicts of interest may provide an incentive to a broker-dealer to seek to increase its own compensation or other financial interests at the expense of the customer to whom it is making investment recommendations.246 * * * * * Notwithstanding these inherent conflicts of interest in the broker-dealer-customer relationship, 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 243 SEC Regulation Best Interest defines retail customer to include ERISA plan participants and beneficiaries, including IRA owners, but not ERISA fiduciaries. See 84 FR 33343–44 (July 12, 2019). This subject is further addressed in the affected entities section below. 244 The SEC’s Regulation Best Interest was adopted pursuant to the express and broad grant of rulemaking in Section 913(f) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC also required disclosure of a Customer Relationship Summary, adopted an interpretation of the fiduciary duty that investment advisers owe to their clients under the Investment Advisers Act, and published an interpretation of the ‘‘solely incidental’’ prong of the broker-dealer exclusion under the Investment Advisers Act. Under Regulation Best Interest, broker-dealers are required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer and cannot place its own interests ahead of the customer’s interests. 245 The SEC also stated that ‘‘[t]he investment adviser-client relationship also has inherent conflicts of interest, including those resulting from an asset-based compensation structure that may provide an incentive for an investment adviser to encourage its client to invest more money through an adviser in order increase its AUM at the expense of the client.’’ 246 84 FR 33319 (July 12, 2019). E:\FR\FM\03NOP3.SGM 03NOP3 75924 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 seeking investment recommendations . . . Nevertheless, concerns exist regarding (1) the potential harm to retail customers resulting from broker-dealer recommendations provided where conflicts of interest exist and (2) the insufficiency of existing broker-dealer regulatory requirements to address these conflicts when broker-dealers make recommendations to retail customers. More specifically, there are concerns that existing requirements do not require a broker-dealer’s recommendations to be in the retail customer’s best interest.247 Accordingly, the SEC stated that Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing ‘‘suitability’’ obligations 248 and aligns the standard of conduct with customers’ reasonable expectations by requiring broker-dealers 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 retail customer’s interest; and, among other things, address conflicts of interest by disclosing and mitigating, or even eliminating, conflicts of interest.249 In particular, the best interest obligation for Regulation Best Interest is only satisfied if the broker-dealer complies with four component obligations: a Disclosure Obligation, which requires a broker-dealer to provide all material facts related to the scope and terms of the relationship with the retail customer and the conflicts of interests associated with the recommendation prior to or at the time of the recommendation; a Care Obligation, which requires a brokerdealer to exercise reasonable diligence, care, and skill when making recommendations to a retail customer; a Conflict of Interest Obligation, which requires the broker-dealer to establish, maintain and enforce written policies and procedures reasonably designed to address conflicts of interest associated with its recommendations to retail customers; and a Compliance Obligation, which requires brokerdealers to establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.250 Significantly, Regulation Best Interest applies to recommendations by brokerdealers to roll over or transfer assets in a workplace retirement plan accounts to 247 Id. at 33319 (internal citation omitted). Rule 2111(a). 249 84 FR 33318 (July 12, 2019). 250 SEC’s Office of Compliance Inspections and Examinations, Examinations that Focus on Compliance with Regulation Best Interest, (April 7, 2020), https://www.sec.gov/files/Risk%20Alert%20Regulation%20Best%20Interest%20Exams.pdf. 248 FINRA VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 an IRA and recommendations to take a plan distribution. The SEC has also issued staff guidance that under Regulation Best Interest and the Advisers Act’s fiduciary duty, when making a rollover recommendation, broker-dealers and investment advisers must consider costs, the level of services available, and features of existing accounts. The guidance notes that, ‘‘it would be difficult to form a reasonable basis to believe that a rollover recommendation is in the retail investor’s best interest and does not place your or your firm’s interests ahead of the retail investor’s interest, if you do not consider the alternative of leaving the retail investor’s investments in their employer’s plan, where that is an option.’’ 251 The standard of conduct in SEC’s Regulation Best Interest draws from key principles of fiduciary obligations, including those that apply to investment advisers under the Investment Advisers Act. As reiterated in Staff Bulletins 252 and speeches,253 254 Regulation Best Interest, as adopted, incorporates Care and Conflict of Interest Obligations substantially similar to the fiduciary duties under the Advisers Act of loyalty (to not subordinate their client’s interest to their own) and care (to ensure that advice is suitable and in the best interest of the client), to recommendations made by brokerdealers to their retail clients. Importantly, 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 does not place the interests of the firm or the financial professional ahead of the interests of the retail investor. The SEC’s Regulation Best Interest covers advice that SEC-registered broker-dealers render to retail investors. Therefore, the affected firms and professionals include those making 251 SEC, Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Account Recommendations for Retail Investors, (March 30, 2022), https://www.sec.gov/tm/iabd-staff-bulletin. 252 Ibid. 253 Chairman Jay Clayton, Statement at the Open Meeting on Commission Actions to Enhance and Clarify the Obligations Financial Professionals Owe to our Main Street Investors, (June 5, 2019), https:// www.sec.gov/news/public-statement/statementclayton-060519-iabd. 254 Chairman Jay Clayton, Regulation Best Interest and the Investment Advisory Fiduciary Duty: Two Strong Standards that Protect and Provide Choice for Main Street Investors, SEC (July 8, 2019), https://www.sec.gov/news/speech/claytonregulation-best-interest-investment-adviserfiduciary-duty. PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 recommendations to the individual IRA and ERISA plan investors covered by this proposal. With respect to this area of overlap, the potential costs of this proposal are relatively limited, because the SEC actions and this proposal share many similarities and many firms have already built compliance structures based on SEC actions, the Department’s 2016 Final Rule, and PTE 2020–02. The SEC also covers robo-advice, subjecting robo-advisers that meet the definition of ‘‘investment adviser’’ to regulation under the Investment Advisers Act of 1940. It states that roboadvisers have a fiduciary duty to provide advice in the best interest of their clients. In addition, if roboadvisers also hold customer assets, they must register with the SEC and FINRA as broker-dealers. In 2017, the SEC’s Division of Investment Management released regulatory compliance guidance for robo-advisers that included the need for adequate disclosure about the robo-adviser and the services it provides, the need to ensure that the robo-adviser is providing appropriate advice to its customers, and the need to adopt and implement appropriate compliance programs tailored to the automated nature of the robo-adviser’s services.255 This SEC guidance confirms that robo-advisers registered as investment advisers with the SEC are subject to the Investment Adviser Act’s legal requirements and fiduciary obligations. For brokers-dealers subject to Regulation Best Interest and investment advisers subject to the Investment Advisers Act, there is substantial overlap between SEC requirements and the obligations imposed by ERISA, the Code, and this regulatory project. Outside this area of overlap, however, current standards generally are lower, so the potential costs—and benefits—of this proposal may be more significant. For example, this proposal would apply to state-licensed insurance agents and state-registered brokers, who are not uniformly regulated by the SEC, when they provide investment advice to IRA or ERISA plan investors. It would also apply to broker-dealers who give fiduciary advice to ERISA plan fiduciaries, who are not included within Regulation Best Interest’s definition of a retail customer. Recommendations regarding plan and IRA investments in real estate, certificates of deposit, other bank products and fixed indexed annuities that are not considered 255 Jill E. Fisch, Marion Laboure ´ , & John A. Turner, The Disruptive Impact of FinTech on Retirement Systems: Chapter 2: The Emergence of the Robo-Advisor, Oxford University Press 13 (2019). E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules securities under the federal securities laws are also not generally regulated by the SEC. The Department is especially concerned about the proper regulation of fixed index annuities, as they comprised 67 percent of the retail annuity market in 2022, an increase of 42 percent from 2021, as investors hedged against rising interest rates.256 This growth in fixed annuity investments has increased the share of retirement savings residing in a less secure environment with fewer protections against conflicted advice compared to direct investors in mutual funds and securities. The Department anticipates the benefits to investors of extending fiduciary law principles to entities providing investment advice in currently less stringent regulatory regimes to be substantial. Regulatory Baseline, State Legislative and Regulatory Developments The appropriate baseline for this analysis is also informed by certain recent legislative and regulatory developments involving conduct standards at the state level. Summary of State Legislative and Regulatory Developments In a list compiled in July 2023, the Department identified 43 states that 75925 have enacted legislation, finalized regulation, or both that impose conduct standards and disclosure requirements on various financial institutions.257 The table below summarizes the enacted legislation and finalized regulation in each state, as well as the type of financial institution each regulation pertains to. This list includes states that have adopted the NAIC Model Regulation #275,258 in addition to states that have adopted conduct standards and disclosure requirements outside of NAIC Model Regulation #275. TABLE 1—STATES THAT HAVE ENACTED LEGISLATION OR FINALIZED REGULATION State Legislation or regulation Title of legislation or regulation Affected entities Alabama ...................... Regulation .................. Suitability in Annuity Transactions .................. Alaska .......................... Arizona ........................ Regulation Legislation Regulation Regulation Regulation .................. .................. .................. .................. .................. Suitability in Annuity Transactions .................. An Act Relating to Annuity Transactions ........ Article 2—Transaction of Insurance ............... Stability in Annuity Transactions ..................... Colorado Securities Act: Dishonest and Unethical Conduct. Regulation .................. Concerning Best Interest Obligations and Supervision in Annuity Transactions. Consumers Doing Business with Financial Planners. An Act Requiring Administrators of Certain Retirement Plans to Disclose Conflicts of Interest. Suitability in Annuity Transactions .................. Stability in Annuity Transactions ..................... Consumer Protection ...................................... Suitability in Annuity Transactions .................. An Act Relating to Insurance .......................... Annuity Consumer Protections Act ................. Suitability in Annuity Transactions .................. Rulemaking Related to Best Interest Standard for Insurance Professionals. Policy and Procedure on Suitability in Annuity Transactions. Stability in Annuity Transactions ..................... Provides Relative to Venue for Direct Actions by Third Parties Against Insurers. Suitability in Annuity Transactions .................. Financial Consumer Protection Act of 2018 ... Suitability in Annuity Transaction .................... Suitability in Annuity Transactions .................. Insurers, Broker-Dealers, and Independent Producers. Insurers and Independent Producers. Insurers and Independent Producers. Insurers and Independent Producers. Insurers and Independent Producers. Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. Insurers and Independent Producers. Arkansas ...................... Colorado ...................... Connecticut .................. Legislation .................. Legislation .................. Delaware ..................... Florida .......................... Georgia ........................ Hawaii .......................... Idaho ............................ Illinois ........................... Iowa ............................. Regulation Regulation Legislation Regulation Legislation Legislation Regulation Regulation Kansas ......................... Regulation .................. Kentucky ...................... Louisiana ..................... Regulation .................. Legislation .................. Maine ........................... Maryland ...................... Regulation Legislation Regulation Regulation Massachusetts 259 ....... .................. .................. .................. .................. .................. .................. .................. .................. .................. .................. .................. .................. lotter on DSK11XQN23PROD with PROPOSALS3 Regulation .................. Regulation .................. 256 LIMRA, Record Annuity Sales in 2022 Expected Continue into First Quarter 2023, (March 8, 2023), https://www.limra.com/en/newsroom/ news-releases/2023/limra-record-annuity-sales-in2022-expected-to-continue-into-first-quarter-2023/. 257 States that have enacted legislation include Arizona, Connecticut, Florida, Hawaii, Idaho, Louisiana, Maryland, Michigan, Minnesota, Montana, Nebraska, Nevada, North Dakota, Oregon, Pennsylvania, South Dakota, Texas, Washington, and Wisconsin. States that have finalized regulation include Alabama, Alaska, Arizona, Arkansas, VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Amendments to Fiduciary Conduct Standards Amendments to Investment Adviser Disclosure Regulations. Colorado, Connecticut, Delaware, Georgia, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Montana, New Mexico, New York, North Carolina, Ohio, Oklahoma, Rhode Island, South Carolina, Tennessee, Virginia, West Virginia, and Wyoming. 258 For more information on the NAIC’s Suitability in Annuity Transactions Model Regulation, or Model Regulation #275, refer to the section entitled ‘‘NAIC Annuity Transactions Model Regulation #275’’ in this RIA. PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 Financial Planners. Administrators to Municipal 403(b) Plans. Insurers Insurers Insurers Insurers Insurers Insurers Insurers Insurers and and and and and and and and Independent Producers. Independent Producers. Insurance Agents. Independent Producers. Independent Producers. Independent Producers. Independent Producers. Independent Producers. Insurers and Independent Producers. Insurers and Independent Producers. Insurance Commissioner. Insurers and Independent Producers. N/A. Insurers and Independent Producers. Investment Advisers, Financial Planners, Broker-Dealers, Insurers, and Independent Producers. Broker-Dealers and Agents. Investment Advisers. 259 The Massachusetts Supreme Judicial Court recently upheld the validity of the state’s fiduciary duty rule, holding that the Secretary of the Commonwealth had authority to promulgate it, that the Secretary’s authority was not an impermissible delegation of legislative power, that the rule did not override the common-law protections available to investors, and that the rule was not preempted by the SEC’s imposition of the Regulation Best Interest. Robinhood Fin. LLC v. Sec’y of Commonwealth, No. SJC–13381, 2023 WL 5490571, at *1, *6–15 (Mass. Aug. 25, 2023). E:\FR\FM\03NOP3.SGM 03NOP3 75926 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules TABLE 1—STATES THAT HAVE ENACTED LEGISLATION OR FINALIZED REGULATION—Continued State Legislation or regulation Title of legislation or regulation Michigan ...................... Legislation .................. Minnesota .................... Legislation Regulation Regulation Legislation Amendments to An Act to Revise, Consolidate, and Classify the Law Relating to the Insurance and Surety Business. Annuity Suitability Regulation Modification ..... Insurance Industry Trade Practices ................ Annuity Transactions Model ........................... An Act to Revise Insurance Laws Related to Annuities. Securities Regulation ...................................... Mississippi ................... Montana ....................... .................. .................. .................. .................. Regulation .................. Nebraska ..................... Legislation .................. Nevada ........................ Legislation .................. New Mexico ................. New York ..................... Regulation .................. Regulation .................. North Carolina ............. North Dakota ............... Regulation .................. Legislation .................. Ohio ............................. Oklahoma .................... Regulation .................. Regulation .................. Regulation .................. Oregon ......................... Pennsylvania ............... Legislation .................. Legislation .................. Rhode Island ............... South Carolina ............. Regulation .................. Regulation .................. Standards of Ethical Practices for BrokerDealers and Their Agents. An Act Relating to Annuities ........................... An Act amending the Insurance company Law of 1921. Suitability in Annuity Transactions .................. Suitability in Annuity Transactions .................. South Dakota ............... Legislation .................. An Act to Revise Annuity Sales Standards .... Tennessee ................... Texas ........................... Regulation .................. Legislation .................. Virginia ......................... Regulation .................. Washington .................. Legislation .................. West Virginia ............... Wisconsin .................... Regulation .................. Legislation .................. Wyoming ...................... Regulation .................. Suitability in Annuity Transactions .................. Relating to Disclosures and Standards Required for Certain Annuity Transactions and Benefits Under Certain Annuity Contracts. Rules Governing Suitability in Annuity Transactions. Concerning the Best Interest Standard for Annuity Transactions. Suitability in Annuity Transactions .................. An Act Relating to Best Interest in Annuity Transactions. Regulation Governing Suitability in Annuity Transactions. In addition, three states, that have not yet enacted legislation or finalized regulations have introduced legislation or proposed regulations that would impose conduct standards and disclosure requirements on various financial institutions.260 lotter on DSK11XQN23PROD with PROPOSALS3 An Act relating to the Nebraska Protections in Annuity Transactions Act. An Act Relating to Financial Planners; Imposing a Fiduciary Duty on Broker-Dealers, Sales Representatives and Investment Advisers Who for Compensation Advise Other Persons Concerning the Investment of Money. Suitability and Annuity Transactions ............... Suitability and Best Interests in Life Insurance and Annuity Transactions. Suitability in Annuity Transactions .................. An Act Relating to Annuity Transaction Practices. Suitability in Annuity Transactions .................. Standards of Ethical Practices ........................ NAIC Annuity Transactions Model Regulation #275 As shown in the table above, much of the legislative and regulatory action among states focuses on insurers and 260 California, New Hampshire, and New Jersey have introduced legislation and/or regulation. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 independent producers. In February 2020, the NAIC membership approved revisions to its Suitability in Annuity Transactions Model Regulation to include a ‘‘best interest’’ standard of conduct. When the Department conducted its analysis of states in July of 2023, 39 states had adopted the NAIC Model Regulation #275.261 Since then, 261 Based on internal Department analysis, the modified Model Regulation #275, including a best interest standard, was adopted by Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 Affected entities Insurers and Independent Producers. Insurers Insurers Insurers Insurers and and and and Independent Independent Independent Independent Producers. Producers. Producers. Producers. Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers. Insurers and Independent Producers. Broker-Dealers, Sales Representatives, Investment Advisers, and Investment Adviser Representatives. Insurers and Independent Producers. Insurers and Independent Producers. Insurers and Independent Producers. Insurers and Independent Producers. Insurers and Independent Producers. Investment Advisers and Investment Adviser Representatives. Broker-Dealers and Agents. Insurers and Independent Producers. Insurers and Independent Producers. Insurers and Independent Producers. Independent Producers, Broker-Dealers, Agents, and Plan Fiduciaries. Broker-Dealers, Investment Advisers, Insurers, and Independent Producers. Insurers and Independent Producers. Insurers and Agents. Insurers and Independent Producers. Insurers and Independent Producers. Insurers and Independent Producers. Insurers, Independent Producers, Investment Advisers, and Broker-Dealers. Insurers and Independent Producers. additional states may have adopted the Model Regulation. In August 2023, the NAIC reported that 43 states had adopted it.262 The revisions were in response to both the SEC and the Department’s work Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. 262 NAIC, Annuity Suitability & Best Interest Standard, (August 2023), https://content.naic.org/ cipr-topics/annuity-suitability-best-intereststandard. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules in the regulatory space and reflected some movement in the direction of greater uniformity, although significant differences remain, as partially discussed below.263 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.264 If these obligations are met, the producer is treated as satisfying the best interest standard. The care obligation states that the producer, in making a recommendation, must exercise reasonable diligence, care and skill to: • Know the consumer’s financial situation, insurance needs and financial objectives; • Understand the available recommendation options after making a reasonable inquiry into options available to the producer; • 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 • Communicate the basis or bases of the recommendation. The 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.’’ ‘‘Material conflict of interest’’ is defined as ‘‘a financial interest of the producer in the sale of an annuity that a reasonable person would expect to influence the impartiality of a recommendation,’’ but the definition expressly carves out ‘‘cash compensation or non-cash compensation’’ from treatment as sources of conflicts of interest. 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. The NAIC expressly disclaimed that its standard creates fiduciary obligations and the obligations in the Model Regulation differ in significant respects lotter on DSK11XQN23PROD with PROPOSALS3 263 NAIC, Suitability in Annuity Transactions Model Regulation (#275) Best Interest Standard of Conduct Revisions Frequently Asked Questions, (May 10, 2021), https://content.naic.org/sites/ default/files/inline-files/Final%20FAQ%20July %202021.pdf. 264 A producer is defined in section 5.L. of the 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. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 from those in Regulation Best Interest. For example, in addition to disregarding compensation as a source of conflicts of interest, the specific care, disclosure, conflict of interest, and documentation requirements, do not expressly incorporate the obligation not to put the producer’s interests before the customer’s interests, even though compliance with their terms is treated as meeting the ‘‘best interest’’ standard. The care obligation in the Model Regulation only requires that the adviser ‘‘[h]ave a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation.’’ 265 In contrast, Regulation Best Interest requires that, when making a recommendation, the broker-dealer ‘‘exercises reasonable diligence, care, and skill to . . . [h]ave a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer,’’ 266 and the exemptions proposed here, consistent with ERISA’s text, require that advice 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. In recent insurance industry litigation against the Department, the plaintiffs described the differences between ‘‘the requirements of an ERISA fiduciary and an insurance agent operating under the NAIC model regulation [as] extensive.’’ 267 Among the numerous differences they identified is the fact that, ‘‘the NAIC model regulation does not define conflicts of interest or the requirements pertaining to such conflicts as broadly as ERISA.’’ 268 Additionally, they asserted that ‘‘the NAIC model regulation does not contain a ‘prudence’ standard’’ 269 and characterized ‘‘these best interest requirements . . . [as] a far cry from the obligations imposed on an ERISA fiduciary.’’ 270 265 Id. at § 6(A)(1)(a)(iii). Members of the insurance industry have noted that ‘‘[t]here is a world of difference’’ between the NAIC model rule and ERISA’s fiduciary regime. See Brief of Plaintiffs at 39–40, FACC, No. 3:22–cv–00243–K–BN (Nov. 7, 2022), ECF No. 48 (comparing ERISA’s best interest requirement to NAIC Model Regulation 275, Sections 2.B and 6.A.(1)(d)). 266 84 FR 33318, 33458, 33491 (July 12, 2019). 267 Brief of Plaintiffs at 40, FACC, No. 3:22–CV– 00243–K–BT (Nov. 7, 2022), ECF No. 48. 268 Id. at 40–41 n.15. 269 Id. 270 Id. at 40. PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 75927 The Department of Labor, uniquely among the regulators, can impose uniform standards for the provision of investment advice to retirement investors. It is neither limited to the regulation of securities, nor to insurance products, but rather can set a uniform fiduciary standard for the regulation of conflicts of interest with respect to any advice on any investment products recommended to retirement investors. The Department believes that retirement investors and the regulated community are best served by a consistent, protective, and understandable fiduciary standard. Market Conditions and Impacts of Conflicts of Interest Financial products, commission structures, and investment services are constantly evolving. The major market developments that the Department considered with respect to the proposed amendments are discussed below. Market Developments, Mutual Fund Share Classes The 2016 Final Rule and recent SEC actions highlighted inherent conflicts of interest in how broker-dealers or investment advisers are compensated for recommending certain share classes of mutual funds. Since then, share classes without traditional conflicts of interest have increased in popularity. For instance, data published by the Investment Company Institute (ICI) in 2021 show that no-load mutual funds, or mutual funds without commissions, accounted for 46 percent of long-term mutual fund gross sales in 2000, 79 percent in 2015, and 89 percent in 2021. The ICI attributed the increase in noload funds to two growing trends: investors paying intermediaries for advice through direct fees rather than indirectly through funds and the popularity of retirement accounts that invest in institutional, no-load share classes.271 Sethi, Spiegel, and Szapiro (2019) found that the Department’s 2016 Final Rule reduced flows into funds with excess loads or loads that were higher than would otherwise be expected based on the fund’s characteristics.272 271 Investment Company Institute, Trends in the Expenses and Fees of Funds, 2021, 28(2) ICI Research Perspective (March 2022). 272 This study updated the analysis performed by Christoffersen, Evans, and Musto (2013) and examined the period from 1993 to 2017 in order to look at the impact of the Department’s Final Rule, taking into consideration preexisting marketplace trends, anticipatory effects, the April 2015 Proposal, and the April 2016 Final Rule. The study calculates the excess load as ‘‘the difference between loads predicted by a regression and actual load, given a E:\FR\FM\03NOP3.SGM Continued 03NOP3 75928 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules Mitchell, Sethi, and Szapiro (2019) found while mutual funds with excess loads have historically received greater inflows, since 2010 the correlation between excess loads and inflows has been lower. The authors attribute this change to an ‘‘increased focus on broker practices’’ and ‘‘a culture of accountability.’’ 273 Meanwhile, other types of share classes have emerged and grown more prevalent, including unbundled and semi-bundled share classes. In a traditional, bundled share class, the investor pays the mutual fund a load or 12b–1 fee, and the mutual fund pays a portion back to an intermediary, such as the intermediary that sold the fund to the investor. Alternatively, in an unbundled or ‘‘clean’’ share class, the investor pays any intermediaries directly, while in a semi-bundled share class, the fund pays sub-accounting fees for recordkeeping services and uses revenue sharing for other services, such as distribution.274 The different compensation arrangement for each of the types of share classes create different types and magnitudes of conflicts for financial professionals. Adoption of these new share classes has spread quickly. Mitchell, Sethi, and Szapiro (2019) found that between July 2018 to August 2019, relatively few bundled share classes were launched into the market and that more bundled share classes closed in that time frame than semi-bundled and unbundled combined. Additionally, they found that unbundled share classes received almost five times as much new money as semi-bundled share classes. While flows to semi-bundled share classes fluctuated, they received net positive flows overall during this period.275 lotter on DSK11XQN23PROD with PROPOSALS3 Market Developments, the Insurance Market Before it was vacated, the 2016 Final Rule had begun exerting substantial influence on financial advice and products in the insurance market, particularly with regard to annuities. There are three common types of annuities offered by insurance companies. • In a variable annuity, an insurance company invests in an investment option chosen by the investor, which is number of other control variables.’’ See Jasmin Sethi, Jake Spiegel, & Aron Szapiro, Conflicts of Interest in Mutual Fund Sales: What Do the Data Tell Us?, 6(3) The Journal of Retirement 46–59 (Winter 2019). 273 Lia Mitchell, Jasmin Sethi, & Aron Szapiro, Regulation Best Interest Meets Opaque Practices: It’s Time to Dive Past Superficial Conflicts of Interest, Morningstar (November 2019). 274 Ibid. 275 Ibid. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 often a mutual fund.276 The return of the variable annuity reflects the return on the underlying investments. Variable annuities have often been referred to as ‘‘mutual funds in an insurance wrapper.’’ 277 • In a fixed annuity, an insurance company agrees to pay the investor no less than a specified rate of interest during the asset accumulation phase and to pay a specified amount per dollar in the decumulation phase.278 279 • In an indexed annuity, an insurance company agrees to pay the investor returns linked to the performance of a market index. However, unlike a variable annuity, the terms in the contract and the method used to calculate gains and losses may result in actualized gains or losses that differ from the gains and losses experienced by the index.280 Annuity regulators also vary by type. While all annuity products are subject to state regulation, variable annuities and some indexed annuities are considered securities, and therefore are also subject to SEC and FINRA regulations.281 As the financial structure of each type of annuity varies, so does the risk of conflicted advice. Variable and fixed-indexed annuity commissions tend to be similar, while fixed rate income and immediate annuity commissions are generally lower.282 Similar to mutual funds, insurance agents and brokers are often compensated through load fees for selling variable annuities.283 The 276 SEC, Annuities, (2021), https:// www.investor.gov/introduction-investing/investingbasics/glossary/annuities. 277 Frank Fabozzi, The Handbook of Financial Instruments, 596–599 (2002). 278 SEC, Annuities, (2021), https:// www.investor.gov/introduction-investing/investingbasics/glossary/annuities. 279 The initial contract of a fixed annuity establishes an initial credited rate, a minimum guaranteed rate, and a bailout rate. The invested premiums grow at the specified credited rate and are added to the cash value of the annuity. The credited rate may be changed by the insurance company at a specified frequency. However, the interest rate is guaranteed to be no lower than the specified minimum guaranteed rate. If the credited rate falls below the bailout rate, the investor is able to withdraw all the funds without paying a surrender charge. See Frank Fabozzi, The Handbook of Financial Instruments, 599–601 (2002). 280 SEC, Updated Investor Bulletin: Indexed Annuities, (July 2020), https://www.investor.gov/ introduction-investing/general-resources/newsalerts/alerts-bulletins/investor-bulletins/updated13. See also FINRA Rule 2330. 281 SEC, Annuities, (2021), https:// www.investor.gov/introduction-investing/investingbasics/glossary/annuities. 282 Constantijn Panis & Kathik Padmanabhan, Literature Review of Conflicted Advice in Annuities Markets, Internal Report for Department of Labor (February 2023). 283 Frank Fabozzi, The Handbook of Financial Instruments 596–599 (2002). PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 commission paid varies significantly, from as little as 0 percent to as much as 10 percent of the investment with the most common amount being 7 percent.284 The 2016 Final Rule discouraged sales of the typical load funds. Between 2016 and 2018, the sale of fee-based variable annuities, or Ishare class variable annuities, increased by 43 percent.285 Following the vacatur of the 2016 Final Rule in 2018, feebased variable annuity sales decreased, falling by 28 percent between 2018 and 2020. More recently, sales have rebounded, increasing 76 percent between 2020 and 2021.286 The significant increases in I-share class variable annuities have been driven by demand for fee-based products among fee-based advisers. They have been the second most popular variable annuity contract type since 2016, though they still only comprised 9.5 percent of retail variable annuity sales in 2021.287 The Department does not have similar trend data on sales of fee-based fixed annuities. Summary The recent regulatory and market developments, combined with the judicial vacatur of the 2016 Final Rule, provide for a different baseline than the pre-2016 Final Rule baseline. While some reforms and improvements in the delivery of advice have endured despite the vacatur, without new regulatory action, gains made to some products and markets that are not covered by recent regulatory actions by the Department, SEC, or states, could be derailed. Other regulatory agencies have worked to reduce conflicts of interest, but this has resulted in a ‘‘patchwork’’ approach to regulating advice arrangements of retirement investments,288 which has already resulted in the most conflicted advisers moving to markets with the least oversight.289 284 Mark Egan, Shan Ge, & Johnny Tang, Conflicting Interests and the Effect of Fiduciary Duty—Evidence from Variable Annuities, 35(12) The Review of Financial Studies 5334–5486 (December 2022). 285 Cerulli Associates, U.S. Annuity Markets 2022: Acclimating to Industry Trends and Changing Demand, Exhibit 4.09. The Cerulli Report. 286 Ibid. 287 Cerulli Associates, U.S. Annuity Markets 2022: Acclimating to Industry Trends and Changing Demand, Exhibit 2.07. The Cerulli Report. 288 Eversheds Sutherland. ‘‘Getting the Full Picture: The Emerging Best Interest and Fiduciary Duty Patchwork.’’ (August 2020), https:// www.jdsupra.com/legalnews/the-emergingpatchwork-of-fiduciary-54761/. 289 Colleen Honigsberg, Edwin Hu, & Robert J. Jackson, Jr., Regulatory Arbitrage and the Persistence of Financial Misconduct, 74 Stanford Law Review 797 (2022). E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules This proposal would extend important and effective protections broadly to retirement investors. Specifically, the proposal would replace the 1975 regulation’s five-part test with a new fiduciary status test, which would capture more financial investment transactions in which the investor is reasonably relying on the advice individualized to the investor’s financial needs and best interest. This proposal would also increase the number of rollover recommendations being considered as fiduciary advice, which would enhance protections to retirement investors, particularly in regard to recommendations regarding annuities. In accordance with OMB Circular A– 4, Table 2 depicts an accounting statement summarizing the Departments’ assessment of the benefits, costs, and transfers associated with this regulatory action. The Department is unable to quantify all benefits, costs, and transfers of the proposal but has sought, where possible, to describe these non-quantified impacts. The effects in Table 2 reflect non-quantified impacts and estimated direct monetary costs resulting from the provisions of the proposal. 75929 The quantified costs are significantly lower than costs in the 2016 RIA due to the smaller scope of the proposal relative to the 2016 Final Rule as well as compliance structures adopted by the industry to reduce conflicted advice in response to state regulations, Regulation Best Interest, PTE 2020–02, and the Department’s 2016 Rulemaking. The methodology for estimating the costs of the proposed amendments to the rule and PTEs is consistent with the methodology and assumptions used in the 2020 analysis for the current PTE 2020–02. TABLE 2—ACCOUNTING STATEMENT Benefits: Non-Quantified (please also see the Transfers section of this table): • Increase uniformity in the regulation of financial advice for retirement investors, across different market segments and market participants. • Protect consumers from losses that can result from advisory conflicts of interest (without unduly limiting consumer choice or adviser flexibility). • Facilitate retirement investors’ trust in advisers. • Facilitate more efficient capital allocation Costs Estimate Annualized ............................................................................... Monetized ($million/Year) ........................................................ Year dollar $221.1 220.4 2023 2023 Discount rate 7 percent ................................ 3 percent ................................ lotter on DSK11XQN23PROD with PROPOSALS3 Quantified Costs: The Department expects that entities would not incur additional costs from the proposed amendments to PTE 77–4, PTE 80–83, and PTE 83–1. However, the Department expects that entities would incur costs directly from the proposed amendments to the following PTEs:. • The annualized cost estimates in PTE 2020–02 reflect estimated costs associated with reviewing the proposal, preparing written disclosures for investors, preparing written disclosures for PEPs, reviewing and updating policies and procedures, reviewing and updating the retrospective review, and preparing rollover documentation. • The annualized cost estimates in PTE 84–24 reflect estimated costs associated with reviewing the rule, providing disclosures to retirement investors, establishing written policies and procedures, conducting a retrospective review, and maintaining recordkeeping. • The annualized cost estimates in PTE 75–1 reflect estimated costs associated with maintaining recordkeeping. • The annualized cost estimates in PTE 86–128 reflect estimated costs associated with maintaining recordkeeping. In addition, the annualized cost estimates in PTE 86–128 reflect estimated costs associated with extending the exemption requirements on IRAs. These costs include preparing and distributing the written authorization from the authorizing fiduciary to the broker-dealer, preparing and mailing the required information to the authorizing fiduciary, preparing and distributing the annual termination form, preparing and distributing the quarterly report, collecting and generating the information required for the annual report, and collecting and generating the information required for the report of commissions paid. VerDate Sep<11>2014 22:21 Nov 02, 2023 Jkt 262001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 E:\FR\FM\03NOP3.SGM 03NOP3 Period covered 2024–2033 2024–2033 75930 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules TABLE 2—ACCOUNTING STATEMENT—Continued Transfers: Non-Quantified: The Benefits section provides a qualitative description of the expected gains to investors; however, the available data do not allow the Department to break down those gains into component social welfare ‘‘benefits’’ and ‘‘transfers.’’ Transfers identified in this analysis include: • Lower fees and expenses for participants paid to financial institutions. • Reallocation of investment capital to different asset classes, share classes, or investment products. • Shifts in the assets in plans and IRAs. 4. Affected Entities The table below summarizes the estimated number of entities that would be affected by the proposed amendments to the Rule and each of the PTEs. These estimates are discussed in greater detail below. TABLE 3—AFFECTED FINANCIAL ENTITIES Prohibited transaction exemptions Retirement Plans ............................................................. Individual Retirement Accounts ....................................... Pooled Employer Plans ................................................... Pooled Plan Providers ..................................................... Broker-Dealers ................................................................. Discretionary Fiduciaries .................................................. Registered Investment Advisers ...................................... Pure Robo-Advisers ......................................................... Insurance Companies ...................................................... Captive Insurance Agents and Brokers ........................... Insurance Producers ........................................................ Banks ............................................................................... Mutual Fund Companies .................................................. Investment Company Principal Underwriters .................. Pension Consultants ........................................................ lotter on DSK11XQN23PROD with PROPOSALS3 Plans and Participants The proposed amendments to the rule and related PTEs would affect plans that receive investment advice from a financial institution. Participants may be affected by advice they receive directly and by advice that is received by their plan’s administrators and fiduciaries. As of 2021, there were approximately 765,000 private sector retirement plans with 146 million participants and $13.2 trillion in assets that would be affected by these proposals. Approximately 46,000 of these plans were defined benefit plans, with 31 million participants and $3.7 trillion in assets, and approximately 719,000 are defined contribution plans with 115 million participants and $9.5 trillion in assets.290 The Department 290 Private Pension Plan Bulletin: Abstract of 2021 Form 5500 Annual Reports, Employee Benefits Security Administration (2023; forthcoming), Table A1. Table A1 reports that there were 765,124 pension plans, consisting of 46,388 defined benefit plans and 718,736 defined contribution plans. Due to a rounding discrepancy, the sum of defined VerDate Sep<11>2014 22:21 Nov 02, 2023 Jkt 262001 2020–02 75–1 77–4 80–83 86–128 84–24 765,124 3,119,832 382 134 1,894 .................... 15,982 200 183 1,577 .................... .................... .................... 20 1,011 765,124 .................... .................... .................... 1,894 .................... .................... .................... .................... .................... .................... 2,048 .................... .................... .................... 277,390 .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... 812 .................... .................... 6,886 .................... .................... .................... .................... .................... .................... .................... .................... .................... .................... 25 .................... .................... .................... 1,000 210 .................... .................... .................... 1,894 .................... .................... .................... .................... .................... .................... .................... .................... .................... 1,722 52,449 .................... .................... .................... .................... .................... .................... 215 1,577 4,000 .................... .................... 20 1,011 recognizes that some plans, such as simplified employee pension (SEP) plans and Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) plans, are exempt from filing and are not included in these estimates but would typically be affected by the proposal. The Department expects that participants in general would benefit from the stronger, uniform standards imposed by the proposed amendments to the rule and PTEs. Participants who receive investment advice would be directly affected by the proposed amendments, particularly participants receiving one-time advice as to whether they should roll over their retirement savings. These participants are discussed in the section on IRA owners, below. Similarly, plans receiving fiduciary investment advice would also be benefit and defined contribution plans does not equal the aggregate of the plans. Additionally, some individuals participate in two or more plans, so the number of individuals covered is lower than the number of gross participants. PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 directly affected by the proposed amendments. The Department believes that most of these plan fiduciaries are compliant with the existing PTE 2020– 02. Accordingly, the Department expects that plans would be only minimally affected by the proposed amendments to the rule. The Department requests comment on how plans currently compliant with PTE 2020–02 would be affected. As amended, PTE 86–128, PTE 84–24, and PTE 77–4 would directly affect subsets of plans, described below. The proposed amendments to PTE 86–128 would limit the scope of the amendment to transactions in which a fiduciary uses its fiduciary authority to cause the plan or IRA to pay a fee to such trustee for effectuating or executing securities transactions as an agent for the plan. Using 2021 Form 5500 data, the Department estimates that 1,257 unique plans hired service providers that denoted on the Schedule C that they were a discretionary trustee. Further, among these plans, 801 plans E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules also reported that the discretionary trustee provided investment management services or received investment management fees paid directly or indirectly by the plan.291 Based on the range of values (801 and 1,257), the Department estimates on average, 1,000 plans have discretionary fiduciaries with full discretionary control. As small plans do not file the Schedule C, this estimate may be an underestimate. The Department requests comment on how many plans have discretionary fiduciaries with full discretionary control and how many would continue to rely on PTE 86–128 under the proposed amendments. The Department estimates that of the estimated 1,000 plans discussed above, 7.5 percent are new accounts or new financial advice relationships.292 Based on these assumptions, the Department estimates that 75 plans would be affected by the proposed amendments to PTE 86–128.293 For PTE 84–24, the Department estimates that 7.5 percent of plans are new accounts or new financial advice relationships 294 and that 3 percent of plans will use the exemption for covered transactions.295 Based on these assumptions, the Department estimates that 1,722 plans would be affected by the proposed amendments to PTE 84– 24.296 To estimate the number of plans affected by the proposed amendments to PTE 77–4, the Department estimated the number of plans relying on a mutual fund company. The Department does not have data on what percentage of plans receive fiduciary advice through mutual fund companies. A 2013 Deloitte/ICI survey found that 37 percent of 401(k) plans have a mutual fund company as their service 291 Estimates based on 2021 Form 5500 data. identified 57,575 new plans in its 2021 Form 5500 filings, or 7.5 percent of all Form 5500 pension plan filings. 293 The number of new plans is estimated as: 1,000 plans × 7.5 percent of plans are new = 75 new plans. The number of new IRAs is estimated as: 10,000 IRAs × 2.1 percent of IRAs are new = 210 new IRAs. 294 EBSA identified 57,575 new plans in its 2021 Form 5500 filings, or 7.5 percent of all Form 5500 pension plan filings. 295 In 2020, 7 percent of traditional IRAs were held by insurance companies. See Investment Company Institute, The Role of IRAs in US Households’ Saving for Retirement, 2020, 27(1) ICI Research Perspective (2021), https://www.ici.org/ system/files/attachments/pdf/per27-01.pdf. This number has been adjusted downward to 3 percent to account for the fact that some transactions are not covered by this exemption. 296 765,124 plans × 7.5 percent of plans are new × 3 percent of plans with relationships with insurance agents or pension consultants = 1,722 plans. lotter on DSK11XQN23PROD with PROPOSALS3 292 EBSA VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 provider.297 Based upon ICI analyses and Form 5500 data that examines the percentage of plans that are invested in registered investment companies, the Department estimates that 24.7 percent of defined benefit plans have mutual fund companies as money managers.298 Applying these percentages to the universe of pension plans that filed a Form 5500 in 2021 yields a total of approximately 277,390 plans with service provider relationships with mutual fund companies.299 Thus, the Department estimates that 277,390 plans would be affected by the proposed amendments to PTE 77–4. The Department acknowledges that this estimate likely overestimates the number of plans affected by the proposed amendments. Individual Retirement Account (IRA) Owners The proposed amendments to the rule and PTEs 2020–02, 84–24, 75–1, and 86–128 would also impact IRA owners receiving investment advice. According to Cerulli Associates, there were 67.8 million IRA owners holding $11.5 trillion in assets in 2022.300 Approximately 85 percent of the assets are held in traditional IRAs, 10 percent in Roth IRAs, and 5 percent in SEP, Salary Reduction Simplified Employee Pension (SARSEP), and SIMPLE IRAs.301 Some owners hold multiple IRAs. The Department estimates that the number of IRA accounts is 83.3 million by applying the ratio of IRA accounts to IRA owners observed in EBRI’s administrative database.302 297 The Department uses this estimate as a proxy for the percent of defined contribution plans that have service provider relationships with mutual fund companies. See Deloitte & Investment Company Institute, Defined Contribution/401(k) Fee Study, (August 2014). 298 Based on Form 5500 Data 2000–2010, defined benefit plans are approximately 33 percent less likely than defined contribution plans to be invested in a registered investment company. See Sarah Holden, The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, Investment Company Institute (September 2010). 299 Private Pension Plan Bulletin: Abstract of 2021 Form 5500 Annual Reports, Employee Benefits Security Administration (2023; forthcoming), Table A1. There are 765,124 pension plans, of which 718,736 are defined contribution plans and 46,388 are defined benefit plans. The number of plans with service provider relationships with mutual fund companies is estimated as: 718,736 defined contribution plans × 37% = 265,932; 46,388 defined benefit plans × 24.7% = 11,458. 300 Cerulli Associates, U.S. Retirement EndInvestor 2023: Personalizing the 401(k) Investor Experience, Exhibits 5.03 and 5.12. The Cerulli Report. 301 Ibid. Exhibits 5.03 and 5.04. 302 The EBRI database has data on 11.3 million IRA accounts owned by 9.2 million individuals. See Craig Copeland, EBRI IRA Database: IRA Balances, Contributions, Rollovers, Withdrawals, and Asset Allocation, 2017 Update, EBRI Issue Brief, no. 513 PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 75931 The proposed amendments to the rule and PTE 2020–02 would affect retirement investors who roll over money from a plan or IRA into another plan or IRA. A 2020 survey found that 46 percent of recent retirees who had at least $30,000 in retirement savings had rolled at least some of their savings into an IRA.303 According to Cerulli Associates, in 2022, almost 4.5 million DC plan accounts with $779 billion in assets were rolled over into an IRA. Additionally, 0.7 million DC plan accounts with $66 billion in assets were rolled over to other employer-sponsored plans.304 It is challenging to obtain detailed data on other types of rollovers such as IRA-to-IRA and DB plan-to-IRA. The Department used IRS data from 2020 to estimate overall rollovers into IRAs, which is 5.7 million taxpayers and $618 billion.305 Adding in the figures for plan-to-plan rollovers, the Department estimates the total number of rollovers at 6.4 million accounts with $684 billion in assets.306 The Department requests comment on these estimates. Only rollovers overseen by an ERISA fiduciary would be affected by the proposed amendments to PTE 2020–02. The Department does not have compelling data on the percentage of rollovers that will be overseen by an ERISA fiduciary under the amended rule. In 2022, 49 percent of DC plan-toIRA rollovers with 63 percent of DC plan rollover assets were intermediated by a financial adviser.307 Because the (2020). The Department uses this ratio as a proxy for the ratio for total IRA accounts to IRA owners in the following estimate: (11.3 million IRA accounts/9.2 million IRA owners) × 67,781,000 IRA owners = 83,252,750 IRA accounts. 303 Pew Charitable Trusts. ‘‘Pew Survey Explores Consumer Trend to Roll Over workplace Savings Into IRA Plans.’’ Issue Brief. (October 2021), https:// www.pewtrusts.org/en/research-and-analysis/issuebriefs/2021/09/pew-survey-explores-consumertrend-to-roll-over-workplace-savings-into-ira-plans. 304 According to Cerulli, in 2022, there were 4,485,059 DC plan-to-IRA rollovers and 707,104 DC plan-to-DC plan rollovers. See Cerulli Associates, U.S. Retirement End-Investor 2023: Personalizing the 401(k) Investor Experience, Exhibit 6.05. The Cerulli Report. 305 Internal Revenue Service, SOI Tax Stats— Accumulation and Distribution of Individual Retirement Arrangement (IRA), Table 1: Taxpayers with Individual Retirement Arrangement (IRA) Plans, By Type of Plan, Tax Year 2020, (2023). 306 Estimates for the number of IRAs may include some non-retirement accounts such as Health Savings Accounts, Archer medical savings accounts, and Coverdell education savings accounts. See the discussion on Code section 4975 in the Background section of the preamble for more details. 307 According to Cerulli, 49 percent of rollovers were mediated by an adviser, while 37 percent were self-directed. The remaining 14 percent were planto-plan rollovers. See Cerulli Associates, U.S. Retirement-End Investor 2023: Personalizing the E:\FR\FM\03NOP3.SGM Continued 03NOP3 75932 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 Department assumes that advisers intermediating rollovers are ERISA fiduciaries, this estimate is an upper bound. The Department then applies the estimate of DC plan-to-IRA rollovers to all types of rollovers. Accordingly, the Department estimates that 3.1 million rollovers and $431 billion in rollover assets would be affected by the proposed amendments to PTE 2020– 02.308 The Department requests comments on these estimates. As amended, PTE 86–128 and PTE 84–24 would each affect subsets of the number of IRAs discussed above. The Department’s estimates of the IRAs that would be affected by the proposed amendments to PTE 86–128 and PTE 84–24 are discussed below. The proposed amendments to PTE 84–24 would affect new IRA accounts. The Department does not have data on the number of new IRA accounts that are opened each year. However, in 2022, of the 67.8 million IRA owners, 1.4 million, or approximately 2.1 percent, opened an IRA for the first time.309 The Department used this statistic to estimate that 2.1 percent of IRA accounts are new each year. The Department acknowledges that some IRA owners may have multiple IRAs, and as such, this statistic may underestimate the percentage of new IRAs opened.310 Additionally, the Department estimates that about 3 percent of these new IRAs, or approximately 52,000 IRAs, would use PTE 84–24 for covered transactions.311 The Department requests comments on these assumptions, particularly with 401(k) Investor Experience Fostering Comprehensive Relationships, Exhibit 6.04. The Cerulli Report. 308 The number of affected rollovers is estimated as: (6,367,005 × 49%) = 3,119,832. 309 Cerulli Associates, U.S. Retirement EndInvestor 2023: Fostering Comprehensive Relationships, The Cerulli Report. 310 The Department lacks data on the number of IRA owners that own multiple IRAs. To provide scope of magnitude, one source reported that in 2019, 19 percent of IRA owners contributed to both a traditional IRA and Roth IRA. See Investment Company Institute, The Role of IRAs in U.S. Households’ Saving for Retirement, 2020, 27(1) ICI Research Perspective (2021), https://www.ici.org/ system/files/attachments/pdf/per27-01.pdf. This statistic does not account for individuals who own multiple of each type of IRA or those who did not contribute in 2019, but it provides a lower bound. 311 In 2020, 7 percent of traditional IRAs were held by insurance companies. See Investment Company Institute, The Role of IRAs in U.S. Households’ Saving for Retirement, 2020, 27(1) ICI Research Perspective (2021), https://www.ici.org/ system/files/attachments/pdf/per27-01.pdf. This number has been adjusted downward to 3 percent to reflect the removal of transactions not covered by this exemption.). The number of IRAs affected is estimated as: (83,252,750 IRAs × 2.1% IRAs assumed to be new IRAs × 3% of IRAs held by insurance companies) = 52,449 IRAs. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 regard to the percent of IRAs that are new accounts each year. The proposed amendments to PTE 86–128 would limit the scope of the amendment to transactions in which a fiduciary uses its fiduciary authority to cause the plan or IRA to pay a fee to such trustee for effectuating or executing securities transactions as an agent for the plan, without providing investment advice. The Department lacks reliable data on the number of managed IRAs that would experience such a transaction in a given year. For the purpose of this analysis, the Department assumes that there are 10,000 managed IRAs. To err on the side of caution, the Department assumes that all managed IRAs would have a relationship with a discretionary fiduciary. As discussed above for PTE 84–24, the Department assumes 2.1 percent of IRA accounts are new each year. This results in an estimate of 210 managed IRAs that are new accounts or new financial advice relationships.312 The Department requests comment on these estimates, particularly on the number of IRAs that are managed accounts. These estimates likely overestimate of the number of IRA owners that would be affected by the proposed amendments, since IRA owners would only be affected by the proposed rule and amendments to PTEs when they have a relationship with certain financial entities or are conducting financial certain transactions, as defined by the revised fiduciary definition and the conditions for exemptive relief of each PTE. In addition to the specific requests for comment, the Department welcomes general comments on how IRAs and rollovers are likely to be affected by the proposed amendments. Pooled Plan Providers and Pooled Employer Plans The proposed amendments to PTE 2020–02 would affect PPPs and PEPs. As of August 22, 2023, 134 PPPs had filed an initial Form PR Pooled Plan Provider Registration (Form PR) and 382 PEPs were registered with the Department, though this number does not include all PEPs operating on fiscal years whose filing deadline may be delayed.313 Due to these data limitations, the Department assumes a 312 (10,000 managed IRAs × 2.1 percent of IRAs are new) = 210 IRAs. 313 Department of Labor, Form PR, https:// www.dol.gov/agencies/ebsa/employers-andadvisers/plan-administration-and-compliance/ reporting-and-filing/form-pr. PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 universe of 134 PPPs and 382 PEPs for its cost estimate.314 The Department does not have data on what percent of PPPs or PEPs would be affected by PTE 2020–02. For the purposes of this analysis, the Department assumes that all PPPS and PEPs would be affected. The Department requests comment on this assumption. Summary of Affected Financial Entities In its economic analysis for its 2020 rulemaking, the Department included all financial institutions eligible for relief on a variety of transactions and compensation that may not have been covered by prior exemptions in its cost estimate. In 2020, the Department acknowledged that not all these entities will serve as investment advice fiduciaries to plans and IRAs within the meaning of Title I and the Code. Additionally, the Department acknowledged that because other exemptions are also currently available to these entities, it is unclear how widely financial institutions will rely upon the new exemptions and which firms are most likely to choose to rely on them. This analysis, like the analysis from 2020, includes all financial institutions eligible for relief in its cost estimate. These estimates are subject to caveats similar to those in 2020. The Department requests comments on which, and how many, financial institutions may rely on each of the exemptions, as amended. Additionally, the proposed rule would expand the definition of a fiduciary such that an advice provider would be a fiduciary if they make an investment recommendation to a retirement investor for a fee or compensation and any of the following circumstances apply: (1) the advice provider (directly or indirectly) has investment discretion over the retirement investor’s assets, (2) the advice provider (directly or indirectly) provides investment recommendations on a regular basis as part of their business and the recommendation is provided under circumstances indicating that it 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 (3) 314 The inaugural filing deadline for Form 5500 filings for PEPs with plan years beginning after January 1, 2021, was July 31, 2022. The Department based its estimates on those filings it had received by August 22, 2023. The Department anticipates that this understates the true number of PEPs. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules the advice provider represents or acknowledges they are a fiduciary when making investment recommendations. Registered Investment Advisers lotter on DSK11XQN23PROD with PROPOSALS3 Registered investment advisers providing investment advice to retirement plans or retirement investors and registered investment advisers acting as pension consultants would be directly affected by the proposed amendments to PTE 2020–02. Generally, investment advisers must register with either the SEC or with state securities authorities, as appropriate.315 Investment advisers registered with the SEC are generally larger than stateregistered investment advisers, both in staff and in regulatory assets under management.316 For example, according to one report, 64 percent of stateregistered investment advisers manage assets under $30 million while investment advisers must register with the SEC if they manage assets of $110 million or more.317 In addition, according to one survey of SECregistered investment advisers, about 47 percent of SEC-registered investment advisers reported 11 to 50 employees.318 In contrast, an examination of stateregistered investment advisers reveals about 80 percent reported less than two employees.319 315 Generally, a person that meets the definition of ‘‘investment adviser’’ under the Investment Advisers Act (and is not eligible to rely on an enumerated exclusion) must register with the SEC, unless they are prohibited from registering under Section 203A of the Investment Advisers Act or qualify for an exemption from the Act’s registration requirement. An adviser precluded from registering with the SEC may be required to register with one or more state securities authorities. 316 After the Dodd-Frank Wall Street Reform and Consumer Protection Act, an investment adviser with $110 million or more in regulatory assets under management generally registers with the SEC, while an investment adviser with less than $110 million registers with the state in which it has its principal office, subject to certain exceptions. For more details about the registration of investment advisers. See Securities and Exchange Commission, General Information on the Regulation of Investment Advisers, (March 11, 2011), https:// www.sec.gov/investment/divisionsinvestmentia regulationmemoiahtm; North American Securities Administrators Association, A Brief Overview: The Investment Adviser Industry, (2019), www.nasaa.org/industry-resources/investmentadvisers/investment-adviser-guide/. 317 North American Securities Administrators Association, 2018 Investment Adviser Section Annual Report, (May 2018), www.nasaa.org/wpcontent/uploads/2018/05/2018-NASAA-IA-ReportOnline.pdf. 318 Investment Adviser Association, 2019 Investment Management Compliance Testing Survey, (June 18, 2019), https://higherlogic download.s3.amazonaws.com/ INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/about/190618_ IMCTS_slides_after_webcast_edits.pdf. 319 North American Securities Administrators Association, NASAA 2019 Investment Adviser VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 As of December 2021, there were 14,714 SEC-registered investment advisers, of which 9,254 provided advice to retail investors while 5,460 provided advice to non-retail investors. Of the 14,714 SEC-registered investment advisers, 325 were dual-registered as broker-dealers.320 To avoid double counting when estimating compliance costs, the Department counted dually registered firms as broker-dealers and excluded them from the count of registered investment advisers.321 Therefore, the Department estimates there to be 14,389 SEC-registered investment advisers. Additionally, as of December 2021, there were 15,987 state-registered investment advisers, of which 283 are dually registered as a broker-dealer.322 In 2018, 125 state-registered investment advisers were also registered with the SEC.323 To avoid double counting, the Department counted dually registered firms as broker-dealers and excluded them from the count of state-registered investment advisers. Similarly, the Department counted investment advisers registered with the SEC and a state as SEC-registered investment advisers. Accordingly, for the purposes of this analysis, the Department considers 15,579 state-registered investment advisers. In 2021, 54 percent of registered investment advisers provided employersponsored retirement benefits consulting.324 Based on this statistic, the Department estimates that 16,182 registered investment advisers, including 7,770 SEC-registered investment advisers and 8,412 stateregistered investment advisers state, would be affected by the proposed amendments.325 As discussed in the Baseline section, PTE 2020–02 excludes investment Section Annual Report, (May 2019), www.nasaa.org/wp-content/uploads/2019/06/2019IA-Section-Report.pdf. 320 Estimates are based on the SEC’s FOCUS filings and Form ADV filings. 321 The Department applied this exclusion rule across all types of investment advisers, regardless of registration (SEC-registered versus state only) and retail status (retail versus nonretail). 322 Estimates are based on the SEC’s FOCUS filings and Form ADV filings. 323 In December 2018, 125 of the state-registered investment advisers were also registered with the SEC and 204 were dually registered as brokerdealers. See Form CRS Relationship Summary; Amendments to Form ADV, 84 FR 33492 (Jul. 12, 2019). 324 Cerulli Associates, U.S. RIA Marketplace 2022: Expanding Opportunities to Support Independence, Exhibit 5.10. The Cerulli Report. 325 The number of registered investment advisers is estimated as: [(14,389 SEC-registered investment advisers + 15,579 state-registered investment advisers) × 54%] = 16,182 registered investment advisers. PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 75933 advisers providing pure robo-advice. The proposed amendments would include these entities; however, pure robo-advisers would have a different baseline from registered investment advisers currently under PTE 2020–02. As discussed below, the Department estimates that there are 200 pure roboadvisers.326 Accordingly, the Department estimates that 15,982 registered investment advisers who do not provide pure robo-advice are currently eligible for relief under PTE 2020–02.327 The Department does not have data on how many of these firms provide advice only to retirement investors that are plan participants, plan beneficiaries, or IRA owners, rather than the workplace retirement plans themselves. These firms are fiduciaries under the Investment Advisers Act and already operate under standards broadly similar to those required by PTE 2020–02.328 Robo Advisers The proposed changes to PTE 2020– 02 would make investment advice providers providing pure robo-advice eligible for relief under the exemption. While there has been a significant increase in robo-advice in recent years,329 the market for robo-advice has shifted away from pure robo-advice to a hybrid approach which combines features of robo-advisers and traditional human advisers.330 This is partly driven by investor preference. For instance, one survey found that only 45 percent of investors were comfortable using online only advice services.331 Another driver is larger financial institutions entering the market with hybrid robo-advice. 326 For more information on this estimate, refer to the Robo-Advisers discussion in the Affected Entities section. 327 As discussed below, the Department estimates that there are 200 pure robo-advisers. Accordingly, the Department estimates that 15,982 registered investment advisers would be affected by the proposed amendments and are not pure roboadvisers. The number of registered investment advisers is estimated as: [(14,389 SEC-registered investment advisers + 15,579 state-registered investment advisers) × 54%]¥200 robo-advisers = 15,982 registered investment advisers. 328 Investment Adviser Association, SEC Standards of Conduct Rulemaking: What It Means for RIAs, IAA Legal Staff Analysis (July 2019), https://higherlogicdownload.s3.amazonaws.com/ INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/resources/IAAStaff-Analysis-Standards-of-ConductRulemaking2.pdf. 329 Deloitte. ‘‘The Expansion of Robo-Advisory in Wealth Management.’’ (2016). 330 Jill E. Fisch, Marion Laboure, & John A. Turner, The Emergence of the Robo-advisor, Wharton Pension Research Council Working Papers (2018). 331 Cerulli Associates, U.S. Retail Investor Advice Relationships 2022: Rethinking the Advice Continuum, Exhibit 3.02. The Cerulli Report. E:\FR\FM\03NOP3.SGM 03NOP3 75934 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 While the first robo-advisers were standalone firms, many existing financial firms, including banks, broker-dealers, technology firms, and asset managers, have entered the market,332 many by acquiring existing pure robo-advice platforms.333 Robo-advisers offer varying services and different degrees of hands-on assistance.334 The most basic models use computer algorithms to offer investments deemed appropriate in terms of asset allocation and diversification based on the information supplied by the client on opening an account. These investments typically include low-cost mutual funds and exchange traded funds (ETFs), and automatically invest and rebalance funds based on a specified objective or risk tolerance. Most robo-advisers offer advice concerning taxable accounts and IRA accounts. The nature of robo-advice appeals to different investors than traditional investment advice does. While traditional advisers often target older investors with high net worth, robo-advice providers or other low-cost investment firms tend to attract young, technology-savvy investors with low balances.335 According to one source, there were 200 robo-advisers in the United States in 2017.336 Robo-advisers are typically required to register with the SEC or state authorities. For the purposes of this analysis, the Department estimates that there are 200 pure robo-advisers that would be subject to the amended PTE 2020–02 that are not subject to the current PTE 2020–02. The Department requests comment on how the number of robo-advisers in the market has evolved since 2017, what proportion of robo-advisers provide pure versus hybrid robo-advice, and what proportion of pure robo-advisers are likely to rely on the amended PTE 2020–02. The Department also requests comment on whether robo-advisers operate as registered investment 332 Jill E. Fisch, Marion Laboure, & John A. Turner, The Emergence of the Robo-Advisor, Wharton Pension Research Council Working Papers (2018). 333 Andrew Welsch, Robo-Advisors Changed Investing. But Can They Survive Independently, Barron’s (February 2022), https://www.barrons.com/ articles/robo-advisors-changed-investing-but-canthey-survive-independently-51645172100. 334 SEC, Investor Bulletin: Robo-Advisers, (February 23, 2017), https://www.sec.gov/oiea/ investor-alerts-bulletins/ib_robo-advisers. 335 Jonathan W. Lam, Robo-Advisors: A Portfolio Management Perspective, (April 2016). https:// economics.yale.edu/sites/default/files/2023-01/ Jonathan_Lam_Senior%20Essay%20Revised.pdf. 336 Facundo Abraham, Sergio L. Schmukler, & Jose Tessada, Robo-advisors: Investing Through Machines, World Bank Research and Policy Briefs 134881 (2019). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 advisers, or if they can also operate as broker-dealers. Broker-Dealers The proposed amendments would modify PTE 75–1 such that brokerdealers would no longer be able to rely on the exemption for investment advice. The Department does not have information about how many of these firms provide investment advice to plan fiduciaries, plan participants and beneficiaries, and IRA owners. Under PTE 75–1, broker-dealers would still be able to receive reasonable compensation for extending credit to a plan or IRA to avoid a failed purchase or sale of securities involving the plan or IRA if (1) the potential failure of the purchase or sale of the securities is not caused by such fiduciary or an affiliate, and (2) the terms of the extension of credit are at least as favorable to the plan or IRA as the terms available in an arm’s length transaction between unaffiliated parties. Any broker-dealers seeking relief for investment advice, however, would be required to rely on the amended PTE 2020–02. According to data provided by the SEC, there were 3,508 registered brokerdealers as of December 2021. Of those, approximately 70 percent, or 2,447 broker-dealers, reported retail customer activities, while approximately 30 percent, or 1,061 broker-dealers, were estimated to have no retail customers.337 Not all broker-dealers perform services for employee benefit plans. In 2021, 54 percent of registered investment advisers provided employersponsored retirement benefits consulting.338 Assuming the percentage of broker-dealers provide advice to retirement plans is the same as the percent of investment advisers providing services to plans, the Department assumes 54 percent, or 1,894 broker-dealers, would be affected by the proposed amendments.339 The Department requests comment on this estimate. Discretionary Fiduciaries The proposed amendments to PTE 86–128 would affect investment advice fiduciaries. The proposed amendments 337 Estimates are based on the SEC’s FOCUS filings and Form ADV filings. 338 Cerulli Associates, U.S. RIA Marketplace 2022: Expanding Opportunities to Support Independence, Exhibit 5.10. The Cerulli Report. 339 The estimated of retail broker-dealers affected by this exemption is estimated as: (2,447 retail broker-dealers × 54%) = 1,321 retail broker dealers. The estimated number of non-retail broker-dealers affected by this exemption is estimated as: (1,061 non-retail broker-dealers × 54%) = 573 non-retail broker dealers. The estimated number of total broker-dealers is 1,894 (1,321 + 573). PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 would remove provisions that had provided relief for certain plans not covering employees, such as IRAs. Investment advice fiduciaries to IRAs would, instead, have to rely on another exemption, such as PTE 2020–02. While fiduciaries that exercise full discretionary authority or control with respect to IRAs may continue to rely on the exemption, the proposed amendments to PTE 86–128 would impose additional requirements on fiduciaries of employee benefits plans that affect or execute securities transactions and the independent plan fiduciaries authorizing the plan or IRA to engage in the transactions with an authorizing fiduciary. The Department lacks reliable data on the number of investment advice providers who are discretionary fiduciaries that would rely on the amended exemption. For the purposes of this analysis, the Department assumes that the number of discretionary fiduciaries relying on the exemption is no larger than the estimated number of broker-dealers estimated to be affected by the amendments to PTE 2020–02, or 1,894 investment advice providers while acknowledging the number is likely significantly smaller.340 The Department requests comment on this assumption, particularly with regard to what types of entities would be likely to rely on the amended exemption, as well as any underlying data. Insurance Companies The proposed amendments to PTE 2020–02 and PTE 84–24 would affect insurance companies and captive agents. The existing version of PTE 84–24 granted relief for captive insurance agents, insurance agents who are overseen by a single insurance company; however, the proposed amendments would exclude insurance companies and captive agents currently relying on the exemption for investment advice. These entities would be required to comply with the requirements of PTE 2020–02 for relief involving investment advice. As a result, the estimates for PTE 84–24 discussed below likely overestimate the reliance on the exemption. The Department requests comment on the extent to which entities currently relying on PTE 84–24 would continue to rely on the exemption. Insurance companies are primarily regulated by states and no single 340 SEC Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion From the Definition of Investment Adviser, 84 FR 33681, 33685–86 (July 12, 2019). E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 regulator records a nationwide count of insurance companies. Although state regulators track insurance companies, the total number of insurance companies cannot be calculated by aggregating individual state totals, because individual insurance companies often operate in multiple states. In the Department’s 2016 RIA, it estimated that 398 insurance companies wrote annuities.341 The Department continues to use this estimate although the number may have changed during the intervening years. Furthermore, this may be an overestimate because some of these insurance companies may not sell annuity contracts in the IRA or Title I retirement plan markets. The Department requests information on the number of insurance companies underwriting annuities that would be affected by this proposal. Annuity sales reached record highs in 2022. Total annuity sales in 2022 amounted to $312.8 billion, while indexed annuity sales amounted to $79.8 billion, or approximately 26% of total annuity sales. During the first two quarters of 2023, indexed annuity sales accounted for 27% of total annuity sales.342 Recent legislative developments may lead to an expansion in this market. A 2021 survey asked insurers what impacts they expected to see from the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). It found that 58 percent of insurers thought the SECURE Act would result in a significant increase in the number of plan sponsors offering in-plan annuities, and 63 percent of insurers thought the SECURE Act would lead to a significant increase in the number of plan participants allocating a portion of their plan balances to an annuity option.343 With increasing usage of annuities in plans, the future impact on plans, participants, assets, and insurance companies will be greater. It also increases the need for 341 This estimate is based on 2014 data from SNL Financial on life insurance companies reported receiving either individual or group annuity considerations. See Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, (April 2016), https://www.dol.gov/sites/dolgov/files/ EBSA/laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. 342 LIMRA, Preliminary U.S. Annuity Second Quarter 2023 Sales Estimates, (2023), https:// www.limra.com/siteassets/newsroom/fact-tank/ sales-data/2023/q2/2q-2023-prelim-annuity-salesestimates-_final.pdf. 343 Cerulli Associates, U.S. Annuity Markets 2021: Acclimating to Industry Trends and Changing Demand, Exhibit 1.06. The Cerulli Report. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 plan fiduciaries to receive advice that is subject to a best interest standard. Insurance companies sell insurance products through (1) their employees or ‘‘captive insurance agents’’ that work directly for an insurance company or as independent contractors and exclusively sell the insurance company’s products, and/or (2) independent agents that sell multiple insurance companies’ products. In recent years, the market has seen a shift away from captive distribution towards independent distribution.344 The Department does not have strong data on the number of insurance companies using captive agents or independent producers. Based on data on the sales of individual annuities by distribution channel, the Department estimates that, of annuities distributed through either a captive or independent distribution channel, approximately 46 percent of sales are done through captive distribution channels and 54 percent of sales are done through independent distribution channels.345 For the purpose of this analysis, the Department assumes that the number of companies selling annuities through captive distribution channels and independent distribution channels is proportionate to the sales completed by each distribution channel. The Department recognizes that the distribution of sales by distribution channel is likely different from the distribution of insurance companies by distribution channel. The Department 344 See Ramnath Balasubramanian, Rajiv Dattani, Asheet Mehta, & Andrew Reich, Unbundling Value: How Leading Insurers Identify Competitive Advantage, McKinsey & Company (June 2022), https://www.mckinsey.com/industries/financialservices/our-insights/unbundling-value-howleading-insurers-identify-competitive-advantage; Sheryl Moore, The Annuity Model Is Broken, Wink Intel (June 2022), https://www.winkintel.com/2022/ 06/the-annuity-model-is-broken-reprint/. 345 According to the Insurance Information Institute, in 2022, independent broker dealers accounted for 20 percent of individual annuities sales, independent agents accounted for 18 percent of sales, career agents accounted for 15 percent of sales, banks accounted for 24 of sales, full-service national broker-dealers accounted for 17 percent of sales, direct response accounted for 3 percent of sales, and other methods accounted for 2 percent of sales. For the purposes of this analysis, the Department considers those sales made by career agents and full-service national broker-dealers to be ‘‘captive,’’ and those made by independent brokerdealers and independent agents to be ‘‘independent.’’ To estimate the proportion of sales completed through ‘‘captive’’ and ‘‘independent’’ channels, the Department excludes the 6% of sales associated with direct response and ‘‘other methods’’ from the calculation. The Department assumes that 46 percent of sales by banks are captive, while 54% of sales by banks are independent. See Insurance Information Institute, Facts + Statistics: Distribution Channels, (2023), https://www.iii.org/fact-statistic/facts-statisticsdistribution-channels. PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 75935 requests comment on how many insurance companies sell annuities through captive and independent distribution channels. The Department also requests comment on whether how many insurance companies may rely on both methods of distribution. Following from this assumption, the Department estimates that 183 insurance companies distribute annuities through captive channels and would rely on PTE 2020–02 for transactions involving investment advice. Further, the Department estimates that 215 insurance companies distribute annuities through independent channels and would rely on PTE 84–24 for transactions involving investment advice.346 The Department estimates that 70 of the 398 insurance companies are large entities.347 In the absence of data relating to the distribution channel differences by firm size, the Department uses the aggregate rate in its estimates. That is, the Department assumes that 46 percent of large insurance companies (32 insurance companies) sell annuities through captive distribution channels, while the remaining 151 insurance companies distributing annuities through captive channels are assumed to be small.348 Additionally, 54 percent of large insurance companies (38 insurance companies) sell annuities through independent distribution channels, while the remaining 177 insurance companies selling annuities through independent distribution channels are assumed to be small.349 The Department requests comment on this assumption. Independent Producers The proposal would also affect independent insurance producers that recommend annuities from unaffiliated 346 The number of insurance companies using captive distribution channels is estimated as 398 × 46% = 183 insurance companies. The number of insurance companies using independent distribution channels is estimated as 398¥183 = 215 insurance companies. 347 LIMRA estimates that, in 2016, 70 insurers had more than $38.5 million in sales. See LIMRA Secure Retirement Institute, U.S. Individual Annuity Yearbook: 2016 Data, (2017). 348 The number of large insurance companies using a captive distribution channel is estimate as: 70 large insurance companies × 46% = 32 insurance companies. The number of small insurance companies using a captive distribution channel is estimated as: 183 insurance companies¥32 large insurance companies = 151 small insurance companies. 349 The number of large insurance companies using an independent distribution channel is estimate as: 70 large insurance companies × 54% = 38 insurance companies. The number of small insurance companies using a captive distribution channel is estimated as: 215 insurance companies¥38 large insurance companies = 177 small insurance companies. E:\FR\FM\03NOP3.SGM 03NOP3 75936 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 financial institutions to retirement investors, as well as the financial institutions whose products are recommended. While captive insurance agents are employees of an insurance company, other insurance agents are ‘‘independent’’ and work with multiple insurance companies. Though these independent insurance producers may rely on PTE 2020–02, the Department believes they are more likely to rely on PTE 84–24, which is tailored to the industry under the proposal. For this reason, the Department only considers captive insurance agents in the analysis for PTE 2020–02. The Department requests comment on how captive insurance agents and independent insurance producers would be affected by the proposed amendments to PTE 2020–02 and PTE 84–24. The Department estimates that the independent agent distribution channel has sales of about $56 billion since this channel is 18 percent of individual annuity sales and total U.S. annuity sales reached $312.8 billion in 2022.350 It is challenging to estimate the number of independent producers selling annuities to the retirement market. A new release referencing a study reported that there were approximately 40,000 independent property-casualty agents and brokers in the United States.351 The Department assumes that the number of independent producers selling annuities to the retirement market who would use the exemption under its proposed provisions would be about 10 percent of this figure, or 4,000 independent producers. This assumption is based on anecdotal evidence. The Department requests comment on these assumptions, as well as information as to how much of an independent producer’s business focuses on the retirement market (i.e., the shares of independent producers serving the retirement market that receive less than one percent of their sales from the 350 Insurance Information Institute, Facts + Statistics: Distribution Channels—Sales of Individual Annuities By Distribution Channels, 2018 and 2022, https://www.iii.org/fact-statistic/ facts-statistics-distribution-channels. LIMRA: Record Annuity Sales in 2022 Expected to Continue Into First Quarter 2023, (March 8, 2023). https:// www.limra.com/en/newsroom/news-releases/2023/ limra-record-annuity-sales-in-2022-expected-tocontinue-into-first-quarter-2023/#:∼:text=LIMRA %20data%20show%20there%20was, 117%25)%20to%20%2421.8%20billion. 351 Annemarie McPherson Spears, 7 Findings From the 2022 Agency Universe Study, (October 13, 2022), https://www.iamagazine.com/news/7findings-from-the-2022-agency-universe-study?__ hstc=79369803.5fd6a87d75ca95f942e9dc 33fed281b9.1691447156981.1691447 156981.1691447156981.1&__hssc=7936 9803.3.1691447156981&__hsfp=2180945085. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 retirement market, between one and twenty-five percent, between twentyfive and seventy-five percent, or more than seventy-five percent). The proposed amendments would not impose any conditions on insurance intermediaries, such as independent marketing organizations, field marketing organizations, or brokerage general agencies. These entities do not have supervisory obligations over independent insurance producers under state or federal law that are comparable to those of the other entities, such as insurance companies, banks, and broker-dealers, nor do they have a history of exercising such supervision in practice. They are generally described as wholesaling and marketing and support organizations that are not tasked with ensuring compliance with regulatory standards. In addition, they are not subject to the sort of capital and solvency requirements imposed on state-regulated insurance companies and banks. Pension Consultants The Department expects that pension consultants would continue to rely on the existing PTE 84–24. Based on 2021 Form 5500 data, the Department estimates that 1,011 pension consultants serve the retirement market.352 The proposed amendment would exclude pension consultants for plans and IRAs currently relying on the existing PTE 84–24 for investment advice. As such, any pension consultants relying on the existing exemption for investment advice would be required to comply with PTE 2020– 02 for relief. In this analysis, the Department includes pension consultants in the affected entities for continued relief for the existing provisions of PTE 84–24 as well as the amended PTE 2020–02. The Department acknowledges that this approach likely overestimates the entities and related costs to complying with the exemptions. The Department requests comment on whether pension consultants would continue to rely on the existing provisions of 84–24 or would rely on the amended 2020–02. Principal Company Underwriter The Department expects that some investment company principal 352 Internal Department of Labor calculations based on the number of unique service providers listed as pension consultants on the 2021 Form 5500 Schedule C. This could be an underestimate as only plans with one hundred or more participants need to file a Schedule C and then only for service providers paid more than $5,000 during the plan year. To the extent small plans use different pension consultants the number would be underestimated. PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 underwriters for plans and IRAs rely on the existing PTE 84–24 for advice. The Department does not have data allowing it to estimate how many investment company principal underwriters would choose to rely on the exemption, but based on its experience, the Department expects investment company principal underwriters relying on PTE 84–24 to be rare. For the purposes of this analysis, the Department assumes that 10 investment company principal underwriters for plans and 10 investment company principal underwriters for IRAs would use this exemption once with one client plan. The proposed amendment would exclude investment company principal underwriters for plans and IRAs currently relying on the existing PTE 84–24 for investment advice. As such, any principal company underwriter relying on the existing exemption for investment advice would be required to comply with PTE 2020–02 for relief. In this analysis, the Department includes principal company underwriters in the affected entities for continued relief for the existing provisions of PTE 84–24 as well as the amended PTE 2020–02. The Department acknowledges that this approach likely overestimates the entities and related costs to complying with the exemptions. The Department requests comment on whether principal company underwriters would continue to rely on the existing provisions of 84– 24 or would rely on the amended 2020– 02. Banks and Credit Unions The proposed amendments to PTE 75–1, PTE 80–83, and PTE 2020–02 would affect banks and credit unions. There are 4,672 federally insured depository institutions in the United States, consisting of 4,096 commercial banks and 576 savings institutions.353 Additionally, there are 4,686 federally insured credit unions.354 In 2017, the GAO estimated that approximately two percent of credit unions have private deposit insurance.355 Based on this estimate, the Department estimates that there are approximately 96 credit unions with private deposit insurance 353 Federal Insurance Deposit Corporation, Statistics at a Glance- as of March 31, 2023, https:// www.fdic.gov/analysis/quarterly-banking-profile/ statistics-at-a-glance/2023mar/industry.pdf. 354 National Credit Union Administration, Quarterly Credit Union Data Summary 2023 Q2, https://ncua.gov/files/publications/analysis/ quarterly-data-summary-2023-Q2.pdf. 355 GAO, Private Deposit Insurance: Credit Unions Largely Complied with Disclosure Rules, But Rules Should be Clarified, (March 29, 2017), https:// www.gao.gov/products/gao-17-259. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 and 4,782 credit unions in total.356 The Department requests comment on what proportion of credit unions offer IRAs and what proportion sell share certificate products. The Department also requests comment on how many banks and credit unions currently rely on PTE 2020–02, PTE 75–1, and PTE 80–83 for investment advice. The proposed amendments would exclude entities currently relying on the existing PTE 75–1 and PTE 80–83 for investment advice. The Department does not have a reliable data source on how many banks currently rely on these exemptions. PTE 75–1 allows banks to engage in certain classes of transactions with employee benefit plans and IRAs. The Department assumes that half of these banks, or 2,048 banks would use PTE 75–1. As amended. PTE 80–83 allows banks to purchase, on behalf of employee benefit plans, securities issued by a corporation indebted to the bank that is a party in interest to the plan. The Department estimates that 25 fiduciary-banks with public offering services would rely annually on the amended PTE 80–83. The Department requests comment on how many banks currently rely on PTE 75–1 and PTE 80– 83 and how many of these entities rely on the exemptions for relief concerning investment advice. Banks relying on the existing exemptions for investment advice would be required to comply with PTE 2020–02 for relief for advice. Banks would be permitted to act as financial institutions under PTE 2020–02 if they or their employees are investment advice fiduciaries with respect to retirement investors. The Department understands that banks most commonly use ‘‘networking arrangements’’ to sell retail non-deposit investment products, including equities, fixed-income securities, exchangetraded funds, and variable annuities.357 Under such arrangements, bank 356 The total number of credit unions is calculated as: 4,686 federally insured credit unions/ (100%¥2% of credit unions that are privately insured) = 4,782 total credit unions. The number of private credit unions is estimated as: 4,782 total credit unions ¥ 4,686 federally insured credit unions = 96 credit unions with private deposit insurance. 357 For more details about ‘‘networking arrangements,’’ see Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, (April 2016), https://www.dol.gov/sites/dolgov/files/ EBSA/laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. Financial institutions that are broker-dealers, investment advisers, or insurance companies that participate in networking arrangements and provide fiduciary investment advice would be included in the counts in their respective sections. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 employees are limited to performing only clerical or ministerial functions in connection with brokerage transactions. However, bank employees may forward customer funds or securities and may describe, in general terms, the types of investment vehicles available from the bank and broker-dealer under the arrangement. Similar restrictions on bank employees’ referrals of insurance products and state-registered investment advisers exist. The Department believes that, in most cases, such referrals would not constitute fiduciary investment advice within the meaning of the proposal. The Department, however, also requests comment on what other types of activities banks or credit unions may engage in that would require reliance on PTE 2020–02. The Department currently estimates that no banks or credit unions would be impacted by the proposed amendments to PTE 2020–02 but requests comments on this assumption. The Department does not have sufficient data to estimate the costs to banks or credit unions of complying with PTE 2020–02 for investment advice services because it does not know how frequently these entities use their own employees to perform activities that would otherwise be covered by the prohibited transaction provisions of ERISA and the Code. The Department seeks comment on the frequency with which employees recommend their products to retirement investors and how they currently ensure such recommendations are prudent to the extent required by ERISA. The Department invites comments on the magnitude of any such costs and solicits data that would facilitate their quantification in the proposal. Mutual Fund Companies The proposed amendments would modify PTE 77–4 such that mutual fund companies providing services to plans can no longer rely on the exemption when giving investment advice. Under the proposal, these mutual funds would need to rely on PTE 2020–02 for relief concerning investment advice. According to the ICI, in 2022, there were 812 mutual fund companies.358 The Department assumes that all of these companies are service providers to pension plans, providing investment management services. Mortgage Pool Sponsors PTE 83–1 provides relief for the sale of certificates in an initial issuance of 358 Investment Company Institute, 2023 Investment Company Fact Book: A Review of Trends and Activities in the Investment Company Industry, (2023), https://www.ici.org/system/files/ 2023-05/2023-factbook.pdf. PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 75937 certificates by the sponsor of a mortgage pool to a plan or IRA when the sponsor, trustee, or insurer of the mortgage pool is a fiduciary with respect to the plan or IRA assets invested in such certificates. The proposed amendments would modify PTE 83–1 to exclude exemptive relief for investment advice. Under the proposal, these entities would need to rely on PTE 2020–02 for relief concerning investment advice. The Department requests comment on how many of these entities currently rely on PTE 83–1 and how many of these entities rely on PTE 83–1 for investment advice. 5. Benefits and Transfers The Department believes that, as a result of this proposal, retirement investors would achieve higher net returns on average in the long run by selecting better investments or paying lower fees. More specifically, this proposal would generate economic gains for retirement investors by: • increasing uniformity in the regulation of financial advice for retirement investors, across different market segments and market participants, • protecting consumers from losses that can result from advisory conflicts of interest (without unduly limiting consumer choice or adviser flexibility), • giving retirement investors increased trust and confidence in their advisers and in the reliability of their advice, and • facilitating more efficient capital allocation. These represent gains to investors, which may manifest as pure social welfare ‘‘benefits,’’ as some resources that were previously inefficiently used to acquire financial products and services are now available for more valuable uses. Other improvements may take the form of ‘‘transfers’’ of social welfare to retirement investors from other entities in society. The available data do not allow the Department to quantify the gains to investors or the components social welfare ‘‘benefits’’ and ‘‘transfers.’’ These transfers represent a beneficial gain to retirement investors and are a primary objective of the proposed rule and PTE. If some transactions have increased net returns for certain parties and decreased returns of equal magnitude for other parties, that would represent a transfer. If the increase in net returns for the first group is larger than the corresponding decrease for the second group, then only the equivalent portion would be transfers and the amount of the additional net returns would represent benefits. For example, non- E:\FR\FM\03NOP3.SGM 03NOP3 75938 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 retirement investors may have previously experienced lower prices and higher returns resulting from timing errors of retirement investors due to conflicted advice. As those conflicts are removed, those transactions may not occur, leading to a transfer from nonretirement investors to retirement investors. Moreover, it is possible that the financial industry would forego profits (e.g., as a result of conflicted advisers charging retirement investors lower fees), resulting in a transfer from investment advisers and associated service providers to retirement investors. As detailed later in this RIA, the magnitude of the gains to retirement investors, through benefits or transfers, is uncertain. As noted earlier, advisory conflicts—which this proposal, in harmony with federal securities laws, would mitigate—are very costly for retirement investors. The cost is high both on aggregate and for individual retirement investors, such as when a new retiree adheres to conflicted advice to transfer a career’s-worth of 401(k) savings into an over-priced annuity or a high-risk investment. Both the Department’s 2016 RIA and the SEC’s Regulation Best Interest analyses show that investors stand to gain much from the mitigation of advisory conflicts. This RIA provides a mainly qualitative discussion of the benefits of this proposal. The Department invites comments and data related to how it might quantify these benefits as part of the RIA of any final rule. Regulatory Uniformity This proposal would make the rules that govern fiduciary advice to plan and IRA investors more consistent with federal securities laws, and thereby promote clarity and efficiency. Under the current regulatory regime, bad actors are drawn to those markets with the least regulated products, where they are not required to prioritize retirement investors interest over their own when they make investment recommendations. By harmonizing advice regulations across all markets that are used by retirement investors, the Department can ensure that advisers all face the same regulatory standard. It would also remove incentives for investment advisers to steer recommendations in ways that customers cannot monitor and that run counter to the customers’ best interest. When contemplating a potential ‘‘Financial Adviser Reform Act’’ that would ‘‘be uniform in its application of the fiduciary duties of loyalty and care across all financial advisers,’’ Smith VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 (2017) noted that, ‘‘this uniformity would eliminate the ‘false distinction’ between investment service providers by recognizing the overlapping services they offer.’’ 359 Smith argued that creating a uniform standard ‘‘would both reduce consumer confusion as to what constitutes advice or recommendations and ensure that the uniform fiduciary duty is consistently applied in the investor’s favor by taking a broad approach to what constitutes investment advice and recommendations.’’ 360 Simply put, requiring that only some investment advisers advising retirement investors adhere to an ERISA fiduciary standard promotes recommendations that are driven by differences in the regulatory regime rather than by the products or investors’ interests. Research suggests that the problems resulting from differing regulatory regimes are not unique to the United States. For instance, Anagol et al. (2017) found that when agents selling life insurance in India were required to disclose commissions for one particular product, they were much less likely to recommend it to clients. Instead, the agents recommended products that did not have this requirement, but which had higher and opaque commissions.361 The authors conclude, ‘‘These results suggest that the disclosure requirements for financial products need to be consistent across the menu of substitutable products.’’ This underscores that regulatory regimes that are not uniform allow advisers to engage in regulatory arbitrage, leaving their clients vulnerable to conflicts of interest. This proposed rule would help create a uniform standard, as it would apply to all retirement investment advice. This would address concerns the Department has about lower standards for advice related to insurance products and other investments that are not securities, advice that broker-dealers render to ERISA plan fiduciaries, and roboadvice.362 The proposed rule’s broad 359 Alec Smith, Advisers, Brokers, and Online Platforms: How a Uniform Fiduciary Duty Will Better Serve Investors, 2017(3) Colum. Bus. L. Rev. 1200–1243 (2017), https://doi.org/10.7916/ cblr.v2017i3.1730. 360 Ibid. 361 Santosh Anagol, Shawn Cole & Shayak Sarkar, Understanding the Advice of CommissionsMotivated Agents: Evidence from the Indian Life Insurance Market, 99(1) The Review of Economics and Statistics 1–15, (2015), https://doi.org/10.1162/ REST_a_00625. 362 The Department identifies these areas as areas of concern because non-security investments and investment advice from broker-dealers to ERISA plan fiduciaries are not covered by recent SEC actions and pure robo-advice, while included in the SEC’s actions was excluded from the current PTE PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 application to all retirement investment advice would help different market participants and different financial products compete on similar terms for IRA and plan business. This would reduce the risk to retirement investors. Uniform, well-designed rules can make markets fairer for competitors and friendlier for customers, leading to more efficient market outcomes. They can also promote efficiency by allowing firms that offer multiple products or make recommendations in both the retail and non-retail market to utilize a common compliance structure. Financial services firms are already moving toward new approaches in how they offer advice, including more feebased advice models, flatter compensation models, and integrating technology. The proposed amendments to the rule and exemptions would help ensure that these new approaches evolve toward less conflicted and more innately impartial business models. These types of technology-enhanced models—whether pure robo-adviser or hybrid models—will contain the overall costs associated with providing investment advice and strategies and will help low-balance account holders obtain investment advice at an affordable cost. This proposal would generate additional economic benefits and transfers by extending important and effective protections broadly to cover all advice given to retirement investors. In this analysis, the Department identifies three specific areas in which retirement investors would benefit from an extension of protections: one-time advice regarding the rollover of assets, advice on non-security annuity products, and advice given to ERISA plan fiduciaries. These types of advice are discussed in the following sections. Protections Concerning Rollover Investment Advice The proposal would generate benefits for, and transfers to, savers by reducing conflicts related to one-time advice concerning rollovers. Frequently, participants are better off leaving their 401(k) account in the retirement plan rather than rolling it over to an IRA, particularly if the 401(k) plan has low fees and high-quality investment options. Large 401(k) plans often have lower fees than IRAs, though smaller 401(k) plans sometimes find it difficult to keep fees low.363 IRAs often utilize 2020–02. For more information, refer to the Baseline discussion. 363 BrightScope and Washington, DC: Investment Company Institute. The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2019 (San Diego, CA: 2022). Available at E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 retail shares in mutual funds with substantially higher fees than the institutional share classes that employer-sponsored plans typically utilize. A 2022 Pew Charitable Trusts study analyzed the difference between median institutional and retail share class expense ratios across all mutual funds that offered at least one institutional share and one retail share in 2019. They found that the median retail shares of equity funds had annual expenses that were 37 percent higher than institutional shares. Over the course of saving for retirement, the impact of even small differences in fees was significant.364 The investment fiduciaries of 401(k) plans also have responsibilities under ERISA to act in the best interests of, and solely for the benefit of, the plan participants, whereas IRA providers do not have such responsibilities.365 Turner and Klein (2014) suggested that the services and investment performance associated with higher fees paid in an IRA are not necessarily justified,366 meaning a plan participant would be able to obtain similar investment performance and services in a lower cost 401(k) plan. For instance, Turner, Klein, and Stein (2015) found that most financial advisers told federal workers about the benefits of rolling over into an IRA, such as having a larger number of investment options and more lenient withdrawal options, without mentioning the higher costs that would be incurred relative to keeping their savings in the Thrift Savings Plan, which has extremely low fees.367 If fewer participants roll over their 401(k) plan account balances into IRAs, and instead keep their account balances in plans sponsored by former or new employers, this would result in transfers between different segments of the market. To consider one example, there may be a transfer from service providers who specialize in serving IRAs to service providers who specialize in serving defined contribution plans. As a www.ici.org/files/2022/22-ppr-dcplan-profile401k.pdf. 364 Pew Charitable Trusts, Small Differences in Mutual Fund Fees Can Cut Billions from Americans’ Retirement Savings, Pew Charitable Trusts Issue Brief, (June 2022), https:// www.pewtrusts.org/-/media/assets/2022/05/ smalldifferenceinmutualfunds_brief_v1.pdf. 365 Ibid. 366 John Turner & Bruce W. Klein, Retirement Savings Flows and Financial Advice: Should You Roll Over Your 401(k) Plan?, 30(4) Benefits Quarterly 42–54 (2014), https://www.iscebs.org/ Documents/PDF/bqpublic/bq414f.pdf. 367 John A. Turner, Bruce W. Klein & Norman P. Stein, Financial Illiteracy Meets Conflicted Advice: The Case of Thrift Savings Plan Rollovers, 3(4) The Journal of Retirement 47–65 (2015), https://doi.org/ 10.3905/jor.2016.3.4.047. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 second example, retirement investors often pay lower fees in plans where they can access institutional share classes than they do in IRAs where they use retail share classes. This represents a transfer from actors in the financial industry to retirement investors. Protections Concerning Annuity Investment Advice The proposal would generate additional benefits by extending protections to investment advice from insurance agents or independent producers to IRA investors. The annuity products offered by insurance companies are notoriously complex, leaving retirement investors reliant on advice from the insurance agent, broker, or independent producer selling the annuity. The fees and adviser incentives are similarly complex, often in a way that can conceal the full magnitude of the fees. Other regulators have highlighted the complexity of many annuity products. For example, FINRA stated: Annuities are often products investors consider when they plan for retirement—so it pays to understand them. They also are often marketed as tax-deferred savings products. Annuities come with a variety of fees and expenses, such as surrender charges, mortality and expense risk charges and administrative fees. Annuities also can have high commissions, reaching seven percent or more.368 As described in the baseline discussion above, fixed annuities, variable annuities, and indexed annuities differ significantly in risk. For instance, while the insurer carries the investment risk for fixed annuities, the investor carries the investment risk for variable annuities and indexed annuities.369 Additionally, they differ in regulatory standards and the required protections owed to customers. While variable annuities and some indexed annuities are considered securities subject to SEC and FINRA regulation,370 the standard of care owed to a customer for other types of annuities depends on the state regulation. One area of concern for the Department is how financial entities selling annuities are compensated, which may result in a conflict of 368 Financial Industry Regulatory Authority, Annuities, Financial Industry Regulatory Authority, https://www.finra.org/investors/investing/ investment-products/annuities. 369 Frank Fabozzi, The Handbook of Financial Instruments 579, (2002), https://seeking worldlywisdom.files.wordpress.com/2011/08/thehandbook-of-financial-instruments-fabozzi.pdf. 370 Securities and Exchange Commission, Annuities, Securities and Exchange Commission, https://www.investor.gov/introduction-investing/ investing-basics/glossary/annuities. PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 75939 interest. According to the 2015 Warren Report, which examined 15 of the largest annuity companies in the United States, 87 percent of the annuity companies offered ‘‘kickbacks’’ to their agents in exchange for sales to retirees.371 Further, insurance agents, brokers, and independent producers are often compensated through load fees for selling variable and fixed annuities fees.372 As discussed in the Baseline section discussion on market developments in the insurance market, research has found load fees create a conflict of interest in investment advice, leading to decreased returns.373 The Department is also particularly concerned about vulnerable retirement investors who lack a basic understanding of investment fundamentals and the complexities associated with indexed annuities. FINRA cautions that, ‘‘indexed annuities are complex financial instruments, and retirement experts warn that such annuities include a number of features that may result in lower returns than an investor may expect.’’ 374 While indexed annuities have a minimum guaranteed rate of return tied to an underlying index, the guarantee rate does not cover all of a premium.375 Moreover, while the rate of return of the indexed annuity is linked to performance of the index, indexed annuity returns are subject to contractual limitations which effectively cap returns. FINRA identified the following contractual limitations observed in indexed annuities: • Participation rates explicitly set the percentage of index returns that are credited to the annuity; • Spread, margin, or asset fees are subtracted from the index returns; and 371 Office of Senator Elizabeth Warren, Villas, Castles, and Vacations: Americans’ New Protections from Financial Adviser Kickbacks, High Fees, & Commissions are at Risk (2017), https:// www.warren.senate.gov/files/documents/2017-2-3_ Warren_DOL_Rule_Report.pdf. 372 Frank Fabozzi, The Handbook of Financial Instruments 576–599, (2002), https://seekingworldly wisdom.files.wordpress.com/2011/08/thehandbook-of-financial-instruments-fabozzi.pdf. 373 Susan Christoffersen, Richard Evans & David Musto, What Do Consumers’ Fund Flows Maximize? Evidence from Their Broker’s Incentives, 68(1) Journal of Finance 201–235 (February 2013), https://doi.org/10.1111/j.1540-6261.2012.01798.x. 374 Financial Industry Regulatory Authority, The Complicated Risks and Rewards of Indexed Annuities, Financial Industry Regulatory Authority, (July 2022), https://www.finra.org/investors/ insights/complicated-risks-and-rewards-indexedannuities. 375 Coryanne Hicks & Phillip Moeller, 17 Things You Need to Know About Annuities, U.S. News and World Report, (May 3, 2021), https:// money.usnews.com/investing/investing-101/ articles/things-you-need-to-know-now-aboutannuities. E:\FR\FM\03NOP3.SGM 03NOP3 75940 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 • Interest caps limit the returns if the underlying index sees large returns.376 FINRA also warns that indexed annuities may be able to change these contractual limitations, depending on the terms of the contract.377 In a 2020 investor alert, the SEC warned, ‘‘You can lose money buying an indexed annuity. Read your contract carefully to understand how your annuity works.’’ 378 The SEC listed several ways that investors in these products can lose money, including through surrender charges and withdrawals during a specified time period. The SEC further cautioned: • ‘‘Indexed annuity contracts describe both how the amount of return is calculated and what indexing method they use. Based on the contract terms and features, an insurance company may credit your indexed annuity with a lower return than the actual index’s gain.’’ • ‘‘Indexed annuity contracts commonly allow the insurance company to change some of these features periodically, such as the rate cap. Changes can affect your return. Read your contract carefully to determine what changes the insurance company may make to your annuity.’’ 379 The Department also has concerns about sales tactics of insurance agents, brokers, and independent producers for annuity products. A number of state regulators have issued website alerts regarding deceptive sales practices to sell annuities to seniors, including ‘‘high-pressure sales pitch[es]’’ and ‘‘quick-change tactics’’ in which an agent tries to convince an investor to change coverage quickly without time for adequate research. State regulators also warned that a licensed agent will be more than willing to show credentials and to question an agent’s ‘‘[unwillingness or inability] to prove credibility’’ to prospective customers.380 376 Financial Industry Regulatory Authority, The Complicated Risks and Rewards of Indexed Annuities, Financial Industry Regulatory Authority, (July 2022), https://www.finra.org/investors/ insights/complicated-risks-and-rewards-indexedannuities. 377 Id. 378 Securities and Exchange Commission, Updated Investor Bulletin: Indexed Annuities, Securities and Exchange Commission, (July 2020), https://www.investor.gov/introduction-investing/ general-resources/news-alerts/alerts-bulletins/ investor-bulletins/updated-13. 379 Id. 380 See e.g., California Department of Insurance, Deceptive Sales Practices When Purchasing Annuities, California Department of Insurance, https://www.insurance.ca.gov/0150-seniors/ 0100alerts/DeceptiveSales.cfm; North Carolina Department of Insurance, Annuities and Senior Citizens, North Carolina Department of Insurance, VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 One regulator noted, ‘‘With billions of dollars in sales to be made, insurance companies may offer commissions as high as 10 percent to agents to sell products like long-term deferred annuities to senior citizens.’’ 381 As described by the regulator: Some unscrupulous sellers use highpressure sales pitches, seminars, and telemarketing. Beware of agents who ‘‘cold call’’ you, contact you repeatedly, offer ‘‘limited time offers,’’ show up without an appointment, or won’t meet with you if your family is present. Beware of estate planning ‘‘seminars’’ that are actually designed to sell annuities. Beware of seminars that offer free meals or gifts. In the end, they are rarely free. Beware of agents who give themselves fake titles to enhance their credibility.382 Supporting this call for caution, Egan et al. (2019) found substantial amounts of misconduct disputes in the sales of annuities between 2005 and 2015.383 Research shows that fiduciary protections in the annuity markets lead to better outcomes for investors. By analyzing deferred annuity sales at a large financial services provider during 2013 to 2015, Bhattacharya et al. (2020) found that fiduciary duty increases riskadjusted returns by 25 basis points.384 https://www.ncdoi.gov/consumers/annuities/ annuities-and-senior-citizens; Mississippi Insurance Department, Annuities and Senior Citizens: Senior Citizens Should Be Aware Of Deceptive Sales Practices When Purchasing Annuities, Mississippi Insurance Department, https://www.mid.ms.gov/ consumers/annuities-senior-citizens.aspx; Kentucky Department of Insurance, Annuities and Senior Citizens Consumer Alert: Senior Citizens Should Be Aware of Deceptive Sales Practices When Purchasing Annuities, Kentucky Department of Insurance, https://insurance.ky.gov/ppc/ Documents/AnnuitiesandSenior.pdf; Massachusetts Division of Insurance, Annuities and Senior Citizens: Senior Citizens Should Be Aware Of Deceptive Sales Practices When Purchasing Annuities, Massachusetts Division of Insurance, https://www.mass.gov/service-details/annuitiesand-senior-citizens; Georgia Office of the Commissioner of Insurance and Safety Fire, Annuity Tips, Georgia Office of the Commissioner of Insurance and Safety Fire, https:// oci.georgia.gov/insurance-resources/annuity/ annuity-tips; South Dakota Division of Insurance, Consumer Alert: Annuities and Senior Citizens: Senior Citizens Should Be Aware Of Deceptive Sales Practices When Purchasing Annuities, South Dakota Division of Insurance, https://dlr.sd.gov/ insurance/publications/alerts/documents/ annuities_senior_citizens.pdf. 381 Minnesota Attorney General, Annuities: Unsuitable Investments for Seniors, Minnesota Attorney General, https://www.ag.state.mn.us/ consumer/Publications/AnnuitiesUnsuitable InvforSeniors.asp. 382 Ibid. 383 Mark Egan, Gregor Matvos, & Amit Seru, The Market for Financial Adviser Misconduct, 127(1) Journal of Political Economy (February 2019), https://www.journals.uchicago.edu/doi/10.1086/ 700735. 384 Vivek Bhattacharya, Gaston Illanes, & Manisha Padi, Fiduciary Duty and the Market for Financial Advice, Working Paper 25861 National Bureau of Economic Research (2020), https://www.nber.org/ papers/w25861. PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 This results from a compositional shift in the set of products purchased by investors. Fiduciary duty protections tend to shift sales towards fixed indexed annuities and away from variable annuities. Within variable annuities, sales shifted towards products with more and higher quality investment options. The authors obtained these findings by exploiting the variation in fiduciary duties between broker-dealers and registered investment advisers as well as the variation between states as to whether broker-dealers are subject to a common law fiduciary duty. Bhattacharya et al. (2020) also found that fiduciary duty led to a 16 percent reduction in the number of brokerdealers, which they described as a ‘‘potentially small’’ effect. There was no change in total annuity sales. Furthermore, the reduction in brokerdealers did not result in poor quality products being sold. The authors developed a model that shows that the benefits of improved advice under a fiduciary standard, offset by the reduction in the number of brokerdealers and the advice they provide, yields an overall effect of increasing average returns by 20 basis points. On the whole, these results indicate that this proposal would improve the quality of advice in the investment market and protect the welfare of investors and retirees.385 The Bhattacharya et al. (2020) model is particularly helpful in that it provides a framework to illustrate the quantitative impact of extending the fiduciary duty. It takes into account both empirical findings—the increase in returns of 25 basis points and the exit of 16 percent of the broker-dealers. While the model illustrates how these results would apply to the larger market, the results are still subject to the limitations of the empirical analysis, which looked only at certain types of annuities sold by one large firm. The authors examined the effects of variation in state-level fiduciary laws, but it is unclear how similar those would be to the effects of a national regulation. Approximately $3.8 trillion in pension entitlements are held in annuities at life insurance companies, including those within IRAs.386 The recommendation of many of these assets are already subject to a best interest 385 Ibid. 386 Board of Governors of the Federal Reserve System, Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts: First Quarter 2023, Table L.227 Federal Reserve Statistical Release Z.1. (June 8, 2023), https://www.federalreserve.gov/releases/ z1/. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules standard; for example, they were sold by a registered investment adviser or sold in a state with a fiduciary standard. It is difficult to know exactly how many assets fall into this category, but for illustrative purposes, let us assume that 50 percent of the market is not currently subject to a best interest standard and would be under the proposal and would therefore expect an increase in average returns of 20 basis points as suggested by Bhattacharya et al. In this scenario, the expansion of fiduciary duty would lead to gains for investors (a mix of societal benefits and transfers) of $3.6 billion, assuming a 20 basis point increase in returns.387 Good regulation may also improve the overall investment advice market. According to Egan, Ge, and Tang (2022), after the Department issued its 2016 Final Rule, total variable annuity sales fell significantly—primarily driven by a 52 percent decrease in annuities with expenses in the highest quartile, suggesting that broker-dealers responded to the 2016 Final Rule by placing greater weight on investor interests. These impacts persisted even after the rule was vacated by the Fifth Circuit. Critics of the Department’s 2016 Final Rule often refer to a decline in variable annuity sales as evidence of the 2016 Final Rule having negative effects. Egan, Ge, and Tang (2002) conclude, however, that investors on average experienced a net benefit from the Rule, even taking into account the fact that some investors were no longer participating in the annuity market.388 Other commenters observed that even if the 2016 Final Rule could have reduced investors’ access to certain services or products, the impact would have been on services and products that were not in the investors’ best interest.389 The benefits of this proposal’s application of fiduciary status to investment advice from insurance agents, brokers, and independent producers include eliminating the incentives for regulatory arbitrage by those agents. Without this proposal, insurers and insurance intermediaries can secure excess profits at investors’ expense by rewarding investment advice providers for giving biased advice in ways that broker-dealers × $3.6 trillion × 50% = $3.6 billion. Egan, Shan Ge, & Johnny Tang, Conflicting Interests and the Effect of Fiduciary Duty—Evidence from Variable Annuities, 35(12) The Review of Financial Studies 5334–5486 (December 2022), https://academic.oup.com/rfs/ article-abstract/35/12/5334/6674521. 389 Ashley C. Vicere, Defining Fiduciary: Aligning Obligations with Expectations. 82(4) Brooklyn Law Review 1783 (2016), https://brooklynworks. brooklaw.edu/blr/vol82/iss4/8/. lotter on DSK11XQN23PROD with PROPOSALS3 387 0.20% 388 Mark VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 operating under Regulation Best Interest cannot. Protections Concerning Advice Given to Plan Fiduciaries This proposal would also yield economic benefits by extending protections to advice given to ERISA plan fiduciaries. Accordingly, the proposal would ensure that investors and the Secretary could enforce the fiduciary protections by pursuing claims for fiduciary misconduct involving ERISA-covered plans. When a brokerdealer currently provides advice to plan fiduciaries, the advice is not covered by Regulation Best Interest because the plan fiduciaries are not retail customers.390 Pool et al. (2016) offered evidence that mutual fund companies acting as service providers to 401(k) plans display favoritism toward their own affiliated funds, even when their performance is worse, generating ‘‘significant subsequent negative abnormal returns for participants investing in those funds.’’ 391 This proposal aims to reduce or eliminate such harmful favoritism. Pool et al. (2022) demonstrated that funds who offer defined contribution plan recordkeepers revenue-sharing payments are more likely to be added as investment options on plan menus and are also more likely to be retained. Additionally, plans whose menus include funds that share revenue had higher expense ratios resulting in significantly higher fees.392 Pool states that this is ‘‘consistent with the notion that . . . less transparent indirect payments allow record keepers to extract additional rents from plan participants.’’ 393 Fiduciaries can negotiate the specific formula and methodology under which revenue sharing will be credited to the plan or plan service providers, indirectly reducing the fees the plan pays which could in turn mitigate the conflict, but this requires a sophisticated understanding of the underlying agreement.394 Given the proliferation of 390 Advice provided by an investment adviser to a plan fiduciary is subject to the Advisers Act fiduciary duty. 391 Veronika K. Pool, Clemens Sialm, & Irina Stefanescu, It Pays to Set the Menu: Mutual Fund Investment Options In 401(K) Plans, 71(4) The Journal of Finance 1779–1812 (August 2016), https://onlinelibrary.wiley.com/doi/abs/10.1111/ jofi.12411. 392 Veronika K. Pool, Clemens Sialm, & Irina Stefanescu, Mutual Fund Revenue Sharing in 401(k) Plans, Vanderbilt Owen Graduate School of Management Research Paper (November 8, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=3752296. 393 Ibid. 394 See Employee Benefits Security Administration, 2013–03A, Advisory Opinions, PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 75941 fee arrangements for investment advice that are increasingly less transparent to clients and regulators as well as the variation in standards and safeguards across advice markets, the Department believes it is critical to extend protections associated with fiduciary status under ERISA, to protect retirement investors’ assets. Plan fiduciaries receive advice on many important topics. For defined contribution plans, these topics can include plan design provisions such as investment alternatives, whether the plan should have automatic enrollment, default contribution rates, and default investments. For defined benefit plans, it can include selection of investments and investment strategies as well as distribution options. Given the large number of participants in ERISA plans and the huge asset holdings of such plans, the benefits of protecting the advice received by plan fiduciaries is likely to be substantial. Increased Confidence in Advisers and in the Reliability of Their Advice The market for financial advice generally works best when investors trust investment advice providers and their trust is well-placed. Both conditions are necessary for optimal results. If investors distrust investment advice providers, they will incur higher costs to select a provider and monitor their conduct. Their provider may also incur higher costs to counter prospective and existing customers’ distrust. Distrustful investors may be less likely to obtain beneficial advice and more likely not to follow beneficial advice.395 Likewise, if investors trust investment advice providers more than is warranted, they may reduce their monitoring of the advisor’s actions and accept less transparency in policies, procedures and fees, making them more vulnerable to harm from advice that is biased by advisory conflicts.396 A 2019 survey regarding the Australian financial advice industry reported that the biggest barriers for consumers in accessing financial advice are cost (35 percent), limited financial (2013), https://www.dol.gov/agencies/ebsa/aboutebsa/our-activities/resource-center/advisoryopinions/2013-03a. 395 Paul Gerrans & Douglas A. Hershey, Financial Adviser Anxiety, Financial Literacy, and Financial Advice Seeking, 51(1) Journal of Consumer Affairs 54–90 (2017), https://www.jstor.org/stable/ 44154765. 396 Winchester, Danielle & Sandra Huston, Trust Reduces Costs Associated with Consumer-Financial Planner Relationship, 71(4) Journal of Financial Service Professionals 80–91 (2017), https://web.p. ebscohost.com/ehost/pdfviewer/pdfviewer?vid= 0&sid=1ca603cd-53ca-4cbb-99b1-5fd43782b0 c4%40redis. E:\FR\FM\03NOP3.SGM 03NOP3 75942 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 circumstances in which it is ‘‘not worth getting financial advice’’ (29 percent), the desire to manage an individual’s own finances (26 percent), a lack of trust (19 percent), or a lack of perceived value in paying for financial advice (18 percent).397 By holding all retirement investment advice providers to standards that rightly instill trust, this proposal would facilitate efficient, trust-based relationships between retirement investors and investment advice providers of all types, so investors would be more likely to obtain and follow beneficial advice, at lower cost. There is extensive evidence that investors, including retail investors and ERISA plan fiduciaries, are often subject to behavioral biases that lead to costly systematic investment errors. There is evidence that good advice can improve saving and investing decisions. Accordingly, the proposal may result in a beneficial reallocation of investment capital. Montmarquette and ViennotBriot (2015) provided evidence that ‘‘having a financial advisor for at least four years has a positive and significant impact on financial assets’’ and that ‘‘the positive effect of advice on wealth creation cannot be explained by asset performance alone: the greater savings discipline acquired through advice plays the major role.’’ 398 Fisch et al. (2016) also provided evidence that ‘‘highlight[s] the potential value of professional advice in mitigating the effects of financial illiteracy in retirement planning.’’ 399 Fisch et al. recruited Amazon Mechanical Turk users (MTurk sample), a crowdsourcing marketplace, to allocate a hypothetical ten thousand dollars among ten investments options as part of a 401(k) plan. Separately, professional advisers—registered investment advisers, broker-dealers or dual registrants—were asked to allocate ten thousand dollars on behalf of a hypothetical 30-year-old, single client, with no children, a lower middle-class income and no substantial outside savings or investments. They found that professional advisers, on average, 397 Australian Securities and Investments Commission, Report 627- Financial Advice: What Consumers Really Think, Australian Securities and Investments Commission, (August 2019), https:// download.asic.gov.au/media/5243978/rep627published-26-august-2019.pdf. 398 Claude Montmarquette & Nathalie ViennotBriot, The Value of Financial Advice, 16(1) Annals of Economics and Finance 69–94 (2015), https:// aeconf.com/articles/may2015/aef160104.pdf. 399 Jill E. Fisch, Tess Wilkinson-Ryan, & Kristin Firth, The Knowledge Gap in Workplace Retirement Investing and the Role of Professional Advisors, 66(3) Duke Law Journal (2016), https://scholarship. law.duke.edu/cgi/viewcontent.cgi?article=3875& context=dlj. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 selected portfolios with higher returns, allocated more money to cheaper index funds, paid lower fees, and accessed more information in connection with the allocation decision than the MTurk sample. For example, professional advisers were ‘‘uniformly sensitive to the fact that the equity risk premium and the 30-year time horizon of the allocation decision warranted substantial equity exposure-facts that the low-literacy investors seemed to be unaware.’’ 400 Overall, professional advisers had a higher level of financial knowledge, which enabled them to make better retirement investing decisions from which unsophisticated investors could benefit. Enforcement Under the proposal, the full range of covered investment advice interactions with Title I plans would be subject to the Department’s robust enforcement program as well as to a private right of action. In general, participants and beneficiaries have the right to bring suit under ERISA 502(a) against fiduciaries who breach their duties and obligations to the plan, including engaging in nonexempt prohibited transactions. This private right of action, which ensures participants and beneficiaries have ready access to the Federal courts, provides critical protection of taxadvantaged retirement plans. For advice interactions not currently covered by relevant standards of conduct, such as much advice provided to plan fiduciaries, these enforcement measures will help to ensure the proposal is implemented effectively. For advice interactions that are subject to state regulation, under the proposal they will likely have stronger oversight, which will provide greater protections to investors. Charoenwong et al. (2019) showed that regulatory oversight has an important impact on investment advice.401 They studied a policy reform that did not affect the laws or rules that registered investment advisers were operating under; instead, it changed the regulatory oversight. The reform shifted some advisers from a federal regulator, the SEC, to state-securities regulators. Registered investment advisers who shifted to the state-securities regulators received 30–40 percent more complaints from customers, relative to the unconditional complaint rate. This effect mainly resulted from fiduciary 400 Id. 401 Ben Charoenwong, Alan Kwan, & Tarik Umar, Does Regulatory Jurisdiction Affect the Quality of Investment-Adviser Regulation, 109(10) American Economic Review (October 2019), https:// www.aeaweb.org/articles?id=10.1257/aer.20180412. PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 violations. Furthermore, the vigor of the enforcement program mattered; the more resources a state-securities regulator had, the fewer complaints there tended to be. The proposal would also ensure the imposition of appropriate excise taxes for prohibited transactions involving both ERISA-covered plans and IRAs. As part of their retrospective review, financial institutions would be required to report to the Department of the Treasury any non-exempt prohibited transactions in connection with fiduciary investment advice, correct those transactions, and pay any resulting excise taxes. Failure to report, correct, and pay an excise tax, in addition to existing factors, would make a financial institution ineligible to rely on PTE 2020–02 and PTE 84–24. The Department believes these additional conditions would provide important protections to retirement investors by enhancing the existing protections of PTE 2020–02 and PTE 84–24. Implications for Retirement Savings Estimates To understand the potential magnitude of savings for retirement investors from the proposed rule, the Department believes the experience following the 2016 rulemaking and SEC’s Regulation Best Interest provides context. As discussed in the baseline discussion, the regulatory and market environments have shifted since the 2016 Rule, and accordingly, the Department acknowledges that there is significant uncertainty about the magnitude of savings that would result for retirement investors as a result of the proposed rulemaking. The Department requests comment on this point. One major market development resulting from the 2016 Final Rule and exemptions involved the development of new mutual fund share classes designed to eliminate advisory conflicts attributable to variation in commissions. As discussed in the Baseline section, Mitchell, Sethi, and Szapiro (2019) found that the share classes that are less likely to have traditional conflicts of interest have become more popular in recent years.402 In 2020, 94 percent of 401(k) mutual fund assets were invested in no-load funds, compared to 66 percent in 2000.403 402 Lia Mitchell, Jasmin Sethi, & Aron Szapiro, Regulation Best Interest Meets Opaque Practices: It’s Time to Dive Past Surface-Level Conflicts, Morningstar (November 2019), https://ccl.yale.edu/ sites/default/files/files/wp_Conflicts_Of_Interest_ 111319%20FINAL.pdf. 403 Investment Company Institute, The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2020, 27(6) ICI Research Perspective E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 In the 2016 RIA, the Department estimated that broker-sold mutual funds underperformed direct-sold mutual funds by approximately 50 basis points per year.404 In response to this estimate, Morningstar opined that transparency improvements associated with such shares ‘‘should encourage advisors to provide high quality advice to remain competitive’’ and that ‘‘50 basis points is a reasonable estimate of savings to investors from reducing conflicted advice.’’ 405 Their support of the Department estimate was based on a study looking at mutual fund T shares. However, this share class has faded following the revocation of the 2016 rule.406 As a result, it is largely uncertain how many retirement investors would have adopted the new share class had it been permitted to go fully into effect. For the purposes of this illustration, if it were assumed that half of the roughly $2.0 trillion assets invested in long-term mutual funds with front-end load fees were transitioned into T shares, investors could have saved approximately $5 billion.407 The Department acknowledges that the Morningstar study only looks at the IRA market, specifically examining share classes designed for retail investors. The proposed rule, of course, applies more broadly than just to IRAs. The Department believes the proposed rule would encourage continued market trends away from share classes with traditional conflicts of interest. However, Mitchell, Sethi, and Szapiro (2019) also found that the newer share classes appear to have their own conflicts that are opaque to investors and regulators, such as revenue Figure 5. (June 2021), https://www.ici.org/system/ files/2021-06/per27-06.pdf. 404 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 162, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/lawsand-regulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf. 405 Aron Szapiro & Paul Ellenbogen, Early Evidence on the Department of Labor Conflict of Interest Rule: New Share Classes Should Reduce Conflicted Advice, Likely Improving Outcomes for Investors, Morningstar Policy Research (April 2017). 406 Greg Iacurci, T Shares Are Dead, InvestmentNews (December 20, 2018), https:// www.investmentnews.com/t-shares-are-dead-77482. 407 According to the Investment Company Institute, in 2017, the total net assets invested in long-term mutual funds with front-end load fees was $1.99 trillion. See Investment Company Institute. ‘‘Trends in the Expenses and Fees of Funds, 2017.’’ Figure 20. ICI Research Perspective (April 2018), Vol. 24, No. 3. If it were assumed that all $1.99 trillion in assets were invested in A shares and that they were all then moved to T shares, then this would have translated into an estimated increase in returns of $4.98 billion for IRA investors. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 sharing.408 Many of the commonly considered potential conflicts of interest are embedded in a bundled share class arrangement, where the investor pays the mutual fund a load or 12b–1 fee, and the mutual fund pays a portion back to an intermediary, such as the intermediary that sold the fund to the investor. Semi-bundled share classes use revenue sharing or sub-accounting fees. The damages associated with conflicts of interest in compensation structures are exacerbated in that many of these compensation structures incentivize excessive trading. Good advice can help investors avoid timing errors when trading by reducing panic-selling during large and abrupt downturns. However, conflicted advice providers may profit by encouraging investors’ natural inclination to trade more and ‘‘chase returns,’’ an activity that tends to produce harmful timing errors.409 Friesen and Sapp (2007) found that equity mutual fund investors made timing decisions that reduced fund investor average returns by 1.56 percent annually.410 Their evidence ‘‘suggests that those investors who are most likely relying on advice from a broker perform especially poorly from a timing standpoint.’’ Bullard, Friesen, and Sapp (2008) found that the difference in performance between load and no-load funds has two components: the difference in prospectus returns across share classes and the difference in investor returns resulting from differences in investor timing.411 Additionally, Christoffersen, Evans, and Musto (2013) found that as the size of the load-share increased, mutual fund returns decreased. This suggests that the greater the adviser’s conflict of interest, the worse off the IRA investor can expect to be.412 413 408 Lia Mitchell, Jasmin Sethi, & Aron Szapiro, Regulation Best Interest Meets Opaque Practices: It’s Time to Dive Past Surface-Level Conflicts, Morningstar (November 2019), https://ccl.yale.edu/ sites/default/files/files/wp_Conflicts_Of_Interest_ 111319%20FINAL.pdf. 409 YiLi Chien, The Cost of Chasing Returns, 18 Economic Synopses (2014), https://doi.org/ 10.20955/es.2014.18. 410 Geoffrey Friesen & Travis Sapp, Mutual Fund Flows and Investor Returns: An Empirical Examination of Fund Investor Timing Ability 31(9) Journal of Banking and Finance 2796–2816 (2007), https://www.sciencedirect.com/science/article/abs/ pii/S0378426607001422. 411 Mercer Bullard, Geoffrey C. Friesen, & Travis Sapp, Investor Timing and Fund Distribution Channels, Social Science Research Network (2008). 412 Susan Christoffersen, Richard Evans, & David Musto, What Do Consumers’ Fund Flows Maximize? Evidence From Their Broker’s Incentives, 68 Journal of Finance 201–235 (2013), https://onlinelibrary. wiley.com/doi/abs/10.1111/j.15406261.2012.01798.x. PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 75943 A Department-sponsored study by Panis and Padmanabhan (2023) examined how investors timed the purchase and sale of mutual funds between 2007 and June 2023. During the decade from 2007 to 2016, the authors found that investors in load funds had worse timing than investors in no-load funds, with an excess performance gap, comparing measures of the impact of purchase and sales timing, of 1.12 percent per year for U.S. equity funds and 0.63 percent for all funds. After Regulation Best Interest took effect, the authors observed that there had been dramatic improvement in the timing of trades. Between July of 2020 and June of 2023, the excess performance gap was only 0.13 percent for U.S. equity funds and was negative, ¥0.11 percent, overall. This means that in the later period, looking across all funds in the aggregate, investors in load funds timed their transactions slightly better than investors in no-load funds. While it is not certain what factors underlie the reduction in timing errors, it is consistent with an interpretation that Regulation Best Interest enhanced the standard of conduct for broker-dealers to act in the best interest of retail customers and persuade their customers to refrain from return chasing behavior.414 The nature of the conflicts facing broker-dealers in the mutual fund space is similar to that facing insurance agents and independent producers in the annuity space. As discussed in the Baseline section, commissions earned by selling annuities vary considerably even within a certain type of product.415 For example, commissions for variable annuities vary widely, creating a strong incentive for brokers to sell some variable annuities over others. Egan, Ge, and Tang (2022) showed that variable annuity sales were four times more sensitive to brokers’ financial interests than to investors’ financial interests.416 413 The performance reduction presented in Christoffersen, Evans and Musto (2013) does not include loads paid by investors in front-end-load funds. 414 Constantijn Panis & Karthik Padmanabhan, Buy Low, Sell High: The Ability of Investors to Time Purchases and Sales of Mutual Funds, Intensity, LLC. (August 14, 2023). Unpublished draft. 415 The commission paid varies significantly, from as little as 0 percent to as much as 10 percent of the investment with the most common amount being 7 percent. See Mark Egan, Shan Ge, & Johnny Tang, Conflicting Interests and the Effect of Fiduciary Duty—Evidence from Variable Annuities, 35(12) The Review of Financial Studies 5334–5486 (December 2022), https://academic.oup.com/rfs/ article-abstract/35/12/5334/6674521. 416 Mark Egan, Shan Ge, & Johnny Tang, Conflicting Interests and the Effect of Fiduciary Duty—Evidence from Variable Annuities, 35(12) E:\FR\FM\03NOP3.SGM Continued 03NOP3 75944 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 After the Department published its 2015 proposal, sales of high-expense variable annuities fell by 52 percent, which Egan, Ge, and Tang (2022) attributed to sales becoming more sensitive to expenses and insurers increasing the availability of lowexpense products. In fact, the authors stated that the ‘‘regulatory change improved the distribution of products available to investors along the extensive margin, in terms of the annuities available for sale, as well as the intensive margin, in terms of the actual annuities sold by brokers.’’ Thus, the authors concluded, the 2016 Final Rule resulted in improved investor welfare, increasing risk-adjusted returns of investors by up to 30 basis points per year, with two-thirds of the effect associated with investors moving into lower-expense products and the remainder from sales of annuities with more desirable investment options and characteristics.417 The long-run impact of such a regulation can be estimated by applying the 30 basis point figure to the assets held in variable annuities in 2018, which was $2.2 trillion, yielding a total annual increase in risk-adjusted returns of approximately $6.6 billion.418 Because the 2016 Final Rule was vacated, its long-run effects on the annuity market remain unknown. The current proposal, however, would help ensure a long-run positive impact on the market for variable annuities. The Department is also concerned about the risks faced by retirement investors purchasing indexed annuities. The benefits from improved investment advice from the proposal would differ from those estimated by Egan, Ge, and Tang (2022), as they would affect a different segment of the market with distinctive characteristics. The recent SEC actions extended new protections to retail customers advised by broker-dealers on securities transactions. According to the SEC, the Conflict of Interest Obligation under Regulation Best Interest is ‘‘intended to reduce the agency costs that arise when a broker-dealer and its associated persons provide a recommendation to a retail customer by addressing the effect of the associated person’s or brokerdealer’s conflicts of interest on the The Review of Financial Studies 5334–5486 (December 2022), https://academic.oup.com/rfs/ article-abstract/35/12/5334/6674521. 417 Id. 418 This estimate is based on variable annuity assets in 2018 of $2.2 trillion, as reported in the referenced study. See Mark Egan, Shan Ge, & Johnny Tang, Conflicting Interests and the Effect of Fiduciary Duty—Evidence from Variable Annuities, 35(12) The Review of Financial Studies 5346 (December 2022), https://academic.oup.com/rfs/ article-abstract/35/12/5334/6674521. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 recommendation.’’ In its Economic Analysis, the SEC explored the market mechanisms by which this and other provisions would benefit retail investors. The SEC estimated that the present value of potential future mutual fund fee reductions after Regulation Best Interest would be between $14 billion to $76 billion.419 The SEC separately estimated that the potential present value of improved future mutual fund performance net of fees (which would overlap with fee reductions) would be between $7 billion to $35 billion. The SEC noted that these estimates represented only ‘‘some of the potential benefits’’ and that more benefits were expected. It also noted that while its estimates focused on mutual funds, it expected that ‘‘the same or similar dynamics could apply to other financial products.’’ As discussed above, the preliminary evidence that is available for the mutual fund and annuity markets following the 2016 Final Rule and SEC’s Regulation Best Interest reinforces the Department’s view that well-designed reforms that raise advisory conduct standards and mitigate advisory conflicts would benefit retirement investors. The Department requests comment on how the investment advice market has evolved since following the enactment of such regulatory actions, with particular interest in how investment returns, net of fees, have changed for mutual funds and annuities. 6. Impact of the Proposal on Small Savers Some observers have argued that some small savers, individuals, or households with low account balances or of modest means, will lose access to investment advice under this type of regulation and will be worse off. The Department has considered in detail the overall impact of the proposal on small savers. The Department recognizes that investment advice is often very valuable for small savers. There is also ample evidence and broad consensus that many U.S. consumers struggle to make and implement good retirement saving and investment decisions without effective help. Many lack the skills, motivation, or discipline to accumulate adequate savings, optimize their investment strategies, and thereby realize financial security in retirement.420 Less sophisticated 419 Regulation Best Interest, 84 FR 33458, 33491 (July 12, 2019). 420 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for PO 00000 Frm 00056 Fmt 4701 Sfmt 4702 investors may benefit from ‘‘handholding’’ to make sure they are taking basic steps such as saving adequately and allocating their investments with an appropriate amount of risk. The Department believes that small savers are especially vulnerable to the detrimental effects of conflicted advice. With fewer economic resources, small savers are particularly susceptible to any practices that diminish their resources by extracting unnecessary fees or by yielding lower returns. These savers cannot afford to lose any of their retirement savings. Yet conflicts sometimes lead advisers to recommend products with lower expected net returns than available alternatives. Consumers’ losses from advisory conflicts tend to exceed what can be justified as fair compensation for good advice as these consumers could often benefit more from competitively priced impartial advice.421 However, advisory conflicts have historically distorted the market in ways that have prevented consumers from accessing less conflicted investment alternatives. Less sophisticated investors frequently do not know how much they are paying for advice and are not equipped to effectively monitor the quality of the advice they receive.422 Indeed, Agnew et al. (2021) found in an experimental setting that younger, less financially literate, and less numerate participants were more likely to hire a low-quality adviser.423 It is possible that they do not Final Rule and Exemptions, pp. 108, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/lawsand-regulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf. (‘‘many IRA investors lack sophistication’’); 136 (older individuals often ‘‘lack even a rudimentary understanding of stock and bond prices, risk diversification, portfolio choice, and investment fees’’); and 137 (‘‘only one-half of individuals aged 50 and older in the United States can correctly answer two simple financial questions that involve calculations. Many respondents failed to correctly conclude that $100 would grow to more than $102 after five years if interest accrues at 2 percent per year, while others were unable to determine that an account earning interest at 1 percent while inflation was 2 percent would lose buying power’’). 421 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 155–158, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. 422 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 136–40, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. 423 Julie Agnew, Hazel Bateman, Christine Eckert, Fedor Iskhakov, Jordan Louviere, and Susan Thorp. Who Pays the Price for Bad Advice?: The Role of E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 understand the potential effects of their advisers’ conflicts.424 By itself, disclosure directly to the consumer is unlikely to change this without other protections also in place.425 Small investors often save using an ERISA plan. Frequently this is the main vehicle they use to save for retirement; in fact, approximately two-thirds of households participating in a pension plan do not own an IRA.426 This proposal will require advice given to the plan fiduciaries to meet a fiduciary standard. Improvements in plan design and selection of investments on the menu will benefit small savers. The vast majority of small savers choose investments from their plan’s platform rather than investing through a brokerage account, if their plan even offers a brokerage account option.427 Research shows that low-income participants tend to be influenced by default options more than high income participants.428 Small savers will benefit from plan fiduciaries choosing default options that are well selected and well monitored. During the 2016 Rulemaking, the Department devoted considerable Financial Vulnerability, Learning and Confirmation Bias,’’ ARC Centre of Excellence in Population Ageing Research, Working Paper 2021/19, (July 1, 2021). 424 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 143–144, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. 425 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 268–271, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. 426 Constantijn W.A. Panis & Michael J. Brien, Savers With and Without a Pension (2015), https:// www.dol.gov/sites/dolgov/files/EBSA/researchers/ analysis/retirement/savers-with-and-without-apension.pdf. 427 In 2022, participants with annual income between $15,000 and $150,000 invested less than 0.5% of their defined contribution plan assets through a brokerage account. See Vanguard, How America Saves, (2023). https://institutional. vanguard.com/content/dam/inst/iigtransformation/has/2023/pdf/has-insights/howamerica-saves-report-2023.pdf. 428 John Beshears, Ruofei Guo, David Laibson, Brigitte C. Madrian, & James J. Choi, Automatic Enrollment with a 12% Default Contribution Rate (August 18, 2023), https://spinup-000d1a-wpoffload-media.s3.amazonaws.com/faculty/wpcontent/uploads/sites/27/2023/08/JPEF20230802.pdf. James Choi, David Laibson, Brigette Madrian, & Andrew Metrick, For Better or For Worse: Default Effects and 401(k) Savings Behavior, In Wise DA (ed.), Perspectives on the Economics of Aging. Chicago: University of Chicago Press, pp. 81–121. https://spinup-000dla-wp-offloadmedia.s3.amazonaws.com/faculty/wp-content/ uploads/sites/27/2019/06/betterorworse.pdf. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 attention to the question of small investors’ access to financial services, including advice.429 The Department believed that the rule would benefit small investors and generally would not adversely affect their access to advice.430 It noted ongoing market innovations that promised to make good advice more affordable and predicted that the rule would accelerate these efforts.431 However, the Department also acknowledged the potential for shortterm disruption and transition costs 432 and noted that the services of independent brokers and insurance agents might be most affected.433 The 2016 Rulemaking was significantly different than the current rulemaking in that it imposed a fiduciary obligation on virtually all investment recommendations specifically directed to retirement investors, imposed demanding contract and warranty requirements in the IRA market, which gave investors a direct cause of action against firms and advisers for breach of the Impartial Conduct Standards, and represented a 429 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiuciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 312-318 & 366-372, (April 2016), https://www.dol.gov/sites/dolgov/files/ EBSA/laws-and-regulattions/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. ‘‘The Department believes that ‘small savers’ (that is, those individuals or households with low account balances and/or modest means) are most negatively impacted by the detrimental effects of conflicted advice. With fewer economic resources, small savers are particlarly vulnerable to any practices that diminish their resources by extracting unnecessary fees or by yielding lower returns.’’ (p. 366.) 430 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 312–318, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. 431 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 318–324, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. 432 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 318, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/lawsand-regulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf. 433 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 308–309, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf. PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 75945 significant break from the then-existing regulatory baseline. Confronted with these significant changes, a number of industry commenters both during the rulemaking process of the 2016 Final Rule, and in the period immediately following the rule’s finalization, expressed concern that the regulatory changes could erode small investors’ access to affordable advice and to some beneficial financial products, primarily based on surveys conducted by the industry of its members. The Department carefully reviewed such comments and papers prior to the publishing of the 2016 Final Rule and found many contained analytic flaws that rendered the comments’ conclusions unsupported and unreliable. The Department accordingly discussed in the 2016 RIA its points of concern with the comments’ methods and conclusions.434 The Department also sought assistance from an outside consultant to help review the comment letters and claims.435 The consultant generally found ‘‘the studies lacking in rigor, failing to recognize emerging alternatives to traditional offerings of investment advice, incorrectly equating the benefits of conflicted advice to those of non-conflicted advice, or suffering from logical fallacies.’’ In 2021, the Hispanic Leadership Fund and Quantria prepared a paper on the effects of reinstatement of the 2016 Rule. Based on the same approach as Quantria’s prior paper, they estimated that reinstatement of the rule would reduce retirement savings of individuals with incomes below $100,000 by $140 billion over 10 years.436 The 2021 findings have shortcomings similar to those identified in the 2014 analysis, such as assuming such policy action would eliminate all financial advice received by these individuals or purporting causation from correlation. Padmanabhan, Panis, and Tardiff (2016) 434 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 108–109 & 136– 137, (April 2016), https://www.dol.gov/sites/dolgov/ files/EBSA/laws-and-regulations/rules-andregulations/completed-rulemaking/1210-AB32-2/ ria.pdf. 435 Karthik Padmanabhan, Constantijn Panis & Timothy Tardiff, Review of Selected Studies and Comments in Response to the Department of Labor’s Conflicts of Interest 2015 Proposed Rule and Exemptions, (March 2016), https:// www.dol.gov/sites/dolgov/files/EBSA/researchers/ analysis/retirement/review-of-selected-studies-andcomments-in-response-to-the-dol-coi-2015proposed-rule-and-exemptions.pdf. 436 Hispanic Leadership Fund and Quantria Strategies, LLC, Analysis of the Effects of the 2016 Department of Labor Fiduciary Regulation on Retirement Savings and Estimate of the Effects of Reinstatement, (November 2021). E:\FR\FM\03NOP3.SGM 03NOP3 75946 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 point out that several of the paper’s key assertions, such as many advisers will not be willing to operate under the fiduciary standard set out by the Department’s rule, do not have empirical support and are not consistent with current practices. Furthermore, the paper’s findings are not applicable to the current proposal because it assumes reinstatement of the 2016 Rulemaking, which was markedly different than the current proposal. For instance, the 2016 Final Rule required fiduciary advisers to enter into a written contract with a plan or IRA investor, which is not included in this proposal. Similarly, the U.S. Chamber of Commerce cited surveys indicating that firms reported they might limit the availability of advice in some customer arrangements after the 2016 Final Rule and predicted that ‘‘up to 7 million IRA owners could lose access to investment advice altogether.’’ 437 This prediction apparently did not consider the potential for customers to move to different firms or the availability of a full range of investment choices and advisory arrangements in the market as a whole. The Chamber of Commerce and others also pointed to an increase in the number of orphaned accounts from which advisers had resigned and argued that many small customers would move to automated advice arrangements.438 Additionally, in 2017, Deloitte prepared a report that suggested the 2016 Final Rule had accelerated the trend toward fee-based accounts.439 Deloitte interviewed and collected data from 21 Securities Industry and Financial Markets Association (SIFMA) member firms regarding their response to the 2016 Final Rule as of June 9, 2017, its initial applicability date.440 Of the member firms that participated in the study, nearly half reported that they maintained advice for all of their brokerage customers, while 29 percent limited advice and 24 percent eliminated advice. Firms that eliminated or limited their advised 437 U.S. Chamber of Commerce, The Data is In: The Fiduciary Rule Will Harm Small Retirement Savers, (Spring 2017), https://www.uschamber.com/ assets/archived/images/ccmc_fiduciaryrule_harms_ smallbusiness.pdf. 438 Investment Company Institute comment letter August 7, 2017. https://www.ici.org/system/files/ attachments/17_conduct_sec_clayton_ltr.pdf. 439 Deloitte, The DOL Fiduciary Rule: A Study in How Financial Institutions Have Responded and the Resulting Impacts on Retirement Investors, (August 9, 2017). 440 Deloitte notes in the report that ‘‘The findings were made based on the analysis of information and data provided by the study participants to Deloitte. Deloitte has analyzed, aggregated and summarized the information provided, but was not asked to and did not independently verify, validate or audit the information presented by the study participants.’’ VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 brokerage platforms gave retirement investors an option to either transition to a fee-based program, self-directed brokerage account, or in some cases, a new platform they were launching (e.g., robo-advice, call-center, self-directed). According to Deloitte, firms reported that many of the investors that moved into self-directed accounts either did not want to move to a fee-based account, had accounts too small to qualify for fee-based advisory accounts at the same firms, wished to retain investments that were not eligible for the same firms’ feebased accounts, or some combination. In a report for the Financial Services Institute, a trade group representing independent financial firms and advisers, Oxford Economics (2017), predicted that ‘‘smaller investors will be offered robo-investing type account services and that these small, often entry level, novice investors would lose access to personalized financial planning.’’ 441 According to a survey conducted by the Insured Retirement Institute, 70 percent of respondents either already had or were considering exiting smaller markets such as small employer-based plans and lower balance IRAs.442 In another survey, twothirds of responding advisers said they believed that small investors would have less access to professional financial advice.443 The preliminary market reaction to the 2016 Rule, however, differed from those expected by the studies discussed above and are inconsistent with more rigorous academic research. In a survey conducted in September 2017, 82 percent of broker-dealers had not made changes to their handling of smaller, retail retirement accounts, although about 18 percent had raised their minimum account threshold and closed smaller accounts.444 In examining the effects of the 2016 Final Rule, Egan, Ge, and Tang (2022) found that while variable annuity sales had decreased, there is no evidence that the change affected investors with less wealth more than others. They concluded that variable annuity sales had become more sensitive to expenses and that insurers had increased the relative availability of low-expense products. Even if there is reporting error in the maximum upfront commission rates data, it would tend to understate the effect of brokerage commissions on investment transactions. Therefore, the study concluded that investor welfare had improved because of the 2016 Rulemaking, despite the fact that it was vacated.445 A majority of surveyed independent registered investment advisers believed that small investors would not lose access to advice due to the 2016 Final Rule.446 Some expected that young advisers just starting out would serve any abandoned investors to build their clientele.447 According to one report, many larger and more productive registered investment advisers viewed robo-advice platforms as a tool to expand their client base and attract young and low-asset investors, not simply as a tool to reduce costs.448 The surveys, papers, and predictions described above do not support a finding that small investors would lose or have lost access to personalized advice as a result of fiduciary protections, even under the 2016 Rulemaking, which imposed more onerous conditions—and liability—on firms and advisers than is true of the proposed rule and exemptions. The proposal broadly comports to Regulation Best Interest, and the Department is not aware of any substantial, documented reductions in access to advice as a result of Regulation Best Interest. The proposal accommodates different types of business models. Still, it is possible that, as the market evolves, small investors and the firms that serve them will increasingly move away from commission-based full-service or ‘‘advised’’ brokerage accounts or commission-compensated advice from insurance agents. Instead, they may use one or more of the following: target-date funds (which adjusts risk allocation over time based on the target-date); receiving advice directly from investment firms (which allows for interaction with a live adviser though the advice tends to focus on in-house funds and investments); hourly engagement or subscription-based firms (which are particularly useful for financial planning); and robo-advice 441 Oxford Economics, How the Fiduciary Rule Increases Costs and Decreases Choice, (April 15, 2017). 442 Comment letter submitted by dated on April 17, 2017 (#1413). 443 Comment letter by Lincoln Financial Network dated March 17, 2017 (#1420). 444 John Crabb, The Fiduciary Rule Poll, International Financial Law Review, International Finance Law Review (October 2017), https:// media2.mofo.com/documents/171000-fiduciaryrule-poll.pdf. 445 Egan, Mark, Shan Ge, & Johnny Tang, Conflicting Interests and the Effect of Fiduciary Duty—Evidence from Variable Annuities, 35(12) The Review of Financial Studies 5334–5486. (December 2022). 446 Cerulli Associates, U.S. Broker/Dealer Marketplace 2016: Retooling for a New Competitive Landscape, The Cerulli Report. 447 Bruce Kelly, Plenty of Advisers Eager to Scoop Up ‘Orphaned’ Accounts, Investment News (August 2017). 448 Blackrock, Elite RIA Study, (2017). PO 00000 Frm 00058 Fmt 4701 Sfmt 4702 E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules (which generally provides a customized investment mix based on information about the investor’s financial circumstances and existing investment assets).449 Robo-advisers and target-date funds, in particular, are rapidly gaining market share.450 451 The Department requests comment on research or data demonstrating how access to advice has changed, particularly for small savers, following the 2016 Final Rule, vacatur of the Final rule, recent regulatory actions taken by the Department and the SEC, and the increased use of technology to provide advice. The Department expects the proposed rule and exemptions would not significantly impact the overall availability of affordable investment advice but rather improve the quality of this advice as conflicts are removed. This would apply as well to small investors who continue to have access to advice. Furthermore, increasing the quality of advice provided to retirement plan fiduciaries will benefit many workers who are participating in a defined contribution or defined benefit pension plan. This is supported by the experience in the U.K., which adopted a far more aggressive stance in addressing conflicted advice than the Department proposed in the 2016 Rulemaking or the current proposals. When the U.K. initially banned commissions for investment advice and required more stringent qualifications for advisers under its Retail Distribution Review (RDR) in 2013, the advice rate fell both in the lead up to the regulatory change and in the years immediately following its implementation. However, more recent research has found evidence of improvements in the market since 2017, including a 35 percent increase in the number of U.K. adults that received financial advice, a 5 percent increase in the number of advisers, and a 9percentage point increase in consumer awareness of automated advice,452 which suggested a greater focus on lotter on DSK11XQN23PROD with PROPOSALS3 449 Christine Benz & Jeremy Glaser, The Best Ways for Small Investors to Get Advice, Morningstar (February 21, 2017), https:// www.morningstar.com/articles/794212/the-bestways-for-smaller-investors-to-get-advice. 450 Deloitte, The Expansion of Robo-Advisory in Wealth Management, (2016). 451 Sarah Holden, Jack VanDerhei, & Steven Bass, Target Date Funds: Evidence Points to Growing Popularity and Appropriate Use by 401(k) Plan Participants, Employee Benefit Research Institute (2021). 452 The U.K. Financial Conduct Authority, Evaluation of the Impact of the Retail Distribution Review and the Financial Advice Market Review, (December 2020), https://www.fca.org.uk/ publication/corporate/evaluation-of-the-impact-ofthe-rdr-and-famr.pdf. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 digital advice as a potential solution to provide low-cost investment advice with specifically tailored outcomes to individual investors at scale.453 The Department has reason to believe that such alternative forms of advice have become more available in the U.S. and, as in the U.K., are beneficial to small investors. In recent years, the investment advice market has seen an increase in financial technology and robo-advice service providers, which cater to small savers. In 2017, Morningstar noted that advances in financial technology could increase personal advisers’ productivity and streamline compliance, enabling them to offer higher service levels affordably to small investors even as they adapt business practices to mitigate conflicts of interest.454 Because the core portfolio management functions are performed by computer algorithm, robo-adviser services generally can be expanded more easily than traditional advisory services. The marginal cost incurred by a robo-adviser to serve additional customers is very small relative to that incurred by traditional advisers. Roboadvisers often serve investors with assets under $500,455 and some roboadvisers do not require a minimum investment at all.456 The financial needs of small investors often can be easily met by basic services and given the low balance of many such accounts, there may be little need or justification for a more intensively personalized (and expensive) strategy. The increasing presence of robo-advice has proved to be such an innovation. Many robo-advice providers claim to offer relatively conflict-free services, claiming no commission, no performance fees, and no compensation from third parties. Others claim to serve investors as fiduciaries. Robo-adviser offerings are typically comprised of ETFs that, in comparison to mutual funds, offer little room for revenue 453 The U.K. Financial Conduct Authority (FCA) has highlighted that digital advice can be more convenient for consumers and can offer efficiency and cost benefits to providers. See FCA, Feedback Statement on Call for Input: Regulatory Barriers to Innovation in Digital and Mobile Solutions (March 2016), https://www.fca.org.uk/static/fca/article-type/ feedback%20statement/fs16-02.pdf). 454 Michael Wong, Financial Services: Weighing the Strategic Tradeoffs of the Fiduciary Rule, Morningstar (February 2017), https:// www.morningstar.com/articles/798573/financialservices-weighing-the-strategic-tradeoffs-of-thefiduciary-rule. 455 Wealthfront, Account Minimums to Invest with Wealthfront, Wealthfront, https://support. wealthfront.com/hc/en-us/articles/210994423Account-minimums-to-invest-with-Wealthfront. 456 One example is Betterment. See Betterment, Pricing at Betterment, Betterment, https:// www.betterment.com/pricing/. PO 00000 Frm 00059 Fmt 4701 Sfmt 4702 75947 streams and payment shares that would create a conflict of interest for investment advisers (e.g., 12b–1 fees, subtransfer agent fees).457 Despite the increasing popularity of robo-advisers, empirical evidence on their performance and returns, especially during market downturns, is limited. In 2015, SEC Commissioner Kara Stein stated, ‘‘Do investors using robo-advisors appreciate that, for all their benefits, robo-advisors will not be on the phone providing counsel if there is a market crash?’’ 458 However, a recent study by Liu et al. (2021) looked specifically at the impact of using roboadvisers on investment performance during the 2020 financial crisis caused by the COVID–19 global pandemic.459 Using portfolio and transaction data from investors at a Taiwanese mutual fund online investment platform, Liu et al. (2021) found that robo-advice significantly reduced the losses experienced by investors during the crisis and that investors using roboadvice adjusted risk levels and trading to adapt to changes in the market while other investors did not. Younger users and those with less investment experience benefited the most from robo-advice. 7. Reform in the United Kingdom As regulators in several countries have identified failures in their investment advice markets, they have undertaken a range of regulatory and legislative initiatives that directly address conflicted investment advice. One of the most studied initiatives occurred in the developed pension markets of the United Kingdom, where the Financial Conduct Authority (FCA) issued new regulations effective January 1, 2013, called the Retail Distribution Review (RDR). The U.K. focused its new regulatory regime on more transparent fee-for-service compensation structures. The U.K. enacted an aggressive reform that banned commissions on all retail investment products, not just those 457 Jennifer Klass & Eric Perelman, Chapter 3: The Transformation of Investment Advice: Digital Investment Advisors as Fiduciaries, The Disruptive Impact of FinTech on Retirement Systems, Oxford University Press 38 (2019). 458 Kara M. Stein, Comm’r, SEC, Surfing the Wave: Technology, Innovation, and Competition— Remarks at Harvard Law School’s Fidelity Guest Lecture Series, (November 9, 2015), https:// www.sec.gov/news/speech/surfing-wavetechnology-innovation-and-competition-remarksharvard-law-schools-fidelity. 459 Che-Wei Liu, Mochen Yang, & Ming-Hui Wen, Judge Me on My Losers: Does Adaptive RoboAdvisors Outperform Human Investors During the COVID–19 Financial Market Crash?, Production and Operations Management Forthcoming, (Accessed Aug. 31, 2023), https://doi.org/10.1111/ poms.14029. E:\FR\FM\03NOP3.SGM 03NOP3 75948 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules related to retirement savings; 460 required that customers in the U.K. be charged directly for advice; and raised qualification standards for advisers. In marked contrast to these reforms, the Department’s proposal does not ban commissions or eliminate conflicted compensation structures, but rather relies upon conduct standards and oversight structures designed to minimize the harmful impact of conflicts of interest, while permitting a wide range of business practices and models. The Department’s proposal represents a middle ground between no reform and the outright bans on conflicted payments, allowing businesses to use a range of compensation practices while minimizing the harmful impact of conflicts of interest on the quality of advice. Moreover, the Department’s proposed regulatory action is narrower than the rules passed by the U.K. as it does not prescribe additional qualification standards for existing financial advisers or broadly ban commissions. Those rules also sought to overhaul the entire financial advice market, while this rule focuses on advice to retirement investors and seeks to harmonize all advice to retirement investors under a uniform standard and oversite structure including disclosure requirements, rather than the existing patchwork of regulatory standards. Still, an important aim of all these interventions is to reduce incentives for financial advisers to recommend investments that are not in their client’s best interest and thereby increase investor confidence in financial advice. The experience of the U.K. suggests that while there are transitional costs of overhauling the incentive structure and qualifications of the financial advisers, the changes have resulted in a modest increase in the number of adults accessing financial advice as well as their satisfaction with the advice they are receiving.461 In general, the U.K., experience, which was more broadly applied, indicates that these reforms will not result in a significant reduction of advice but will instead increase confidence in that advice’s value. 8. Cost To estimate compliance costs associated with the proposal, the Department considers the marginal cost associated with the proposed amendments. The Department estimates that the proposal would impose total costs of $253.2 million in the first year and $216.2 million in each subsequent year. The estimated compliance costs associated with the proposed amendments in the rule and PTEs are summarized in the table below. Over 10 years, the costs associated with the proposal would total approximately $1,553.1 million, annualized to $221.1 million per year (using a 7 percent discount rate).462 TABLE 4—SUMMARY OF MARGINAL COST AND PER-ENTITY COST BY EXEMPTION lotter on DSK11XQN23PROD with PROPOSALS3 Total cost First year Subsequent years 3(21)(A)(ii) of ERISA: PTE 2020–02 ............................................................................................................................................ PTE 84–24 ................................................................................................................................................ Mass Amendments: PTE 75–1 .................................................................................................................................................. PTE 77–4 .................................................................................................................................................. PTE 80–83 ................................................................................................................................................ PTE 83–1 .................................................................................................................................................. PTE 86–128 .............................................................................................................................................. ............................ $231,518,275 18,107,613 ............................ 3,005,854 0 0 0 609,487 ............................ $197,282,110 15,302,629 ............................ 3,005,854 0 0 0 609,487 Total ................................................................................................................................................... 253,241,229 216,200,080 The estimated costs associated with each exemption are broken down and explained below. More details can be found in the Paperwork Reduction Act sections of each respective exemption, also published in today’s Federal Register.463 The quantified costs are significantly lower than costs in the 2016 RIA due to the smaller scope of the proposal relative to the 2016 Final Rule as well as compliance structures adopted by the industry to reduce conflicted advice in response to state regulations, Regulation Best Interest, PTE 2020–02, and the Department’s 2016 Rulemaking. The methodology for estimating the costs of the proposed amendments to the rule and PTEs is consistent with the methodology and assumptions used in the 2020 analysis for the current PTE 2020–02. Preliminary Assumptions and Cost Estimate Inputs The Department acknowledges that not all entities would decide to use the amended PTE 2020–02 and PTE 84–24 for transactions resulting from fiduciary investment advice. Some may instead rely on other existing exemptions that better align with their business models. However, for this cost estimation, the Department assumes that all eligible 460 ‘‘Non–advised’’ services, or execution-only sales, where no advice or recommendation is given, fall outside of the RDR. Thus, a commission is still permitted for non-advised annuity sales. The FCA is currently examining the risks that exist with the purchase of ‘‘non-advised’’ annuities. Please see: https://www.fca.org.uk/static/documents/ consultation-papers/cp15-30.pdf. 461 UK Financial Conduct Authority, Evaluation of the Impact of the Retail Distribution Review and the Financial Advice Market Review, U.K. Financial Conduct Authority, (December 2020), https:// www.fca.org.uk/publication/corporate/evaluationof-the-impact-of-the-rdr-and-famr.pdf. 462 The costs would be $1,880.2 million over 10year period, annualized to $220.4 million per year if a 3 percent discount rate were applied. 463 As noted above, the Department is proposing to amend the following exemptions: PTE 2020–02 (Improving Investment Advice for Workers & Retirees), PTE 84–24 (Class Exemption for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters), PTE 75–1 (Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks), PTE 80–83 (Class Exemption for Certain Transactions Between Investment Companies and Employee Benefit Plans), PTE 80–83 (Class Exemption for Certain Transactions involving Purchase of Securities where Issuer May Use Proceeds to Reduce or Retire Indebtedness to Parties In Interest), PTE 83–1 (Class Exemption for Certain Transactions Involving Mortgage Pool Investment Trusts) and PTE 86–128 (Class Exemption for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers). VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 PO 00000 Frm 00060 Fmt 4701 Sfmt 4702 E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 entities would use the PTE 2020–02 and PTE 84–24 for such transactions. The Department recognizes that this may result in an overestimate. The Department does not have information on how many retirement investors—including plan beneficiaries, plan participants, and IRA owners— receive electronic disclosures from investment advice fiduciaries. For the purposes of this analysis, the Department assumes that the percent of retirement investors receiving electronic disclosures would be similar to the percent of plan participants receiving electronic disclosures under the Department’s 2020 and 2002 electronic disclosure safe harbors.464 Accordingly, the Department estimates that 94.2 percent of the disclosures sent to retirement investors would be sent electronically, and the remaining 5.8 percent would be sent by mail.465 For disclosure sent by mail, the Department estimates that entities will incur a cost of $0.66 466 for postage and $0.05 per page for material and printing costs. Additionally, the Department assumes that several types of personnel would perform the tasks associated with information collection requests at an hourly wage rate of $63.45 for clerical personnel, $128.11 for a top executive, $133.05 for a computer programmer, $158.94 for an insurance sales agent, $159.34 for a legal professional, $190.63 for a financial manager, and $219.23 for a financial adviser.467 Finally, the Department assumes affected entities would likely incur only incremental costs if they were already subject to rules or requirements from the Department or another regulator. 464 67 FR 17263 (Apr. 9, 2002); 85 FR 31884 (May 27, 2020). 465 The Department estimates 94.2 percent of retirement investors receive disclosures electronically. This is the sum of the estimated share of retirement investors receiving electronic disclosures under the 2002 electronic disclosure safe harbor (58.2 percent) and the estimated share of retirement investors receiving electronic disclosures under the 2020 electronic disclosure safe harbor (36 percent). 466 United States Postal Service, First-Class Mail, United States Postal Service (2023), https:// www.usps.com/ship/first-class-mail.htm. 467 Internal DOL calculation based on 2023 labor cost data. For a description of the Department’s methodology for calculating wage rates, see Internal DOL calculation based on 2023 labor cost data. For a description of the Department’s methodology for calculating wage rates. See Employee Benefits Security Administration, Labor Cost Inputs Used in the Employee Benefits Security Administration, Office of Policy and Research’s Regulatory Impact Analyses and Paperwork Reduction Act Burden Calculations, Employee Benefits Security Administration, https://www.dol.gov/sites/dolgov/ files/EBSA/laws-and-regulations/rules-andregulations/technical-appendices/labor-cost-inputsused-in-ebsa-opr-ria-and-pra-burden-calculationsjune-2019.pdf. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Costs Associated With Amendments to Section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 and Section 4975(e)(3)(B) of the Code 75949 Summary of Affected Entities As discussed in the Affected Entities section, the proposed amendment to the rule would change the definition of a fiduciary such that some financial institutions previously not considered fiduciaries would be so under the proposed rule. Additionally, some financial institutions, who already provide fiduciary services for some clients or types of services, would be required to act as a fiduciary for more services under the proposed rule. Entities may incur some cost associated with the proposed amendments to regulations under section 3(21)(A)(ii) of ERISA and section 4975(e)(3)(B) of the Code. While most of the cost incurred would be associated with the proposed amendments to related PTEs, entities who did not previously identify as a fiduciary may also incur some transition costs. These costs would likely differ significantly by type of financial institution. For instance, retail broker-dealers subject to Regulation Best Interest or registered investment advisers subject to the Investment Advisers Act would be closer to satisfying the requirements of a fiduciary under ERISA than an insurance company or independent producer selling annuity products. The Department requests comment on the costs these entities would incur as a result of becoming a fiduciary under this rule, as well as the underlying data to estimate these costs. The Department is particularly interested in costs that would not be incurred in satisfying the requirements to the PTEs, such as legal costs, fiduciary insurance costs, technology costs, human capital costs, or other costs of this nature. The Department also requests comment on how plans would be affected by the proposed rule. The entities that the Department expects to be affected by the proposed amendments to the PTE are also affected by the existing PTE 2020–02. The Department estimates that 19,290 financial institutions, composed of 1,894 broker-dealers, 15,982 registered investment advisers,468 183 insurers, 200 pure robo-advisers, 1,011 pension consultants, and 20 investment company underwriters would be affected by the proposed amendments.469 The Department recognizes that the proposed amendments may change the number of financial institutions who choose to rely on PTE 2020–02. Consistent with its initial analysis of the exemption in 2020, this analysis assumes that all eligible entities currently rely on the exemption and would continue to rely on the exemption if amended as proposed. As a result, this analysis does not reflect any change in the number of entities relying on the exemption in response to these amendments. The Department requests comment on how the proposed amendments might change the number of affected entities relying on PTE 2020– 02. Additionally, the Department recognizes that entities within the insurance industry are subject to different regulatory regimes, depending on the types of products they offer. The Department does not have data on what proportion of entities are subject to the requirements in the NAIC Model regulation, or obligations subject to regulation by the SEC or state insurance departments. The analysis below considers cost to comply if the entity currently meets none of the requirements. This likely is an overestimate, as many of these entities are already meeting some, if not most, of the requirements of this proposal. The Department requests comments on this assumption. Costs Associated With PTE 2020–02 Costs To Review the Rule The Department proposes to amend PTE 2020–02 to require the provision of additional disclosures to retirement investors receiving advice from financial institutions and to provide more guidance for financial institutions and investment professionals complying with the Impartial Conduct Standards and implementing the policies and procedures. This proposal is intended to align with other regulators’ rules and standards of conduct. As such, the Department expects that satisfying the proposal would not be unduly burdensome. The Department estimates that all of the 19,290 financial institutions discussed above would be affected by the proposed amendments to PTE 2020– 02 and would need to review the rule. The Department estimates that such a review would take a legal professional, on average, nine hours to review the rule, resulting in an estimated cost of PO 00000 Frm 00061 Fmt 4701 Sfmt 4702 468 The Department estimates that 15,982 registered investment advisers that do not provide pure robo-advice. 469 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. E:\FR\FM\03NOP3.SGM 03NOP3 75950 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules $27.7 million in the first year.470 This estimate also assumes all effected financial institutions expend the effort, however, that may not be the case as other arrangements may exist where individual financial firms receive compliance assistants from other sources. The Department asks for comments on this estimate. Costs Associated With General Disclosures for Investors lotter on DSK11XQN23PROD with PROPOSALS3 Costs Associated With Modifications of Existing Disclosure Requirements As discussed in the preamble, Section II(b) currently requires financial institutions to provide certain disclosures to retirement investors before engaging in a transaction pursuant to the exemption. These disclosures include: (1) a written acknowledgment that the financial institution and its investment professionals are fiduciaries; (2) a written description of the services to be provided and any conflicts of interest of the investment professional and financial institution; and (3) documentation of the financial institution and its investment professional’s conclusions as to whether a rollover is in the retirement investor’s best interest, before engaging in a rollover or offering recommendations on post-rollover investments. As discussed in more detail in the preamble and below, the proposed amendments make minor language edits to the existing disclosures. The proposed amendment makes minor edits to the written acknowledgment that the financial institution and its investment professionals are fiduciaries. Financial institutions would be required to provide a written acknowledgment that the Financial Institution and its Investment Professionals are providing fiduciary investment advice to the Retirement Investor and are fiduciaries under Title I, the Code, or both when making an investment recommendation. This condition would not be met if the fiduciary acknowledgement states that the financial institution and its investment professionals ‘‘may’’ be fiduciaries or would become fiduciaries only ‘‘if’’ or ‘‘when’’ providing fiduciary investment advice as defined under the applicable regulation. The Department does not have data on how many financial institutions 470 The burden is estimated as: (19,290 entities × 9 hours) = 173,610 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (38,580 entities × 9 hours) × $159.34 = $27,663,017. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 would need to modify their disclosures in response to this amendment; however, the Department expects that the disclosures required under the existing form of PTE 2020–02 likely satisfy this requirement for most financial institutions covered under the existing exemption. For the purposes of this analysis, the Department assumes that 10 percent of financial entities under the existing exemption would need to update their disclosures and that it would take a legal professional at a financial institution, on average, 10 minutes to update existing disclosures. Robo-advisers, pension consultants, and investment company underwriters, who are not covered under the existing exemption would need to draft the acknowledgement. The Department estimates that it would take a legal professional at these entities, on average, 30 minutes to draft the acknowledgement. Updating and drafting the acknowledgement is estimated to result in a cost of approximately $0.1 million in the first year.471 The proposed amendments would also expand on the existing requirement for a written description of the services provided to also require a statement on whether the retirement investor would pay for such services, directly or indirectly, including through third-party payments. The Department assumes it would take a legal professional at a financial institution under the existing exemption 30 minutes to update existing disclosures to include this information. Robo-advisers, pension consultants, and investment company underwrites, who are not covered under the existing exemption, would need to draft a written description of services provided, which the Department estimates would take a legal professional a large institution five hours and a legal professional at a small institution one hour, on average, to 471 The number of financial entities needing to update their written acknowledgement is estimated as: (1,894 broker-dealers × 10%) + (7,570 SECregistered investment advisers × 10%) + (8,412 state-registered investment advisers × 10%) + (183 insurers × 10%) = 1,806 financial institutions updating existing disclosures. The number of financial entities needing to draft their written acknowledgement is estimated as: 200 robo-advisers + 1,011 pension consultants + 20 investment company underwriters = 1,231 financial institutions drafting new disclosures. The burden is estimated as: (1,806 financial institutions × (10 minutes ÷ 60 minutes)) + (1,231 financial institutions × (30 minutes ÷ 60 minutes) = 917 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(1,806 financial institutions × (10 minutes ÷ 60 minutes)) + (1,231 financial institutions × (30 minutes ÷ 60 minutes)] × $159.34 = $146,035. PO 00000 Frm 00062 Fmt 4701 Sfmt 4702 prepare such a draft.472 The Department requests comment on how long it would take entities of varying size to prepare such a disclosure. This results in an estimated cost of approximately $1.8 million in the first year.473 The Department requests comment on the average time estimates to satisfy each of the new requirements in the proposed amendments. Costs Associated With New Disclosure Requirements As amended, PTE 2020–02 would require financial institutions to provide investors with the following additional disclosures: (1) a written statement of the best interest standard of care owed; and (2) a written statement that the retirement investor has the right to obtain specific information regarding costs, fees, and compensation, described in dollar amounts, percentages, formulas, or other means reasonably designed to present full and fair disclosure that is materially accurate in scope, magnitude, and nature, sufficient detail to permit the Retirement Investor to make an informed judgment about the costs of the transaction and about the significance and severity of the Conflicts of Interest, and describes how the Retirement Investor can get the information, free of charge. Under the Investment Advisers Act and the SEC’s Regulation Best Interest, most registered investment advisers and broker-dealers with retail investors already provide disclosures that the 472 As discussed in the Regulatory Flexibility Act analysis, the Department estimates that 10 roboadvisers, 930 pension consultants, and 20 investment company underwriters are considered small entities. For more information, refer to the Affected Entities discussion in the Regulatory Flexibility Act section of this document. 473 The number of financial entities needing to update their written description of services is estimated as: (1,894 broker-dealers + 7,750 SECregistered investment advisers + 8,412 stateregistered investment advisers + 183 insurers) = 18,059 financial institutions updating existing disclosures. The number of financial entities needing to draft their written description of services is estimated as: (200 robo-advisers + 1,011 pension consultants + 20 investment company underwriters) = 1,231 financial institutions drafting new descriptions. Of these, 960 financial institutions, or 10 robo-advisers, 930 pension consultants, and 20 investment company underwriters, are considered small entities. For more information, refer to the Affected Entities discussion in the Regulatory Flexibility Act section of this document. The burden is estimated as: (18,059 financial institutions × (30/60 hours)) + (960 small financial institutions × 1 hour) + [(1,231 financial institutions¥960 small financial institutions) × 5 hours] = 11,345 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: {(18,059 financial institutions × (30/60 minutes)) + (960 small financial institutions × 1 hour) + [(1,231 financial institutions –960 small financial institutions) × 5 hours]} × $159.34 = $1,807,712. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 Department expects would satisfy these requirements.474 The Department expects that the written statement of the Best Interest standard of care owed would not take a significant amount of time to prepare and would be uniform across clients. The Department assumes that a legal professional employed by a brokerdealer or registered investment advisers, on average, would take 30 minutes to modify existing disclosures and that it would take insurers, robo-advisers, pension consultants, and investment company underwriters, on average, one hour to prepare the statement. This results in a cost estimate of approximately $1.7 million in the first year.475 The added requirement of a written statement informing the investor of their right to obtain a written description of the financial institution’s policies and procedures and information regarding costs, fees, and compensation would require financial institutions to maintain sufficient records to allow them to meaningfully respond to investors’ requests to demonstrate how the financial institution and its investment professionals are compensated in connection with their recommendations. The Department expects that many financial institutions’ disclosures already substantially comply with this regulation or would require modest adjustments to do so. To satisfy this requirement, the Department estimates that a legal professional for broker-dealers and registered investment advisers would require, on average, 30 minutes to modify existing statements and that it would take insurers, robo-advisers, pension consultants, and investment company underwriters, on average, one hour to prepare the statement. This results in a cost estimate of approximately $1.7 million in the first year.476 474 Form CRS Relationship Summary; Amendments to Form ADV, 84 FR 33492 (July 12, 2019). 475 The burden is estimated as: [(1,894 brokerdealers + 15,982 registered investment advisers) × (30 minutes ÷ 60 minutes)] + [(183 insurers + 200 robo-advisers + 1,011 pension consultants, and 20 investment company underwriters) × 1 hour] = 10,352 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: {[(1,894 broker-dealers + 15,982 registered investment advisers) × (30 minutes ÷ 60 minutes)] + [(183 insurers + 200 roboadvisers + 1,011 pension consultants, and 20 investment company underwriters) × 1 hour]} × $159.34 = $1,649,488. 476 The burden is estimated as: [(1,894 brokerdealers + 15,982 registered investment advisers) × (30 minutes ÷ 60 minutes)] + [(183 insurers + 200 robo-advisers + 1,011 pension consultants, and 20 investment company underwriters) × 1 hour] = 10,352 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 The Department requests comment on the average time estimates to satisfy each of the new requirements in the proposed amendments. Costs Associated With the Provision of Disclosures to Retirement Investors Financial institutions would incur costs associated with preparing and sending the new disclosure requirements. The Department does not have data on the number of retirement investors that have relationships with financial institutions that would engage in transactions covered under the amended exemption. For the purposes of this analysis, the Department uses the number of participants who roll over defined contribution plan assets to IRAs as a proxy for the number of retirement investors that would receive general disclosures. Accordingly, the Department estimates that approximately 3.2 million retirement investors have relationships with financial institutions and are likely to engage in transactions covered under this PTE.477 Of these 3.2 million retirement investors, it is assumed that 5.8 percent, or 184,643 retirement investors would receive paper disclosures.478 The Department assumes that there would not be a measurable increase in the time burden for a clerical worker to prepare the additional disclosures for individuals already receiving disclosures. The Department estimates that providing the additional disclosures would require two additional pages, resulting in a material cost estimate of $18,464.479 Financial institutions would also incur costs associated with preparing and sending requested written descriptions of policies and procedures and information regarding costs, fees, and compensation. The Department does not have data on how often investors would request this information. The Department assumes that, on average, each financial institution would receive 10 such following calculation: {[(1,894 broker-dealers + 15,982 registered investment advisers) × (30 minutes ÷ 60 minutes)] + [(159 insurers + 200 roboadvisers + 1,060 pension consultants, and 20 investment company underwriters) × 1 hour]} × $159.34 = $1,649,488. 477 The Department estimates the number of affected plans and IRAs to be equal to 50 percent of rollovers from retirement plans to IRAs. As discussed in the Affected Entities section, the Department estimates that there are 6,367,005 total rollovers annually. 478 The number of retirement investors receiving paper disclosures is estimated as: (3,183,503 retirement investors × 5.8%) = 184,643 paper disclosures. 479 The cost is estimated as: (184,643 paper disclosures × 2 pages) × $0.05 = $18,464. PO 00000 Frm 00063 Fmt 4701 Sfmt 4702 75951 requests annually and that most financial institutions already have such information available. The Department requests comments on the assumption that financial institutions readily have this information available and the time necessary to gather such information. The Department estimates it would take a clerical worker five minutes to distribute, regardless of whether it is sent electronically or by mail. This results in an estimated cost of approximately $1.0 million.480 As discussed at the beginning of the cost section, the Department assumes that 5.8 percent of these disclosures (11,188 disclosures) would be mailed. Financial institutions would incur $0.66 for postage and $0.10 for the paper and printing costs of two pages for each of the disclosures, which the Department estimates to cost approximately $8,503.481 Summary Costs Associated With the General Disclosures The Department estimates that the total cost associated with preparing and providing the general disclosures discussed above would be approximately $6.3 million in the first year and $1.0 million in subsequent years.482 Costs Associated With Rollover Documentation and Disclosure for Financial Institutions Compared to the requirements in the existing exemption, the proposed amendment would clarify the rollover disclosure requirements in Sections II(b)(3) and II(c)(3) of PTE 2020–02. Before engaging in a rollover or making 480 The burden is estimated as: (19,290 financial institutions × 10 disclosures) × (5 minutes ÷ 60 minutes) = 16,075 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: [(19,290 financial institutions × 10 disclosures) × (5 minutes ÷ 60 minutes)] × $63.45 = $1,019,959. 481 The cost is estimated as: (19,290 financial institutions × 10 disclosures × 2 pages × $0.05) + (19,290 financial institutions × 10 disclosures × $0.66)) × (5.8%) = $8,503. 482 The cost in the first year is estimated as: ($146,035 to prepare the written acknowledgment + $1,807,633 to prepare the written description of services provided + $1,649,488 to prepare the written statement of the Best Interest standard of care + $1,649,488 to prepare the written statement informing the investor of their right to obtain a written description of the financial institution’s policies and procedures + $18,464 to prepare and send disclosures + $1,019,959 to prepare requested written policies and procedures + $8,053 for material costs associated with requested policies and procedures) = $6,299,569. The cost in subsequent years is attributable to the $18,464 to prepare and send disclosures + $1,019,959 to prepare requested written policies and procedures + $8,503 for material costs associated with requested policies and procedures = $1,046,926. Note that the total value may not equal the sum of the parts due to rounding. E:\FR\FM\03NOP3.SGM 03NOP3 75952 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 a recommendation to a plan participant as to the post-rollover investment of assets, the investment professional must consider and document their conclusions as to whether a rollover is in the retirement investor’s best interest and provide that documentation to the retirement investor. Relevant factors to consider must include but are not limited to: (i) the alternatives to a rollover, including leaving the money in the plan or IRA, if applicable; (ii) the comparative fees and expenses; (iii) whether an employer or other party pays for some or all administrative expenses; and (iv) the different levels of fiduciary protection, services, and investments available. As discussed in the Affected Entities section, the Department estimates that 3,119,832 rollovers would be affected by the proposed amendments to PTE 2020– 02.483 As a best practice, the SEC already encourages firms to record the basis for significant investment decisions, such as rollovers, although doing so is not required under Regulation Best Interest. In addition, some firms may voluntarily document significant investment decisions to demonstrate compliance with applicable law, even if not required. SIFMA commissioned Deloitte to conduct a survey of its member firms to learn how they expected to implement Regulation Best Interest. The survey was conducted by December 31, 2019, prior to Regulation Best Interest’s effective date of June 30, 2020. Just over half (52 percent) of the firms surveyed will require their financial advisers to provide best interest rationale documentation for rollover recommendations.484 The Department estimates that documenting each rollover recommendation will require 30 minutes for a personal financial adviser whose firms currently do not require rollover documentations and 483 For more information on how the number of IRA rollover is estimated, refer to the Affected Entities section. In light of ongoing litigation, the Department is assuming for purposes of this discussion that all Affected Entities will become subject to these requirements, regardless of whether they currently provide fiduciary investment advice. 484 Deloitte, Regulation Best Interest: How Wealth Management Firms are Implementing the Rule Package, Deloitte, (Mar. 6, 2020). 485 The burden is estimated as: (3,119,833 rollovers x 48% × (30 minutes ÷ 60 minutes)) + (3,119,833 rollovers × 52% × (5 minutes ÷ 60 minutes)) = 883,953 hours. A labor rate of $219.23 is used for a personal financial adviser. The labor rate is applied in the following calculation: (3,119,833 rollovers × 48% × (30 minutes ÷ 60 minutes)) + (3,119,833 rollovers × 52% × (5 minutes ÷ 60 minutes)) × $219.23 = $193,788,961. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 five minutes for financial advisers whose firms already require them to do so. This results in an estimated annual cost of approximately $193.8 million.485 The Department requests comment on how long such documentation would take. The Department assumes financial institutions that do not have enhanced technology capabilities for other regulations will take a mixed approach, combining current technology solutions with manual processes. Accordingly, the Department estimates that financial institutions already requiring rollover documentation will face no more than a nominal burden increase, and only to the extent that their current compliance systems do not meet the requirements of this exemption. Those firms currently not documenting rollover recommendations will likely face a larger, but still somewhat limited burden. Costs Associated With Disclosures for PEPs Financial institutions providing investment advice for PEPs must give each participating employer an additional disclosure detailing any amounts the financial institution pays to or receives from the PPP or its affiliates, in addition to any conflicts of interest that arise in connection with the investment advice it provides to a PEP. According to filings submitted to the Department as of August 22, 2023, there are 382 PEPs and 134 PPPs.486 The Department does not have data on what percent of PEPs would be affected by the exemption. For the purposes of this analysis, the Department assumes that all PEPs would be affected. The Department requests comment on this assumption. The Department assumes that, on average, one financial institution would need to prepare one disclosure for each PEP in the first year. The Department requests comment on this assumption and how frequently PPPs would provide investment advice to a PEP within the framework of the exemption. The Department estimates that, on average, it would take a legal professional at each entity two hours to prepare the disclosure, resulting in a cost of approximately $0.1 million in the first year.487 486 For more information on this estimate, refer to the Affected Entities section. 487 The burden is estimated as: (382 financial institutions × 2 hours) = 764 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (382 financial institutions × 2 hours) × $159.34 = $121,736. PO 00000 Frm 00064 Fmt 4701 Sfmt 4702 In addition to providing the disclosure described above to each PEP, financial institutions must also provide these disclosures to each participating employer. According to filings submitted to the Department by August 22, 2023, there are 955 employers in PEPs.488 The Department assumes that all of these disclosures will be sent electronically. Distributing the disclosures is estimated to take clerical personnel one minute per disclosure, resulting in an estimated cost of approximately $1,010.489 Costs Associated With Annual Report of Retrospective Review for Financial Institutions PTE 2020–02 currently requires financial institutions to conduct a retrospective review at least annually that is reasonably designed to prevent violations of, and achieve compliance with the conditions of this exemption, the Impartial Conduct Standards, and the policies and procedures governing compliance with the exemption. The Department is clarifying that the Financial Institution must update the policies and procedures as business, regulatory, and legislative changes and events dictate, and to ensure they remain prudently designed, effective, and compliant with the exemption. Under the original exemption, financial institutions were already required to maintain their policies and procedures. The Department’s estimates for any additional cost for entities updating their policies and procedures are discussed in the discussion of costs associated with written policies and procedures for financial institutions, below. Robo-advisers, pension consultants, and investment company underwrites, who are not covered under the existing exemption, would incur costs associated with conducting the annual review. The Department does not have data on how many would incur costs associated with this requirement; however, the Department expects that many of these entities already develop an audit report. The Department assumes that 10 percent of these entities do not currently 488 Estimates are based on 2021 EFAST filings as of August 22, 2023. The inaugural filing deadline for Form 5500 filings for PEPs with plan years beginning after January 1, 2021 was July 31, 2022. The Department based its estimates on those filings it had received by August 22, 2023. However, since this is the first year PEPs could file, the Department anticipates that this understates the true number of PEPs affected by this proposed rule. 489 The burden is estimated as: (955 employers × (1 minute ÷ 60 minutes)) = 16 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (955 employers × (1 minute ÷ 60 minutes)) × $63.45 = $1,010. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 produce an audit report, while the remaining 90 percent would need to make modifications to satisfy the requirements. This results in an estimate of 123 entities not currently producing audit reports, of which 96 are small entities and 27 are large entities.490 The Department requests comment on this assumption. The Department estimates that it would take a legal professional five hours for small firms and ten hours for large firms to produce a retrospective review report, resulting in an estimated cost of $0.1 million.491 The Department estimates that it would take a legal professional one hour for small firms and two hours for large firms to modify existing reports, on average. This results in an estimated cost of $0.2 million.492 The Department estimates it will take a certifying officer two hours for small firms and four hours for large firms to review the report and certify the exemption, resulting in an estimated cost burden of approximately $0.6 million.493 The results in a total cost annual cost of $0.9 million.494 490 The number of total entities affected is estimated as: (200 robo-advisers + 1,011 pension consultants + 20 investment company underwriters) × 10% = 123 entities. As discussed in the Regulatory Flexibility Act analysis of this document, 10-robo advisers, 930 pension consultants, and 20 investment company underwriters are estimated to be small entities. The number of small entities affected is estimated as: (10 robo-advisers + 930 pension consultants + 20 investment company underwriters) × 10% = 96 small entities. 491 The burden is estimated as: (96 financial institutions × 5 hours) + (27 financial institutions × 10 hours) = 750 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(96 financial institutions × 5 hours) + ((27 financial institutions × 10 hours)] × $159.34 = $119,505. 492 The number of total entities affected is estimated as: (200 robo-advisers + 1,011 pension consultants + 20 investment company underwriters) × 90% = 1,108 entities. As discussed in the Regulatory Flexibility Act analysis of this document, 10 robo-advisers, 930 pension consultants, and 20 investment company underwriters are estimated to be small entities. The number of small entities affected is estimated as: (10 robo-advisers + 930 pension consultants + 20 investment company underwriters) × 90% = 864 small entities. The burden is estimated as: (905 financial institutions × 1 hours) + (248 financial institutions × 2 hours) = 1,401 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(864 financial institutions × 1 hour) + (244 financial institutions × 2 hours)] × $159.34 = $215,428. 493 The burden is estimated as: (960 financial institutions × 2 hours) + ((1,231¥ 960 financial institutions) × 4 hours) = 3,004 hours. A labor rate of $190.63 is used for a top executive. The labor rate is applied in the following calculation: [(960 financial institutions × 2 hours) + ((1,231¥ 960 financial institutions) × 4 hours)] × $190.63 = $572,653. 494 This is estimated as: ($119,505 + $215,428 + $572,653) = $907,586. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Costs Associated With Written Policies and Procedures for Financial Institutions The time required to establish, maintain, and enforce written policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards would depend on the size and complexity as of the financial institution. The Department estimates that this would take a legal professional 10 hours at a large firm and five hours at a small firm in the first year and 30 minutes in subsequent years.495 The Department assumes that most financial institutions affected by the existing exemption likely already satisfy much of this requirement, as it would be a customary business practice to periodically review required policies and procedures. The proposed amendments would also require financial institutions to provide their complete policies and procedures to the Department upon request. Based on the number of past cases as well as current open cases that would merit such a request, the Department estimates that the Department would request 165 policies and procedures in the first year and 50 policies and procedures in subsequent years. The Department assumes that a clerical worker would prepare and send their complete policies and procedures to the Department and that it would take them 15 minutes. The Department requests comment on these assumptions. The Department estimates that the requirement would result an estimated cost of approximately $2,600 in the first year 496 and $790 in subsequent years.497 The Department assumes financial institutions would send the documents electronically and thus would not incur costs for postage or materials. This results in a total cost of $2.6 million in the first year and $1.5 million in subsequent years.498 495 As discussed in the Regulatory Flexibility Act analysis, the Department estimates that 960 entities, consisting of 10 robo-advisers, 930 pension consultants, and 20 investment company underwriters, are considered small entities. For more information, refer to the Affected Entities discussion in the Regulatory Flexibility Act section of this document. 496 The burden is estimated as: (165 × (15 minutes ÷ 60 minutes)) = 41 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (165 × (15 minutes ÷ 60 minutes)) × $63.45 = $2,617. 497 The burden is estimated as: (50 × (15 minutes ÷ 60 minutes)) = 12.5 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (50 × (15 minutes ÷ 60 minutes)) × $63.45 = $793. 498 The cost in the first year is estimated as: ($2,635,404 + $2,617) = $2,638,021. The cost in PO 00000 Frm 00065 Fmt 4701 Sfmt 4702 75953 Summary of Total Cost for the Proposed Amendments to PTE 2020–02 The Department estimates that in order to meet the additional conditions of the amended PTE 2020–02, affected entities would incur a total cost of $231.6 million and a per-firm cost of $12,002 in the first year and a total cost of $197.3 million and a per-firm cost of $10,227 in subsequent years.499 Costs Associated With PTE 84–24 Currently, PTE 84–24 provides an exemption for insurance agents, insurance brokers, and pension consultants to receive a sales commission from an insurance company for the purchase of an insurance or annuity contract with plan or IRA assets. Relief is also provided for a principal underwriter for an investment company registered under the Investment Company Act of 1940 to receive a sales commission for the purchase of securities issued by the investment company with plan or IRA assets. The Department is proposing an amendment to PTE 84–24 that would exclude many investment advice fiduciaries from the existing relief. Except for independent producers, fiduciary advisers would be expected to rely on the relief provided by PTE 2020– 02, rather than PTE 84–24. The proposed amendment would provide exemptive relief to fiduciaries who are independent producers that recommend annuities from an unaffiliated financial institution to retirement investors. Relief for independent producers depends on protective conditions that substantially mirror those contained in PTE 2020–02. The conditions are tailored to protect retirement investors from the specific conflicts that arise for independent producers who are compensated through commissions when providing investment advice to retirement investors regarding the purchase of an annuity. The Department recognizes that entities within the insurance industry are subject to different regulatory regimes, depending on the types of products they offer. The Department does not have data what proportion of subsequent years is estimated as: ($1,536,834 + $793) = $1,537,627. 499 The first-year total cost includes: ($27,663,017 for rule review + $6,422,616 for general disclosures + $193,788,961 for rollover disclosures + 907,585 for the retrospective review + $2,736,095 for policies and procedures) = $231,518,275. The total cost in subsequent years includes: ($1,047,936 for general disclosures + $193,788,961 for rollover disclosures + 907,585 for the retrospective review + $1,537,627 for policies and procedures) = $197,282,110. Note, the total values may not equal the sum of the parts due to rounding. E:\FR\FM\03NOP3.SGM 03NOP3 75954 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules entities are subject to the requirements in the NAIC Model regulation, SEC, or state insurance departments. The analysis below considers the full cost of compliance. This likely is an overestimate, as many of these entities are already meeting some, if not most, of the requirements of this proposal. The Department requests comment on this assumption. Summary of Affected Entities The Department expects that 5,246 financial entities would be affected by the proposed amendments, consisting of 1,011 pension consultants, 10 investment company principal underwriters that service plans, 10 investment company principal underwriters that service IRAs, 4,000 independent producers, and 215 insurance companies would be affected by the proposed amendments to PTE 84–24.500 Additionally, the Department estimates that 1,722 plans would be affected by the proposed amendments.501 Costs to Rule Review The Department estimates that the financial entities—including pension consultants, investment company principal underwriters, and insurance companies—currently relying on the exemption and independent producers affected by the proposed amendments would need to review the rule. The Department estimates that such a review will take a legal professional, on average, two hours to review the rule, resulting in an estimated cost of approximately $1.7 million.502 lotter on DSK11XQN23PROD with PROPOSALS3 Costs Associated With Disclosures for Investors The proposed amendment would require independent producers to provide disclosures to retirement investors before engaging in a transaction covered by this exemption. Under the proposed amendments, independent producers seeking relief would be required to provide: • a written fiduciary acknowledgement, • a written statement of the Best Interest standard of care owed, • a written description of the service provided by the independent producer 500 For more information on how the number of each entity type is calculated, refer to the Affected Entities section. 501 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. 502 The burden is estimated as: (5,246 entities × 2 hours) = 10,492 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (5,246 entities × 2 hours) × $159.34 = $1,671,795. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 and the products they are licensed to sell, • a written statement of the independent producer’s material conflicts of interest and the amount of insurance commission paid in connection with the purchase by a retirement investor of the recommended annuity, and • a written explanation of whether a rollover is in the retirement investor’s best interest before engaging in a rollover or making a recommendation to a plan participant. Costs Associated With Preparing General Disclosure Documents For more generalized disclosures, the Department assumes that insurance companies would prepare and provide disclosures to independent producers selling their products. However, some of the disclosures are tailored specifically to the independent producer. For these, the Department assumes that the disclosure would need to be prepared by the independent producer themselves. The Department recognizes that some may rely on intermediaries in the distribution channel to prepare more specific disclosures and that the costs associated with the preparation would be covered by a commission retained by the intermediary for its services. The costs for the intermediary to prepare the disclosure may result in an increase in commission. The Department expects that this increase in commission would not exceed the cost of preparing the disclosure in house. The Department is including model language in the preamble to PTE 84–24 that details what should be included in fiduciary acknowledgment for financial institutions. The Department assumes that the time associated with preparing the disclosures would be minimal. Further, these disclosures are expected to be uniform in nature. Accordingly, the Department estimates that these disclosures would not take a significant amount of time to prepare. Due to the nature of independent producers, the Department assumes that most financial institutions would make draft disclosures available to independent producers, pertaining to their fiduciary status. However, the Department expects that a small percentage of independent producers may draft their own disclosures. The Department assumes that an in-house attorney for all 215 insurance companies and 5 percent of independent producers, or 200 independent producers, would spend 10 minutes of legal staff time to produce a written acknowledgement in the first year. This results in an estimated cost of PO 00000 Frm 00066 Fmt 4701 Sfmt 4702 approximately $11,000 in the first year.503 Regarding the required written statement of the Best Interest standard of care owed by the independent producer, the Department similarly assumes that most financial institutions would make draft disclosures available to independent producers. The Department assumes that an in-house attorney for all 215 insurance companies and 5 percent of independent producers, or 200 independent producers, would spend 30 minutes of legal staff time to prepare the statement in the first year. This results in an estimated cost of approximately $33,100 in the first year.504 The written description of the services provided and the products the independent producer is licensed to sell would likely need to be produced by the independent producer. The Department recognizes that many independent producers may not have the internal resources to prepare such disclosure. The Department expects that some may rely on intermediaries in the distribution channel to prepare the disclosures and some may seek external legal support. However, the Department expects that the costs associated with the preparation would be covered by commissions retained by the intermediary for its services or by the fee paid to external legal support. As such, the Department still attributes this cost to the independent producer. The Department requests comment on this assumption. Accordingly, the Department assumes that all 4,000 independent producers in this analysis would need to prepare the disclosure. The Department assumes that for each of these independent producers, an attorney would spend 30 minutes of legal staff time drafting the written description. This results in an estimated cost of approximately $0.3 million in the first year.505 503 The burden is estimated as: (215 insurance companies + 200 independent producers) × (10 minutes ÷ 60 minutes) = 69 hours. A labor rate of approximately $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(215 insurance companies + 200 independent producers) × (10 minutes ÷ 60 minutes)] × $159.34 = $11,021. 504 The burden is estimated as: (215 insurance companies + 200 independent producers) × (30 minutes ÷ 60 minutes) = 208 hours. A labor rate of approximately $159.43 is used for a legal professional. The labor rate is applied in the following calculation: [(215 insurance companies + 200 independent producers) × (30 minutes ÷ 60 minutes)] × $159.34 = $33,063. 505 The burden is estimated as: (4,000 independent producers × (30 minutes ÷ 60 minutes)) = 2,000 hours. A labor rate of approximately $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (4,000 independent E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 Similarly, the Department expects that the statement of the independent producer’s material conflicts of interest and the amount of insurance commission paid in connection with the purchase by a retirement investor of the recommended annuity would need to be prepared by the individual producer. As with the written statement on the description of services, the Department recognizes that many independent producers may not have the internal resources to prepare such disclosures, however they may already have similar statements to satisfy other legal requirements. The Department expects that some may rely on intermediaries in the distribution channel to prepare the disclosures and some may seek external legal support. However, the Department expects that the costs associated with the preparation would be covered by commissions retained by the intermediary for its services or by the fee paid to external legal support. As such, the Department still attributes this cost to the independent producer. The Department requests comment on this assumption. Accordingly, the Department assumes that all 4,000 independent producers in this analysis would need to prepare the disclosure. The Department assumes that, for each of these entities, an attorney would spend one hour of legal staff time drafting the written description. This results in an estimated cost of approximately $0.6 million the first year.506 Costs Associated With Documenting Whether a Rollover Is in the Investor’s Best Interest, Before Recommending an Annuity, Engaging in a Rollover, or Making a Recommendation to a Plan Participant as to the Post-Rollover Investment of Assets Currently Held in a Plan In addition, the proposed amendment would require an independent producer to provide a disclosure to investors that documents their consideration as to whether a recommended annuity or rollover is in the retirement investor’s best interest. Due to the nature of this disclosure, the Department assumes that the content of the disclosure would need to be prepared by the independent producer. The Department recognizes that some may rely on intermediaries in the distribution channel, and some may producers × (30 minutes ÷ 60 minutes)) × $159.34 = $318,680. 506 The burden is estimated as: (4,000 independent producers × 1 hour) = 4,000 hours. A labor rate of approximately $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (4,000 independent producers × 1 hour) × $159.34 = $637,360. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 seek external legal support to assist with drafting the disclosures. However, the Department expects that most independent producers would prepare the disclosure themselves. The Department requests comment on this assumption. The Department estimates that 52,449 retirement investors would receive documentation on whether the recommended annuity is in their best interest each year.507 The Department assumes that, for each of these retirement investors, an independent producer would spend one hour of a financial manager’s time drafting the documentation. This results in an estimated cost of approximately $8.3 million annually.508 Costs Associated With the Provision of Disclosures to Retirement Investors The Department does not have data on the number of retirement investors that have relationships with independent producers that would engage in transactions covered under the exemption. For the purposes of this analysis, the Department uses its estimate for the number of new IRA accounts held by insurance companies as a proxy for the number of retirement investors that have relationships with independent producers that would engage in transactions covered under the exemption. As such, the Department estimates that 52,449 retirement investors would receive documentation on whether the recommended annuity is in their best interest each year.509 As discussed at the beginning of the cost section, the Department assumes that 5.8 percent of disclosures sent to retirement investors would be mailed. Accordingly, of the estimated 52,449 affected retirement investors, 3,042 retirement investors are estimated to receive paper disclosures.510 For paper copies, a clerical staff member is assumed to require five minutes to prepare and mail the required information to the retirement investor. This requirement results in an estimated 507 For information on this estimate, refer to the estimate of IRAs affected by the proposed amendments to PTE 84–24 in the Affected Entities section. 508 The burden is estimated as: (52,449 rollovers × 1 hour) = 52,449 hours. A labor rate of approximately $158.94 is used for an independent producer. The labor rate is applied in the following calculation: (52,449 rollovers × 1 hour) × $158.94 = $8,336,244. 509 For information on this estimate, refer to the estimate of IRAs affected by the proposed amendments to PTE 84–24 in the Affected Entities section. 510 This is estimated as: (52,449 retirement investors × 5.8%) = 3,042 paper disclosures. PO 00000 Frm 00067 Fmt 4701 Sfmt 4702 75955 labor cost of approximately $16,100.511 The Department assumes that this information would include seven pages, resulting annual cost burden for material and paper costs of approximately $3,100.512 Additionally, independent producers would be required to send the documentation to the insurance company. The Department expects that such documentation would be sent electronically and result in a de minimis burden. The Department requests comment on this assumption. Summary Costs Associated With Disclosures The estimates described above result in a total cost estimate of $9.4 million in the first year and $8.4 million in subsequent years.513 Costs Associated With Policies and Procedures The proposed amendment would require insurance companies to establish, maintain, and enforce written policies and procedures to review each recommendation from an independent producer before an annuity is issued to a retirement investor. The insurance company’s policies and procedures must mitigate conflicts of interest to the extent that a reasonable person reviewing the policies and procedures and incentive practices as a whole would conclude that they do not create an incentive for the independent producer to place its interests, or those of the insurance, or any affiliate or related entity, ahead of the interests of the retirement investor. Insurance companies’ policies and procedures include a prudent process for determining whether to authorize an independent producer to sell the insurance company’s annuity contracts to retirement investors, and for taking 511 This is estimated as: (3,042 paper disclosures × (5 minutes ÷ 60 minutes)) = 253.5 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (3,042 paper disclosures × (5 minutes ÷ 60 minutes)) × $63.45 = $16,085. 512 This is estimated as: 3,042 rollovers resulting in a paper disclosure × [$0.66 postage + ($0.05 per page × 7 pages)] = $3,072. 513 The cost in the first year is estimated as: ($11,021 for the disclosure confirming fiduciary status + $33,063 for the written statement of the Best Interest standard of care + $318,680 for the written description of services provided + $637,360 for the statement on material conflicts of interest and commissions paid + $8,336,244 for the rollover disclosure + $16,085 to prepare and send disclosures + $3,072 for material and postage costs) = $9,355,525. The cost in subsequent years is estimated as: ($8,336,244 for the rollover disclosure + $16,085 to prepare and send disclosures + $3,072 for material and postage costs) = $8,355,401. Note, the total values may not equal the sum of the parts due to rounding. E:\FR\FM\03NOP3.SGM 03NOP3 75956 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 action to protect retirement investors from independent producers who have failed or are likely to fail to adhere to the impartial conduct standards, or who lack the necessary education, training, or skill. Finally, insurance companies must provide their complete policies and procedures to the Department within 10 days upon request. These requirements are consistent with, though more protective than, the requirements in NAIC Model Regulation 275. Model Regulation 275 has been updated and revised several times; however, both the 2010 Model Regulation 275 514 and the 2020 revisions to Model Regulation 275 515 include a requirement to ‘‘establish and maintain procedures for the review of each recommendation prior to issuance of an annuity.’’ 516 While the 2010 version required such procedures ‘‘are designed to ensure that there is a reasonable basis to determine that a recommendation is suitable,’’ 517 the 2020 version requires such procedures are ‘‘are designed to ensure there is a reasonable basis to determine that the recommended annuity would effectively address the particular consumer’s financial situation, insurance needs and financial objectives.’’ 518 The 2020 revisions impose a higher best interest standard, compared to the suitability standard in 2010 standard. Most states have adopted some form of the Model Regulation 275, and, to date, 39 states have adopted the most recent version.519 The Harkin amendment, Section 989J of the DoddFrank Act requires states to adopt rules 514 NAIC, Model Suitability Regulations, § 6(F)(1)(d) NAIC (2010), https://naic.soutronglobal. net/Portal/Public/en-GB/RecordView/Index/25201. 515 NAIC, Model Suitability Regulations, § 6(F)(1)(d) NAIC (2010), https://naic.soutron global.net/Portal/Public/en-GB/RecordView/Index/ 25201. 516 This language was included in both the 2010 and 2020 versions of Model Regulation 275. See NAIC, Model Suitability Regulations, § 6(F)(1)(d) NAIC (2010), https://naic.soutronglobal.net/Portal/ Public/en-GB/RecordView/Index/25201. ; NAIC, Model Suitability Regulations, § 6(F)(1)(d) NAIC (2020). 517 NAIC, Model Suitability Regulations, § 6(F)(1)(d) NAIC (2010), https://naic.soutronglobal. net/Portal/Public/en-GB/RecordView/Index/25201. 518 NAIC, Model Suitability Regulations, § 6(F)(1)(d) NAIC (2020), https://content.naic.org/ sites/default/files/inline-files/MDL-275.pdf. 519 Based on internal Department analysis, the modified Model Regulation #275, including a best interest standard, was adopted by Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 that meet or exceed the minimum requirements of model regulation modifications within five years of adoption.520 While many insurance companies may have policies and procedures in place that would largely satisfy the requirements of the proposed amendments, the Department expects that many would need to change and improve policies and procedures to be fully compliant. The Department requests comment on how extensive and costly changes to existing policies and procedures would need to be, both in terms of establishing and updating policies and procedures and in terms of the annual review in subsequent years. The Department expects that satisfying this requirement would be more time consuming for larger entities due to the complexity of their business. The Department assumes that, for each large insurance company, an in-house attorney would spend on average, 10 hours of legal staff time drafting or modifying the policies and procedures, and for each small insurance company, an in-house attorney would spend on average, five hours of legal staff time. This results in an estimated cost of approximately $0.2 million in the first year.521 The Department requests comment on this assumption. In the following years, the Department assumes for each insurance company, an in-house attorney would spend two hours of legal staff time reviewing. This results in an estimated cost of approximately $68,500 in subsequent years.522 The proposed rule would also require insurance companies to review each of the independent producer’s recommendations before an annuity is issued to a retirement investor to ensure compliance with the Impartial Conduct Standards and other conditions of this exemption. Given the requirements established in both the 2010 and 2020 versions of Model Regulation 275, the Department expects that reviewing recommendations before an annuity is 520 NAIC. Suitability in Annuity Transactions Model Regulation (#275) Best Interest Standard of Conduct Revisions Frequently Asked Question, (May 2021). 521 This is estimated as: (177 small insurance companies × 5 hours) + (38 large insurance companies × 10 hours) = 1,265 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(177 small insurance companies × 5 hours) + (38 large insurance companies × 10 hours)] × $159.34 = $201,565. 522 This is estimated as: (215 insurance companies × 2 hours) = 430 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (215 insurance companies × 2 hours) × $159.34 = $68,516. PO 00000 Frm 00068 Fmt 4701 Sfmt 4702 issued is common industry practice. Accordingly, the Department expects that for those insurance companies already complying with Model Regulation 275, the cost to review and comply with the proposed amendment would be small. The Department lacks data on how many recommendations are already reviewed or how many additional recommendations would need to be reviewed based on this proposal. The Department requests data and comment to inform its estimate. The proposed amendments would also require insurance companies to provide their complete policies and procedures to the Department upon request. As discussed above for PTE 2020–02, the Department estimates that it would request 165 policies and procedures in the first year and 50 in subsequent years. Assuming that the number of requests for the entities covered under PTE 2020–02 is equivalent to the number of requests for the entities covered under PTE 84–24, the Department assumes that it will request two policies and procedures from insurers in the first year and one request in subsequent years, on average.523 This results in an estimated cost of approximately $30 in the first year 524 and $15 in subsequent years.525 The Department believes that policies and procedures requested by the Department under the proposed PTE 84–24 would be accounted for in the paperwork burden of PTE 2020–02. Accordingly, this analysis does not include an additional burden. The Department estimates that satisfying the requirements described above would result in an estimated total cost of approximately $0.2 million in first year and $68,500 in subsequent years.526 523 The number of requests in the first year is estimated as 215 insurance companies × (165 requests in PTE 2020–02/19,290 financial institutions in PTE 2020–02) = 2 requests. The number of requests in subsequent years is estimated as: 215 insurance companies × (50 requests in PTE 2020–02/19,290 financial institutions in PTE 2020– 02) = 1 request. 524 The burden is estimated as: (2 × (15 minutes ÷ 60 minutes)) = 0.5 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (2 × (15 minutes ÷ 60 minutes)) × $63.45 = $32. 525 The burden is estimated as: (1 × (15 minutes ÷ 60 minutes)) = 0.25 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (1 × (15 minutes ÷ 60 minutes)) × $63.45 = $16. 526 The cost in the first year is estimated as: ($201,565 to develop policies and procedures + $32 to provide policies and procedures upon request) = $201,597. The cost in subsequent years is estimated as: ($68,516 to review policies and procedures + $16 to provide policies and procedures upon request) = $68,532. Note, the total values may not equal the sum of the parts due to rounding. E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules Costs Associated With Retrospective Review The proposed amendment would require insurance companies to conduct a retrospective review at least annually. The review would be required to be reasonably designed to prevent violations of and achieve compliance with (1) the Impartial Conduct Standards, (2) the terms of this exemption, and (3) the policies and procedures governing compliance with the exemption. The review would be required to evaluate the effectiveness of the supervision system, any noncompliance discovered in connection with the review, and corrective actions taken or recommended, if any. The retrospective review must also include a review of independent producers’ rollover recommendations and the required rollover disclosure. As part of this review, the insurance company must prudently determine whether to continue to permit individual independent producers to sell the insurance company’s annuity contracts to retirement investors. Additionally, the insurance company must update the policies and procedures as business, regulatory, and legislative changes and events dictate, and to ensure they remain prudently designed, effective, and comply with the exemption. The insurance company annually must provide a written report to a Senior Executive Officer which details the review. The Senior Executive must annually certify that (A) the officer has reviewed the report of the retrospective review report; (B) the insurance company has, within 90 days of discovery, reported to the Department of the Treasury any non-exempt prohibited transaction discovered by the insurance company in connection with investment advice covered under Code section 4975(e)(3)(B), advised the independent producer of the violation and any resulting excise taxes owed under Code section 4975, and notified the Department of Labor of the violation via email; (C) the insurance company has established policies and procedures prudently designed to ensure that independent producers achieve compliance with the conditions of this exemption, and has updated and modified the policies and procedures as appropriate after consideration of the findings in the retrospective review report; and (D) the insurance company has in place a prudent process to modify such policies and procedures. Insurers would also be required to provide the independent producer with the underlying methodology and results VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 of the retrospective review. The Department assumes that the insurance company would provide the methodology and results electronically. The Department lacks data on the average number of independent producers selling annuities per insurance company. For the purposes of this analysis, the Department assumes that, on average, each independent producer sells the products of three insurance companies. From each of these insurance companies, they may sell multiple products. As such, the Department assumes that each year, insurance companies would need to prepare a total 12,000 retrospective reviews,527 or on average, each insurance company would need to prepare approximately 56 retrospective reviews.528 The Department requests comment on this estimate. The Department assumes that, for each independent producer selling an insurance company’s products, an inhouse attorney at the insurance company would spend one hour of legal staff time, on average, conducting and drafting the retrospective review. This results in an estimated cost of approximately $1.9 million.529 The Department assumes it would take a Senior Executive Officer 15 minutes to review and certify the report. This results in an estimated annual cost of approximately $0.4 million.530 The Department assumes that the insurance company would provide the methodology and results electronically. The Department requests comment on this assumption. The Department estimates that it would take clerical staff five minutes each to prepare and send each of the estimated 12,000 retrospective reviews. This results in an estimated annual cost of approximately $63,500.531 The Department expects that the results would be provided 527 This is estimated as: (4,000 independent producers × 3 insurance companies covered) = 12,000 retrospective reviews. 528 This is estimated as: (12,000 retrospective reviews/215 insurance companies) = 55.8 retrospective reviews, on average. 529 This is estimated as: (12,000 retrospective reviews × 1 hour) = 12,000 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (12,000 retrospective reviews × 1 hour) × $159.34 = $1,912,080. 530 This is estimated as: (12,000 retrospective reviews × (15 minutes ÷ 60 minutes)) = 3,000 hours. A labor rate of $128.11 is used for a senior executive officer. The labor rate is applied in the following calculation: (12,000 retrospective reviews × (15 minutes ÷ 60 minutes)) × $128.11 = $384,330. 531 This is estimated as: (12,000 retrospective reviews × (5 minutes ÷ 60 minutes)) = 1,000 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (12,000 retrospective reviews × (5 minutes ÷ 60 minutes)) × $63.45 = $63,450. PO 00000 Frm 00069 Fmt 4701 Sfmt 4702 75957 electronically, thus the Department does not expect there to be any material costs with providing independent producers with the retrospective review. The Department estimates that satisfying the requirements for retrospective reviews would result in an estimated total annual cost of approximately $2.4 million.532 Costs Associated With Recordkeeping The proposed amendment would change the current recordkeeping requirements to incorporate a new provision that is similar to the recordkeeping provision in PTE 2020– 02. This requirement would replace the more limited existing recordkeeping requirement in the current version of PTE 84–24, which requires sufficient records to demonstrate that the conditions of the exemption have been met. The Department does not have data on how many pension consultants, insurance companies, and investment company principal underwriters would continue to rely on PTE 84–24 as amended without also complying with the amended PTE 2020–02. In this analysis, the Department assumes that all of the pension consultants and investment company principal underwriters continuing to rely on the amended PTE 84–24 would also rely on the amended on the PTE 2020–02. Thus, to avoid double counting the compliance cost, this analysis does not include the cost associated with the proposed recordkeeping requirement for these entities. For this analysis, the Department only considers the cost for insurance companies and independent producers complying with the proposed recordkeeping requirements. The Department estimates that the additional time needed to maintain records to be consistent with the exemption would require an independent producer two hours, resulting in an estimated cost of $1.3 million.533 The proposed amendment would require fiduciaries engaging in all transactions covered by the exemption to maintain records necessary for the 532 The annual cost is estimated as: ($1,912,080 to conduct the retrospective review + $384,330 for the review of the retrospective review + $63,450 for the provision of the report to Independent Producers) = $2,359,860. 533 This is estimated as: (4,000 independent producers + 215 insurance companies) × 2 hours = 8,430 hours. A labor rate of $158.94 is used for an independent producer and $159.34 for a legal professional at an insurance company. The labor rate is applied in the following calculation: (4,000 independent producers × 2 hours × $159.34) + (215 insurance companies × 2 hours × $158.34) = $1,340,036. E:\FR\FM\03NOP3.SGM 03NOP3 75958 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules following entities to determine whether the conditions of this exemption have been met. (1) any authorized employee of the Department or the IRS or another state or federal regulator, (2) any fiduciary of a plan that engaged in a transaction pursuant to this exemption, (3) any contributing employer and any employee organization whose members are covered by a plan that engaged in a transaction pursuant to this exemption, or (4) any participant or beneficiary of a plan or beneficial owner of an IRA acting on behalf of the IRA that engaged in a transaction pursuant to this exemption. The Department does not have data on how often independent producers would receive requests for records. For the purposes of this analysis, the Department assumes that, on average, independent producer would receive 10 requests per year and that preparing and sending each request would take a legal professional, on average, 30 minutes. Based on these assumptions, the Department estimates that the proposed amendments would result in an annual cost of approximately $3.2 million.534 The Department requests comment on how often financial institutions would receive requests for records, who would prepare such reports, and how long the preparation of such records would take. This results in a total annual cost of $4.5 million associated with recordkeeping.535 Summary of Total Cost for the Proposed Amendments to PTE 84–24 lotter on DSK11XQN23PROD with PROPOSALS3 The Department estimates that in order to meet the additional conditions of the amended PTE 84–24, affected entities would incur a total cost of $18.1 million in the first year and $15.3 million in subsequent years.536 534 The burden is estimated as: (4,000 independent producers × 10 requests) × (30 minutes ÷ 60 minutes) = 20,000 hours. A labor rate of $158.94 is used for an independent producer. The labor rate is applied in the following calculation: [(4,000 independent producers × 10 requests) × (30 minutes ÷ 60 minutes)] × $158.94 = $3,178,800. 535 The annual cost is estimated as: ($1,340,036 to maintain records + $3,178,800 to distribute records) = $4,518,836. 536 The first-year total cost includes: ($1,671,795 for rule review + $9,355,525 for general disclosures + $201,597 for policies and procedures + $2,359,860 for the retrospective review + $4,518,836 for recordkeeping) = $18,107,613. The total cost in subsequent years includes: ($8,355,401 for disclosures + $68,532 for policies and procedures + $2,359,860 for the retrospective review + $4,518,836 for recordkeeping) = 15,302,629. Note, the total values may not equal the sum of the parts due to rounding. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Costs Associated With the Mass Amendments requirement produces no additional burden to the public. The following analysis summarizes the proposed changes and associated costs to PTE 75–1, PTE 77–4, PTE 1980– 3, and 86–128. For more information on the cost estimates, refer to the Paperwork Reduction Act statements for the proposed amendments, published elsewhere in today’s edition of the Federal Register. Costs Associated With Recordkeeping in Parts II and V Costs Associated With PTE 75–1 Summary of Affected Entities The amendment to PTE 75–1 would affect banks, reporting dealers, and broker-dealers registered under the Security Exchange Act of 1934. As discussed in the Affected Entities section above, the Department estimates that 1,894 broker-dealers and 2,048 banks would use PTE 75–1.537 Costs Associated With Disclosure Requirements in Part V The Department proposes to amend PTE 75–1 Part V to allow an investment advice fiduciary to receive reasonable compensation for extending credit to a plan or IRA to avoid a failed purchase or sale of securities involving the plan or IRA if (1) the potential failure of the purchase or sale of the securities is not caused by such fiduciary or an affiliate, and (2) the terms of the extension of credit are at least as favorable to the plan or IRA as the terms available in an arm’s length transaction between unaffiliated parties. Prior to the extension of credit, the plan or IRA receives written disclosure, including the interest rate or other fees that will be charged on the credit extension as well as the method of determining the balance upon which interest will be charged. The Department believes that it is a usual and customary business practice to maintain records required to demonstrate compliance with SECmandated disclosure distribution regulations. The Department believes that this new requirement is consistent with the disclosure requirement mandated by the SEC in 17 CFR 240.10b-16(1) for margin transactions.538 Therefore, the Department concludes that this 537 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. 538 Employee Benefits Security Administration, Regulating Advice Markets Definition of the Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement Investment Advice Regulatory Impact Analysis for Final Rule and Exemptions, pp. 258, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/lawsand-regulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf. PO 00000 Frm 00070 Fmt 4701 Sfmt 4702 The Department is also amending PTE 75–1 Parts II and V to adjust the recordkeeping requirement to shift the burden from plans and IRAs to financial institutions. The amended class exemption requires financial institutions engaging in the exempted transactions (rather than the plans or IRAs) to maintain all records pertaining to such transactions for six years and provide access to the records upon request to the specified parties. The Department has estimated that the amount of time needed for financial professional to maintain records for the financial institutions to be consistent with the exemption and to make the record available for inspection would require four hours, on average, resulting in an estimated cost of $3.0 million.539 Costs Associated With Removing Fiduciary Investment Advice From Parts III and IV Finally, the Department is proposing to amend PTE 75–1 Parts III and IV, which currently provide relief for investment advice fiduciaries, by removing fiduciary investment advice from the covered transactions. Investment advice providers would instead have to rely on the amended PTE 2020–02 for exemptive relief covering investment advice transactions. The Department believes that since investment advice providers were already required to provide records and documentation under PTE 2020–02, this amendment would not result in additional costs. Summary of Total Cost for the Proposed Amendments to PTE 75–1 The Department estimates that in order to meet the additional conditions of the amended PTE 75–1, affected entities would annually incur a total cost of $3.0 million.540 Costs Associated With PTE 77–4, PTE 80–83, PTE 83–1 Summary of Affected Entities The amendment to PTE 77–4 would affect mutual fund companies. As discussed in the Affected Entities section, the Department estimates that 539 The burden is estimated as: (3,942 financial institutions × 4 hours) = 15,768 hours. A labor rate of $190.63 is used for a financial manager. The labor rate is applied in the following calculation: (3,942 × 4 hours) × $190.63 = $3,005,854. 540 This cost is the estimated $3,005,854 cost to maintain recordkeeping. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules 825 mutual fund companies would be affected by the amended PTE 77–4.541 PTE 80–83 allows banks to purchase, on behalf of employee benefit plans, securities issued by a corporation indebted to the bank that is a party in interest to the plan. The Department estimates that 25 fiduciary-banks with public offering services would be affected by the amended PTE 80–83.542 PTE 83–1 provides relief for the sale of certificates in an initial issuance of certificates by the sponsor of a mortgage pool to a plan or IRA when the sponsor, trustee, or insurer of the mortgage pool is a fiduciary with respect to the plan or IRA assets invested in such certificates. Summary of Total Cost for the Proposed Amendments to PTE 77–4, PTE 80–83, and PTE 83–1 The Department is proposing to amend PTE 77–4, PTE 80–83, and PTE 83–1 which currently include relief for investment advice fiduciaries, by removing fiduciary investment advice from the covered transactions. Investment advice providers would instead have to rely on the amended PTE 2020–02 for exemptive relief covering investment advice transactions. The Department believes that since investment advice providers were already required to provide documentation under PTE 2020–02, these amendments would not result in additional costs. lotter on DSK11XQN23PROD with PROPOSALS3 Costs Associated With PTE 86–128 The Department is proposing to amend Section VI of PTE 86–128 to require financial institutions to maintain for six years the records necessary for the Department, the IRS, the plan fiduciary, the contributing employer, or employee organization whose members are covered by the plan, plan participants, plan beneficiaries, and IRA owners to determine whether conditions of this exemption have been met. In addition, the amendment would extend and impose conditions on IRAs. Section III of PTE 86–128 imposes requirements on investment advice providers and the independent plan fiduciaries authorizing the IRA to engage in the transactions with the investment advice providers (‘‘authorizing fiduciary’’) under the conditions contained in the exemption. 541 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. 542 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Summary of Affected Entities The amendment to PTE 86–128 would affect fiduciaries of employee benefit plans that effect or execute securities transactions and independent plan fiduciaries that authorize the plan or IRA to engage in the transactions. As discussed in the Affected Entities section, the Department estimates that 1,894 investment advice providers would be affected by the proposed amendments to PTE 86–128. Additionally, the Department estimates that 10,000 IRAs will engage in transactions covered under this class exemption, of which 210 are new IRAs.543 With the removal of exemptive relief for investment advice, the Department requests comment on what types of financial institutions would continue to rely on PTE 86–128, as well as how many entities would do so. Additionally, the Department requests comment on how many plans or managed IRAs would receive services from these entities. Costs Associated With Recordkeeping Each of the estimated 1,894 investment advice providers will maintain these records on behalf of their client plans in their normal course of business. The Department estimates that the additional time needed to maintain records consistent with the exemption would require a financial professional 30 minutes annually, resulting in an estimated cost of $0.2 million.544 The Department estimates that the proposed amendments would also require 15 minutes of clerical time to prepare and send the documents for inspection, resulting estimated cost of approximately $30,000.545 Costs Associated With Written Authorization From the Authorizing Fiduciary to the Investment Advice Provider Authorizing fiduciaries of IRAs entering into a relationship with an investment advice provider are required to provide the investment advice 543 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. 544 The burden is estimated as: (1,894 investment advice providers × (30 minutes ÷ 60 minutes)) = 947 hours. A labor rate of $190.63 is used for a financial manager. The labor rate is applied in the following calculation: (1,894 investment advice providers × (30 minutes ÷ 60 minutes)) × $190.63 per hour = $180,527. 545 The burden is estimated as: (1,894 investment advice providers × (15 minutes ÷ 60 minutes)) = 474 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (1,894 investment advice providers × (15 minutes ÷ 60 minutes)) × $63.45 per hour = $30,044. PO 00000 Frm 00071 Fmt 4701 Sfmt 4702 75959 provider with advance written authorization to perform transactions for the IRA. The Department estimates that there are approximately 210 IRAs that are new or that enter new arrangements each year.546 Therefore, the Department estimates that approximately 210 authorizing fiduciaries are expected to send an advance written authorization. It is assumed that a legal professional will spend 15 minutes per IRA reviewing the disclosures and preparing an authorization form, resulting in an estimated cost of approximately $8,400.547 As discussed at the beginning of the cost section, the Department assumes that 5.8 percent of these authorizations will be mailed. For paper and electronic authorizations, the Department assumes that clerical staff will spend five minutes per participant to prepare and send the authorization, resulting in an estimated labor cost of approximately $1,100.548 It is assumed that the authorization will be two pages and paper authorizations will cost $0.76 each, which results in a cost burden of approximately $9.549 This results in a total cost for the written authorization of approximately $9,500.550 Cost Associated With the Provision of Materials for the Evaluation of Authorization of Transaction Prior to a written authorization, the investment advice provider must provide the authorizing fiduciary with a copy of the exemption, a form for termination of authorization, a description of broker’s placement 546 The Department estimates that there are 10,000 managed IRAs. Of these managed IRAs, the Department assumes that 2.1 percent are new accounts or new financial advice relationships See Cerulli Associates. ‘‘U.S. Retirement End-Investor 2023: Personalizing the 401(k) Investor Experience.’’ Exhibit 6.02. The Cerulli Report., and that 100 percent of these managed IRAs will engage in transactions covered under this class exemption. These assumptions are applied in the following manner: 10,000 managed IRAs × 2.1 percent of plans are new × 100 percent of plans with brokerdealer relationships = 210 IRAs. 547 The burden is estimated as: (210 IRAs × (15 minutes ÷ 60 minutes) per IRA) = 52.5 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (210 IRA × (15 minutes ÷ 60 minutes)) per IRA) × $159.34 per hour = $8,365. 548 The burden is estimated as: (210 IRA × (5 minutes ÷ 60 minutes) per IRA) = 17.5 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (210 IRA × (5 minutes ÷ 60 minutes) per IRA) × $63.45 = $1,110. 549 The burden is estimated as: (2 pages × $0.05 per page) + $0.66 for postage = $0.76; The mailing rate is applied in the following calculation: (210 authorizations for IRAs × 5.8%) × $0.76 = $9. 550 This is estimated as: ($8,365 to prepare the written authorization + $1,110 to send the written authorization + $9 for material costs) = $9,485. E:\FR\FM\03NOP3.SGM 03NOP3 75960 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules practices, and any other reasonably available information. The Department assumes that this information is readily available. As discussed at the beginning of the cost section, the Department assumes that 5.8 percent of these authorizations will be mailed, while the remaining 94.2 percent will be delivered electronically. A clerical staff member is assumed to require five minutes per participant to electronically send and mail the required information to the authorizing fiduciary. This information will be sent to the authorizing fiduciaries of 210 IRAs entering into an agreement with an investment advice provider. Based on the above, the Department estimates that this requirement results in estimated cost of approximately $1,100.551 It is assumed that this information will be seven pages and paper distribution will cost $1.01 each, which results in an estimated cost of approximately $12.552 This results in a total cost of approximately $1,100.553 lotter on DSK11XQN23PROD with PROPOSALS3 Costs Associated With the Provision of an Annual Termination Form Investment advice providers must annually supply each authorizing fiduciary with a form expressly providing an election to terminate the written authorization. It is assumed that legal professionals with each of the estimated 1,894 investment advice providers would spend one hour preparing the termination forms, which results in an estimated cost of approximately $0.3 million.554 As discussed in the Affected Entities section, the Department estimates that 10,000 IRAs will engage in transactions covered under this class exemption and would receive the form.555 As discussed at the beginning of the cost section, the Department assumes that 5.8 percent of IRAs will receive paper copies of the termination forms. The Department 551 The burden is estimated as: (210 IRAs × (5 minutes ÷ 60 minutes) per IRA) = 17.5 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (210 IRAs × (5 minutes ÷ 60 minutes) per IRA) × $63.45 = $1,110. 552 The burden is estimated as: (7 pages × $0.05 per page) + $0.66 for postage = $1.01; The mailing rate is applied in the following calculation: (210 materials packages for IRAs × 5.8%) × $1.01 = $12. 553 This is estimated as: ($1,110 to prepare the information + $12 for materials and postage) = $1,123. 554 The burden is estimated as: (1,894 investment advice providers × 1 hour per broker-dealer) = 1,894 hours; A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (1,894 investment advice providers × 1 hour per broker-dealer) × $159.34 per hour = $301,790. 555 For more information on how the number of IRAs is estimated, refer to the Affected Entities section. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 estimates that clerical staff will spend five minutes per IRA preparing and distributing the paper and electronic termination forms, resulting in an estimated cost of approximately $52,900.556 It is assumed that the form will be two pages, so paper copies will cost $0.76 each for materials and postage, which results in a cost burden of approximately $441.557 This results in a total cost of 0.4 million.558 Cost Associated With Transaction Reporting The investment advice provider engaging in a covered transaction must give the authorizing fiduciary either a confirmation slip for each securities transaction or a quarterly report. As discussed above, the provision of the confirmation is already required under SEC regulations. Therefore, if the transaction reporting requirement is satisfied by sending confirmation slips or quarterly reporting, no additional hour and cost burden will occur. Costs Associated With the Annual Statement Investment advice providers are required to send to each authorizing fiduciary an annual report that contains the same information as the quarterly report, including all security transaction-related charges, the brokerage placement practices, and a portfolio turnover ratio. As such, the Department does not expect that financial institutions would incur an additional burden to produce the annual statement, aside from what is already incurred to produce the quarterly report. Additionally, the Department assumes that this information could be sent with the annual termination form. Therefore, the clerical staff hours required to prepare and distribute the report, as well as postage costs, have been included with the provision of annual termination form requirement, and no additional burden has been reported. It is assumed that the annual statement will be five pages, and the paper and print costs are $0.25 each. Therefore, the burden is estimated as: (10,000 IRAs × (5 minutes ÷ 60 minutes) per IRA) = 833 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (10,000 IRAs × (5 minutes ÷ 60 minutes) per IRA) × $63.45 per hour = $52,875. 557 The mailing cost is estimated as: (2 pages × $0.05 per page) + $0.66 for postage = $0.76; The mailing rate is applied in the following calculation: (10,000 IRAs × 5.8%) × $0.76 = $441. 558 This cost is estimated as: ($301,790 to prepare the termination form + $52,875 to distribute the termination form + $441 for material and postage costs) = $355,106. 556 The PO 00000 Frm 00072 Fmt 4701 Sfmt 4702 overall cost burden for the paper and print costs are approximately $145.559 Costs Associated With the Report of Commissions Paid A discretionary trustee must provide an authorizing fiduciary with an annual report that separately shows the commissions paid to affiliated brokers and non-affiliated brokers on both a total dollar basis and a cents-per-share basis. The clerical hour burden to prepare and distribute the report is included with the provision of annual termination form requirement, because both items are required to be sent annually. However, the collecting and generating information for the report of commissions paid is reported as a cost burden. An investment advice provider that is a discretionary trustee must provide each of the 10,000 authorizing fiduciaries with this annual commissions report.560 As discussed at the beginning of the cost section, the Department assumes that 5.8 percent of investment advice providers will mail the annual reports. As the report is sent annually, it is assumed that it could be sent with the transaction report, therefore postage costs are not counted here. It is assumed that the report will be two pages, and the paper and print costs are $0.10 each. Therefore, the overall cost burden of the paper and print costs is approximately $58.561 Investment advice providers are required to report the total of all transaction-related charges incurred by the plan in connection with covered transactions, the allocation of such charges among various persons, as well as a conspicuous statement about the negotiability of brokerage commissions and an estimate of future commission rates to the plan fiduciaries. The information must be tracked, assigned to specific plans, and reported. It is assumed that it costs the investment advice provider $3.30 per IRA to track this information.562 With approximately 10,000 affected IRAs, this results in a cost burden of approximately $33,000 annually.563 559 The mailing cost is estimated as: (5 pages × $0.05 per page) = $0.25. The mailing cost is applied in the following calculation: (10,000 IRAs × 5.8%) × $0.25 = $145. 560 For more information on how the number of IRAs is estimated, refer to the Affected Entities section. 561 The mailing cost is estimated as: (2 pages × $0.05 per page) = $0.10. The mailing cost is applied in the following calculation: (10,000 IRAs × 5.8%) × $0.10 = $58. 562 This estimate is based on information from a Request for Information and from industry sources. 563 This burden is estimated as: (10,000 IRAs × $3.30) = $33,000. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules This results in a total cost of approximately $33,100.564 Summary of Total Cost for the Proposed Amendments to PTE 86–128 The Department estimates that in order to meet the additional conditions of the amended PTE 86–128, affected entities would annually incur a total cost of $0.6 million.565 9. Regulatory Alternatives The Department considered various alternative approaches in developing this proposal. Those alternatives are discussed below. Broader Rule lotter on DSK11XQN23PROD with PROPOSALS3 The Department considered proposing a definition of an investment advice fiduciary that would be broader in scope, similar to the 2016 Final Rule. In promulgating the 2016 Final Rule, the Department expanded the definition of a fiduciary beyond the five-part test included in the 1975 regulation. The 2016 Final Rule covered as fiduciary investment advice: • recommendations by a person who represents or acknowledges their fiduciary status under the Act or the Code; • 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; • 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; and • recommendations to buy, sell or hold assets held in IRAs and non-ERISA plans. In developing this proposal, the Department has crafted a more focused definition that would consider the scope issues identified by the Fifth Circuit while still protecting retirement investors. The Department was also cognizant of stated concerns of some stakeholders that the compliance costs associated with the broader 2016 Final 564 This cost is estimated as: ($58 for material and post costs + $33,000 to track relevant information for mailing annual reports) = $33,058. 565 The annual cost is estimated as: ($180,527 for recordkeeping + $30,044 for preparing and sending documents for inspection + $9,485 for the written authorization + $1,123 for the materials for the evaluation of authorization of transaction + $355,106 for the annual termination form + $145 for materials for the annual statement + $33,058 for the report on commissions paid) = $609,487. Note, the total may not equal the sum of components due to rounding. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Rule would lead to adverse consequences such as increases in the cost of investment advice and potential loss of access by retirement investors with small account balances. The current proposal bases investment advice fiduciary status on circumstances that indicate the retirement investor may place trust and confidence in the recommendation as a professional recommendation based upon the particular needs of the investor. The proposal reflects the Department’s interpretation of the text of the statute, as informed by the Fifth Circuit’s emphasis on relationships of trust and confidence. Accordingly, the proposed definition, unlike the 2016 Final Rule, does not automatically treat as fiduciary advice all compensated recommendations directed to a specific retirement investor regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA. For example, an entity can satisfy the test under (c)(1)(ii) of this proposal, only if they satisfy each part, including the requirement that the retirement adviser provides investment advice on a regular basis as part of their business. This is more limiting than the 2016 Final Rule, and it ensures that individuals like human resource professionals discussing 401(k) investment options, and the car salesman who recommends a retiree cash in their 401(k) for a new convertible are not caught up in the definition. In publishing this proposal, the Department was mindful of concerns with respect to the 2016 Final Rule, specifically regarding access to investment advice for all retirement investors. No Amendment to PTE 2020–02 The Department considered not amending PTE 2020–02 and leaving the exemption in its present form. The Department supports the existing PTE 2020–02 and has retained its core components in the amendment, including the Impartial Conduct Standards and the requirement for strong policies and procedures. These are fundamental investor protections that are necessary to ensure the financial institutions and investment professionals provide investment advice that is in the best interest of retirement investors. The retention of the core elements of PTE 2020–02 will also ensure that any work financial institutions have done to comply with PTE 2020–02 will prepare them to comply with the amended exemption. However, the Department believes that additional protections are necessary PO 00000 Frm 00073 Fmt 4701 Sfmt 4702 75961 to ensure that fiduciary investment advice providers adhere to the stringent standards outlined in PTE 2020–02. Therefore, as discussed in detail earlier, the proposed amendments clarify and tighten the existing text of PTE 2020–02 to enhance the disclosure requirements. In order to more fully protect retirement investors, the Department is proposing additional disclosures to ensure that investors have sufficient information to make informed decisions about the costs of an investment advice transaction and about the significance and severity of the investment advice fiduciary’s conflicts of interest. In addition to the need for additional protections, upon reviewing the implementation of PTE 2020–02, the Department determined it is necessary to provide financial institutions and investment professionals with additional guidance on implementing the exemption’s core elements. As a result, the proposed amendment would also provide more guidance on how to best comply with the Impartial Conduct Standards and implement the policies and procedures condition. No Amendment to PTE 84–24 The Department is aware that insurance companies sometimes sell insurance products through independent agents that sell multiple insurance companies’ products. In connection with this business structure, when the Department finalized PTE 2020–02, the Department explained that insurance companies could rely on either PTE 2020–02 or PTE 84–24. As a result, the Department considered the option of leaving PTE 84–24 unaltered. Through outreach with financial institutions after issuing PTE 2020–20, the Department heard concerns from insurance companies that distribute annuities through independent agents and believed that they may not be able to effectively comply with PTE 2020–02. This is primarily due to the difficulty insurers confront when overseeing independent insurance producers who do not work for any one insurance company and are not obligated to recommend only one company’s annuities. The Department understands that this compliance issue has been resolved by reliance on PTE 84–24. However, the Department is concerned that PTE 84–24, if left in its current state, offers few of the protections provided by PTE 2020–02. Further, insurance companies’ continued reliance on PTE 84–24 instead of PTE 2020–02 could prevent retirement investors from being able to fully compare varying products and services. In order to address these E:\FR\FM\03NOP3.SGM 03NOP3 75962 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 concerns, the Department proposes to amend PTE 84–24 to provide an exemption to independent insurance producers to sell annuities or other insurance products. The proposed amendment addresses insurance industry concerns regarding the workability of PTE 2020–02’s conditions, while providing a tailored exemption for insurance companies and independent agents that ensures that fiduciary investment advice with respect to all products is delivered pursuant to the same core principles that protect retirement investors. Including an Individual Contract Requirement The Department also considered amending PTE 2020–02 to include an enforceable written contract between the financial institution and the retirement investor. While the predecessor to PTE 2020–02, the Best Interest Contract Exemption,566 required such an enforceable contract, PTE 2020– 02 did not include a contract or warranty provision enforceable by IRA owners. In crafting the proposed amendment, the Department reviewed the decision to not include an enforceable written contract in PTE 2020–02 but concluded that the better course of action was not to include such a requirement. Given that the Fifth Circuit found that the contractual requirement for IRAs exceeded the scope of the Department’s authority, a proposal attempting to reinstate that requirement would likely be invalidated in the Fifth Circuit, leading to uncertainty in the regulated community. Such uncertainty could lead to the potential for disruption in the market for investment advice, and in crafting an exemption that does not include an enforceable written contract, the Department intends to avoid this potential disruption. Instead, the exemption includes many protective measures and targeted opportunities for the Department to review compliance within its existing oversight and enforcement authority under ERISA. For example, financial institutions’ reports regarding their retrospective review are required to be certified by a senior executive officer of the financial institution and provided to the Department within 10 business days of request. The exemption also includes eligibility provisions, which the Department believes will encourage financial institutions and investment professionals to maintain an appropriate focus on compliance with legal requirements and with the exemption. The Department also intends to ensure that financial institutions relying on the exemption comply with excise tax provisions. The Department has proposed to bolster this protection by requiring financial institutions, as part of their retrospective review, to report to the Department of the Treasury any nonexempt prohibited transactions in connection with fiduciary investment advice, correct those transactions, and pay any resulting excise taxes. Further, the proposed amendment would add failure to report, correct, and pay an excise tax to the list of factors that could make a financial institution ineligible to rely on PTE 2020–02. The Department believes these additional conditions would provide important protections to retirement investors by enhancing the existing protections of PTE 2020–02. Relying on Disclosure Alone Some commenters responding to the 2015 NPRM 567 argued that disclosure of potential adviser conflicts is, by itself, sufficiently protective of plan and IRA investors’ interests. According to these comments, if conflicts are transparent, then investors can choose between more and less conflicted advisers. The commenters advocated that the Department should issue broad PTEs that exempt all or almost all existing and potential adviser business models and compensation arrangements on the sole condition that material conflicts be disclosed. The Department does not believe that disclosure alone is adequately protective of retirement investors. The Department chose not to take that approach in the 2016 Final Rule and chooses not to take that approach with this proposal. As discussed above in the ‘‘Need for Regulatory Action’’ section, most retirement investors are not financially sophisticated, and even those who are financially sophisticated are unlikely to detect lapses in the quality of financial advice. Due to the complexity of some disclosures as well as investors’ propensity to ignore lengthy disclosures, disclosures often fail to accomplish their goals. Retirement investors regularly fail to understand advisers’ conflicts, let alone the impacts that those conflicts could have on their investments. A large body of research discussed in the RIA for the 2016 Final Rule suggested that disclosures alone can have, at best, a minor impact on conflicts, and can sometimes exacerbate the conflicted behavior.568 Advisers may inflate the bias in their advice to counteract any discounting that might 567 See 566 See 81 FR 21002 (Apr. 8, 2016). VerDate Sep<11>2014 21:24 Nov 02, 2023 568 See Jkt 262001 PO 00000 FR 21927 (Apr. 20, 2015). FR 20946, 20950–51 (Apr. 8, 2016). Frm 00074 Fmt 4701 Sfmt 4702 occur because of the disclosure of conflicts.569 In addition, even when inexpert retirement investors receive easy-to-understand disclosures alerting them to conflicts, there is no ready way for them to use that knowledge to improve investment outcomes, inasmuch as they are still dependent on the adviser’s recommendations and expertise. Adding a Requirement for a Web Disclosure The Department considered amending PTE 2020–02 and PTE 84–24 to require financial institutions to disclosure the sources of third-party compensation received in connection with recommended investment products on a public web page. The Department believes such disclosures would allow market-based forces to extend protections to consumers by discouraging and eliminating the most conflicted compensation practices. Moreover, public disclosure of firms’ compensation arrangements with the third parties whose products they recommend would provide an additional focus on firm-level, as opposed to individual adviser-level, conflicts of interest. Such public disclosure could produce market effects similar to public disclosures required by the SEC (e.g., public companies’ 10–K filings). Conflicted compensation practices are often complex, opaque, and shrouded from view. Requiring public disclosure of conflicted compensation practices would allow investment professionals, experts, and consultants, as well as academic researchers, to draw attention to the concerning aspects of the conflicts and even rate firms based on the scope of their conflicts. As noted by Landier and Thesmar (2011), data availability feeds research intensity.570 A wide range of literature suggest that when financial data are available to researchers, these researchers uncover problematic behaviors and draw attention to the behaviors, which has the effect of curbing the practices in the future.571 Making compensation 569 George Loewenstein, Daylian M. Cain & Sunita Sah, The Limits of Transparency: Pitfalls and Potential of Disclosing Conflicts of Interest, 101(3) American Economic Review 423–28, (May 2011). 570 Augustin Landier & David Thesmar, Regulating Systemic Risk Through Transparency: Tradeoffs in Making Data Public, Working Paper 17664 National Bureau of Economic Research (December 2011), 320, https://www.nber.org/ system/files/working_papers/w17664/w17664.pdf. 571 For example: Randall A. Heron & Erik Lie, Does Backdating Explain the Stock Price Pattern Around Executive Stock Option Grants?, 83(2) Journal of Financial Economics 271–295 (2007).; Randall A. Heron & Erik Lie, What Fraction of Stock E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules information publicly available could allow intermediaries and consultants to package this information as part of their ratings and evaluations, likely improving investor information. Further, a web disclosure of this nature may encourage financial institutions to stop engaging in conflicted behaviors due to litigation risk from unsatisfied clients, risk of complaints made to the Department that might result in enforcement actions, and the risk to their public reputations. The Department estimates that, if such a disclosure were required, it would require eight hours of labor annually from a computer programmer, on average, resulting in an annual cost of approximately $20.5 million for PTE 2020–02 572 And $$4.5 million for PTE 84–24.573 The Department welcomes comments on the accuracy of Department’s estimates on the required time to maintain the disclosure, and how many financial institutions currently have the technology infrastructure to post a web disclosure. The Department is also interested in the benefits of such a disclosure, as well as in any data that commenters may have that estimate how frequently retirement investors may visit a web page that includes such disclosures, and the extent to which various consultants and financial intermediaries would likely use the website to assist retirement investors and others. Allowing for More Parties To Review Records lotter on DSK11XQN23PROD with PROPOSALS3 For the proposed amendment to PTE 2020–02, the Department considered allowing more parties to review the records necessary to determine whether the exemption is satisfied, such as: • any authorized employee of the Department or the Department of the Treasury, Option Grants to Top Executives Have Been Backdated or Manipulated?, 55(4) Management Science 513–525.; Mark Carhart, Ron Kaniel & Adam Reed, Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds, 57(2) Journal of Finance 661–693 (2002).; Truong X. Duong & Felix Meschke, The Rise and Fall of Portfolio Pumping Among U.S. Mutual Funds, 60 Journal of Corporate Finance (February 2020). 572 The burden is estimated as: (19,290 entities × 8 hours) = 154,320 hours. A labor rate of $133.05 is used for a computer programmer professional. The labor rate is applied in the following calculation: (19,290 entities × 8 hours) × $133.05 = $20,532,276. 573 The burden is estimated as: (215 insurance companies + 4,000 independent producers) × 8 hours = 33,720 hours. A labor rate of $133.05 is used for a computer programmer professional. The labor rate is applied in the following calculation: (215 insurance companies + 4,000 independent producers) × 8 hours × $133.05 = $4,486,446. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 • any fiduciary of a plan that engaged in a transaction pursuant to this exemption, • any contributing employer, any employee organization whose members are covered by a plan that engaged in a transaction pursuant to this exemption, and • any participant or beneficiary of a plan or beneficial owner of an IRA acting on behalf of the IRA that engaged in a transaction pursuant to this exemption. The Department does not have data on how often financial institutions would receive such requests. For the purposes of this analysis, the Department assumes that, on average, financial institutions would receive 10 requests per year and that preparing and sending each request would take a legal professional, on average, 30 minutes. Based on these assumptions, the Department estimates that the proposed amendments would result in an annual cost of approximately $15.4 million.574 The Department requests comment on how often financial institutions would receive requests for records, who would prepare such reports, and how long the preparation of such records would take. 10. Uncertainty In estimating costs associated with rollover documentations, the Department faces uncertainty in determining the number of rollovers affected by the amendments to PTE 2020–02 and PTE 84–24. Some financial services professionals who do not generally serve as fiduciaries may act in a fiduciary capacity when making certain rollover recommendations, and thus will be affected by the exemptions. Alternatively, the opposite can also be true. Financial services professionals who generally serve as fiduciaries may act in a non-fiduciary capacity in handling certain rollover recommendations, and thus will not be affected by the exemptions. Thus, there is uncertainty in estimating the cost of compliance. The Department welcomes any comments and data that can help estimate the number of rollovers affected by the exemptions. The Department also invites comments about financial services professionals’ practices for documenting rollover recommendations, particularly the extent to which financial services 574 The burden is estimated as follows: (19,290 financial institutions × 10 requests) × (30 minutes ÷ 60 minutes) = 96,450 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(19,290 financial institutions × 10 requests) × (30 minutes ÷ 60 minutes)] × $159.34 = $15,368,343. PO 00000 Frm 00075 Fmt 4701 Sfmt 4702 75963 professionals use standardized forms or templates to document the reasons for recommending rollovers and how long on average it would take for a financial services professional to document a rollover recommendation.575 While the Department expects that the proposed rule would result in lower fees and expenses for plan participants, the Department faces uncertainty in estimating the magnitude of savings. The Department welcomes any comments and data that can help estimate the amount of decrease in fees and expenses. The Department also expects the proposed rule would result in a reallocation of capital, but the Department faces uncertainty on estimating the new market equilibrium across products and services. The Department welcomes any comments and data that can help estimate how much capital may be reallocated and how much efficiency will be gained. G. Paperwork Reduction Act As part of its continuing effort to reduce paperwork and respondent burden, the Department conducts a preclearance consultation program to allow the general public and Federal agencies to comment on proposed and continuing collections of information in accordance with the Paperwork Reduction Act of 1995 (PRA). This helps ensure that the public understands the Department’s collection instructions, respondents can provide the requested data in the desired format, reporting burden (time and financial resources) is minimized, collection instruments are clearly understood, and the Department can properly assess the impact of collection requirements on respondents. The Department is soliciting comments regarding the information collection request (ICR) included in the proposed amendments to the prohibited transaction exemptions. To obtain a copy of the ICR, contact the PRA addressee below or go to RegInfo.gov. The Department has submitted a copy of 575 The Department assumes that financial services professionals would spend, on average, 10 minutes to document the basis for rollover recommendations in addition to their work researching and determining the recommendations. The Department understands that financial services professionals seek and gather information regarding investor profiles in accordance with other regulators’ rules. Further, financial professionals often discuss the basis for their recommendations and associated risks with their clients as a best practice. After collecting relevant information and discussing the basis for certain recommendations with clients, the Department believes that it would take a relatively short time to document justifications for rollover recommendations. However, the Department welcomes comments about the burden hours associated with documenting rollover recommendations. E:\FR\FM\03NOP3.SGM 03NOP3 75964 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 the rule to the Office of Management and Budget (OMB) in accordance with 44 U.S.C. 3507(d) for review of its information collections. The Department and OMB are particularly interested in comments that: • Evaluate whether the collection of information is necessary for the functions of the agency, including whether the information will have practical utility; • Evaluate the accuracy of the agency’s estimate of the burden of the collection of information, including the validity of the methodology and assumptions used; • Enhance the quality, utility, and clarity of the information to be collected; and • Minimize the burden of the collection of information on those who are to respond, including through the use of appropriate automated, electronic, mechanical, or other technological collection techniques or other forms of information technology (e.g., permitting electronically delivered responses). Commenters may send their views on the Departments’ PRA analysis in the same way they send comments in response to the proposed rule as a whole (for example, through the www.regulations.gov website), including as part of a comment responding to the broader proposed rule. Comments are due by January 2, 2024 to ensure their consideration. ICRs are available at RegInfo.gov (reginfo.gov/public/do/PRAMain). Requests for copies of the ICR can be sent to the PRA addressee: By mail: James Butikofer, Office of Research and Analysis, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue NW, Room N–5718, Washington, DC 20210. By email: ebsa.opr@dol.gov. There is no paperwork burden associated with the proposed rule. However, there is paperwork burden associated with the amendments to PTEs 75–1, 84–24, 86–128, and 2020– 02. The Department estimates that the proposed amendments would not affect the paperwork burden related to PTEs 77–4, 80–3, and 83–1.The PRA analysis for the amendments is included with each of the respective amendments. PTE 75–1 Type of Review: Revision of an existing collection. Agency: Employee Benefits Security Administration, Department of Labor. Titles: Prohibited Transaction Exemption 75–1 (Security Transactions VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 with Broker-Dealers, Reporting Dealers and Banks). OMB Control Number: 1210–0092. Affected Public: Businesses or other for-profits; not for profit institutions. Estimated Number of Respondents: 3,942. Estimated Number of Annual Responses: 3,942. Frequency of Response: Initially, Annually, When engaging in exempted transaction. Estimated Total Annual Burden Hours: 15,768 hours. Estimated Total Annual Burden Cost: $0. PTE 84–24 Type of Review: Revision of an Existing Collection. Agency: Employee Benefits Security Administration, Department of Labor. Title: Prohibited Transaction Exemption (PTE) 84–24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters. OMB Control Number: 1210–0158. Affected Public: Businesses or other for-profits; not for profit institutions. Estimated Number of Respondents: 7,221. Estimated Number of Annual Responses: 119,376. Frequency of Response: Initially, Annually, When engaging in exempted transaction. Estimated Total Annual Burden Hours: 123,726 hours. Estimated Total Annual Burden Cost: $8,457. PTE 86–128 Type of Review: Revision to an existing collection. Agency: Employee Benefits Security Administration, Department of Labor. Titles: PTE 86–128 (Securities BrokerDealers). OMB Control Number: 1210–0059. Affected Public: Businesses or other for-profits; not for profit institutions. Estimated Number of Respondents: 2,179. Estimated Number of Annual Responses: 33,570. Frequency of Response: Initially, Annually, When engaging in exempted transaction. Estimated Total Annual Burden Hours: 2,929 hours. Estimated Total Annual Burden Cost: $37,034. PTE 2020–02 OMB Control Number: 1210–0163. Affected Public: Businesses or other for-profits; not for profit institutions. PO 00000 Frm 00076 Fmt 4701 Sfmt 4702 Estimated Number of Respondents: 19,290. Estimated Number of Annual Responses: 6,504,119. Frequency of Response: Initially, Annually, When engaging in exempted transaction. Estimated Total Annual Burden Hours: 1,044,050 hours. Estimated Total Annual Burden Cost: $167,296. H. Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) 576 imposes certain requirements on rules subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act or any other law.577 Under section 603 of the RFA, agencies must submit an initial regulatory flexibility analysis (IRFA) of a proposal that is likely to have a significant economic impact on a substantial number of small entities, such as small businesses, organizations, and governmental jurisdictions. Below is the Department’s IRFA. 1. Need for and Objectives of the Rule As discussed earlier, the Department believes that changes to the marketplace since 1975, when ‘‘fiduciary’’ was first defined, have made the existing definition inadequate and obsolete. This proposal will update the definition of ‘‘fiduciary’’ to reflect changes to the retirement and financial advice marketplaces since 1975 and add important protections to existing prohibited transaction class exemptions. More detail can be found in the ‘‘Need for Regulatory Action’’ section of this RIA. Smaller plans may be more exposed to conflicts of interest on the part of service providers, because they are less likely than larger plans to receive investment assistance from a service provider that is acting as a fiduciary. Smaller plans have historically received investment assistance from insurance brokers or broker-dealers, who may be subject to conflicts of interest.578 Larger plans may also have sufficient resources and in-house expertise to make investment decisions without outside assistance.579 Additionally, many sponsors of smaller plans may have a lack of knowledge of whether the providers to the plan are fiduciaries and how the provider’s compensation varies 576 5 U.S.C. 601 et seq. U.S.C. 601(2), 603(a); also see 5 U.S.C. 551. 578 U.S. Government Accountability Office, GAO– 11–119, 401(K) Plans: Improved Regulation Could Better Protect Participants from Conflicts of Interest, U.S. Government Accountability Office (2011), https://www.gao.gov/products/GAO-11-119. 579 Id. 577 5 E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules The SBA defines a small business in the financial investments and related activities sector as a business with up to $47.0 million in annual receipts. Over 97 percent of broker-dealers 583 and 99 percent of registered investment based on the investment options selected.580 2. Affected Small Entities The Small Business Administration (SBA) 581 582 defines small businesses and issues size standards by industry. 75965 advisers 584 are small businesses according to the SBA size standards. The Department requests comments on the appropriateness of the size standards used to evaluate the impact of the proposal on small entities. TABLE 5—AFFECTED SMALL FINANCIAL ENTITIES Prohibited transaction exemptions Broker-Dealers .......................................................................... Registered Investment Advisers ............................................... Pure Robo-Advisers ........................................................... Discretionary Fiduciaries ........................................................... Insurance Companies ............................................................... Insurance Producers ................................................................. Banks ........................................................................................ Mutual Fund Companies ........................................................... Investment Company Principal Underwriters ............................ Pension Consultants ................................................................. In its economic analysis for its 2020 rulemaking, the Department included all entities eligible for relief on a variety of transactions and compensation that may not have been covered by prior exemptions in its cost estimate. In 2020, the Department acknowledged that not all these entities will serve as investment advice fiduciaries to plans and IRAs within the meaning of Title I and the Code. Additionally, the Department acknowledged that because other exemptions are also currently available to these entities, it is unclear how widely financial institutions will rely upon the new exemptions and which firms are most likely to choose to rely on it. This analysis, like the analysis from 2020, includes all entities eligible for relief in its cost estimate. These estimates are subject to caveats like those in 2020, though this proposal will expand the parties that will be considered investment advice fiduciaries and also will narrow the exemption alternatives. The Department requests comments on which, and how many, entities may rely on each of the exemptions, as amended. Registered Investment Advisers Small, registered investment advisers who provide investment advice to 580 Id. lotter on DSK11XQN23PROD with PROPOSALS3 581 13 CFR 121.201. 582 15 U.S.C. 631 et seq. 583 This is estimated on the percent of entities with less than $47.0 million for the industry Securities Brokerage, NAICS 523120. See NAICS Association, Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/ business-lists/counts-by-naics-code/. 584 This is estimated on the percent of entities with less than $47.0 million for the industry Investment Advice, NAICS 523930. See NAICS VerDate Sep<11>2014 22:21 Nov 02, 2023 Jkt 262001 2020–02 84–24 75–1 77–4 80–83 86–128 1,835 15,775 10 ........................ 151 ........................ ........................ ........................ 20 930 ........................ ........................ ........................ ........................ 177 3,960 ........................ ........................ 20 930 1,835 ........................ ........................ ........................ ........................ ........................ 1,568 ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ 796 ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ 19 ........................ ........................ ........................ ........................ ........................ ........................ 1,835 ........................ ........................ ........................ ........................ 20 930 retirement plans or retirement investors and registered investment advisers who act as pension consultants would be directly affected by the proposed amendments to PTE 2020–02. As discussed in the Affected Entities section of the RIA, the Department estimates that 16,182 registered investment advisers, including 200 robo-advisers, would be affected by the proposed amendments.585 The Department estimates that 98.7 percent of broker-dealers are small businesses according to the SBA size standards.586 Based on these statistics, the Department estimates that 15,775 registered investment advisers, including those registered with the SEC and the state, would be affected by the proposed amendments.587 robo-advisers, are small entities. The Department requests comment on these estimates. Robo Advisers The proposed changes to PTE 2020– 02 would affect robo-advisers. As discussed in the RIA, the Department estimates that 200 robo-advisers will be affected by the proposed amendments. The Department does not have information on how many of these roboadvisers would be considered small entities. The Department expects that most robo-advisers would not be considered small. For the purposes of this analysis, the Department assumes that 5 percent of robo-advisers, or 10 Broker-Dealers Small broker-dealers who provide investment advice to retirement plans or retirement investors and registered investment advisers who act as pension consultants would be directly affected by the proposed amendments to PTE 2020–02. Additionally, the proposed amendments would modify PTE 75–1 and PTE 86–128 such that small brokerdealers would no longer be able to rely on the exemption for investment advice. The Department does not have information about how many small broker-dealers provide investment advice to plan fiduciaries, plan participants and beneficiaries, and IRA owners. However, the Department believes that few broker-dealers, including small broker-dealers, will continue to rely on PTE 75–1 and PTE 86–128 for transactions that do not involve investment advice. As discussed in the RIA, the Department assumes that 1,894 brokerdealers would be affected by the proposed amendments.588 The Department estimates that 96.9 percent of broker-dealers are small businesses according to the SBA size standards.589 Accordingly, the Department assumes Association, Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/ business-lists/counts-by-naics-code/. 585 For more information on this estimate, refer to the Affected Entities section of the RIA. 586 This is estimated on the percent of entities with less than $47.0 million for the industry Investment Advice, NAICS 523930. See NAICS Association, Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/ business-lists/counts-by-naics-code/. 587 The number of small investment advisers, who do not provide pure robo-advice, is estimated as: (16,182 investment advisers ¥ 200 robo-advisers) × 98.7% = 15,775 small investment advisers. 588 For more information on this estimate, refer to the Affected Entities section of the RIA. 589 This is estimated on the percent of entities with less than $47.0 million for the industry Securities Brokerage, NAICS 523120. See NAICS Association, Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/ business-lists/counts-by-naics-code/. PO 00000 Frm 00077 Fmt 4701 Sfmt 4702 E:\FR\FM\03NOP3.SGM 03NOP3 75966 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules that 1,835 small broker-dealers would be affected by the proposed amendments.590 The Department requests comment on this estimate. lotter on DSK11XQN23PROD with PROPOSALS3 Discretionary Fiduciary The proposed amendments to PTE 86–128 would delete Section IV(a), which provides an exclusion from the conditions of the exemption for certain plans not covering employees, including IRAs, to increase the safeguards available to these retirement investors. Therefore, investment advice fiduciaries to IRAs would have to rely on another exemption, such as PTE 2020–02. Fiduciaries that exercise full discretionary authority or control with respect to IRAs could continue to rely on PTE 86–128, as long as they comply with all of the exemption’s conditions. Under PTE 86–128, discretionary fiduciaries would still be able to effect or execute securities transactions. Any discretionary fiduciaries seeking relief for investment advice, however, would be required to rely on the amended PTE 2020–02. The Department lacks reliable data on the number of investment advice providers who are discretionary fiduciaries that would rely on the amended exemption. For the purposes of this analysis, the Department assumes that the number of discretionary fiduciaries relying on the exemption is no larger than the estimated number of broker-dealers estimated to be affected by the amendments to PTE 2020–02. As discussed in the RIA, the Department assumes that 1,894 broker-dealers would be affected by the proposed amendments.591 The Department estimates that 96.9 percent of brokerdealers are small businesses according to the SBA size standards.592 Accordingly, the Department assumes that 1,835 small discretionary fiduciaries would be affected by the proposed amendments.593 The Department requests comment on this assumption, particularly with regard to what types of entities would be likely to rely on the amended exemption, as well as any underlying data. 590 The estimated of retail broker-dealers affected by this exemption is estimated as: (1,894 brokerdealers × 96.9%) = 1,835 broker dealers. 591 For more information on this estimate, refer to the Affected Entities section of the RIA. 592 This is estimated on the percent of entities with less than $47.0 million for the industry Securities Brokerage, NAICS 523120. See NAICS Association, Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/ business-lists/counts-by-naics-code/. 593 The estimated of retail broker-dealers affected by this exemption is estimated as: (1,894 brokerdealers × 96.9%) = 1,835 broker dealers. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 Insurance Companies The proposed amendments to PTE 2020–02 and PTE 84–24 would affect small insurance companies and captive agents. The existing version of PTE 84– 24 granted relief for captive insurance agents, overseen by insurance companies; however, the proposed amendments would exclude insurance companies and captive agents currently relying on the exemption for investment advice. These entities would be required to comply with the requirements of PTE 2020–02 for relief involving investment advice. As discussed in the RIA, the Department estimates that 398 insurance companies would be affected by the proposed rulemaking. The Department estimates that 70 of these entities are large entities.594 The Department does not have data on whether small insurance companies are more likely to rely on captive or independent distribution channels. For the purposes of this analysis, the Department assumes the percent of small insurance companies using each distribution channel is the same as for all insurance companies. That is, the Department assumes that 46 percent of insurance companies (183 insurance companies) sell annuities through captive distribution channels, of which 151 are estimated to be small insurance companies and 32 are estimated to be large insurance companies.595 Additionally, 54 percent (215 insurance companies) sell annuities through independent distribution channels, of which 177 are estimated to be small insurance companies and the remaining 38 are large insurance companies.596 The Department requests comment on this assumption. Captive Insurance Agents Additionally, as discussed in the Affected Entities section of the RIA, the Department estimates that 1,577 captive insurance agents would be affected by 594 LIMRA estimates that, in 2016, 70 insurers had more than $38.5 million in sales. See LIMRA, U.S. Individual Annuity Yearbook: 2016 Data, LIMRA Secure Retirement Institute (2017). 595 The number of large insurance companies using a captive distribution channel is estimated as: (70 large insurance companies × 46%) = 32 insurance companies. The number of small insurance companies using a captive distribution channel is estimated as: (183 insurance companies ¥ 32 large insurance companies) = 151 small insurance companies. 596 The number of large insurance companies using an independent distribution channel is estimated as: (70 large insurance companies × 54%) = 38 insurance companies. The number of small insurance companies using an independent distribution channel is estimated as: (215 insurance companies ¥ 38 large insurance companies) = 177 small insurance companies. PO 00000 Frm 00078 Fmt 4701 Sfmt 4702 the proposed amendments. The Department estimates that 99 percent of these captive agents work for small entities.597 Thus, the Department estimates there are 1,561 captive insurance agents and brokers that would be affected by the proposed amendments.598 Independent Producers The proposal would also affect independent insurance producers that recommend annuities from unaffiliated financial institutions to retirement investors, as well as the financial institutions whose products are recommended. While captive insurance agents are employees of an insurance company, other insurance agents are ‘‘independent’’ and work with multiple insurance companies. Though these independent insurance producers may rely on PTE 2020–02, the Department believes they are more likely to rely on PTE 84–24. For this reason, the Department only considers captive insurance agents in the analysis for PTE 2020–02. The Department requests comment on how captive insurance agents and independent insurance producers would be affected by the proposed amendments to PTE 2020–02 and PTE 84–24. The Independent Insurance Agents and Brokers of America estimated that there were 40,000 independent producers in 2022. The Department does not have data on what percent of independent producers serve the retirement market. For the purposes of this analysis, the Department assumes that 10 percent, or 4,000, of these independent producers serve the retirement market. The Department estimates that 99 percent of these entities are small entities.599 As such, the Department estimates that 3,960 597 This is estimated on the percent of entities with annual receipts less than $15.0 million for the industry Insurance Agencies and Brokerages, NAICS 524210. See NAICS Association, Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/business-lists/counts-bynaics-code/.; Small Business Administration, Table of Size Standards, Small Business Administration, (December 2022), https://www.sba.gov/document/ support--table-size-standards. 598 The number of captive insurance agents is calculated as: (1,577 captive agents × 99.0%) = 1,561 captive insurance agents serving the annuity market. 599 This is estimated on the percent of entities with annual receipts less than $15.0 million for the industry Insurance Agencies and Brokerages, NAICS 524210. See NAICS Association, Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/business-lists/counts-bynaics-code/; Small Business Administration, Table of Size Standards, Small Business Administration, (December 2022), https://www.sba.gov/document/ support--table-size-standards. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules small independent producers would be affected by the proposed amendment. Pension Consultants The Department expects that pension consultants would continue to rely on the existing 84–24; however, the proposed amendment would exclude pension consultants for plans and IRAs currently relying on the existing PTE 84–24 for investment advice. As such, any pension consultants relying on the existing exemption for investment advice would be required to comply with PTE 2020–02 for relief. In this analysis, the Department includes pension consultants in the affected entities for continued relief for the existing provisions of PTE 84–24 as well as the amended PTE 2020–02. As discussed in the Affected Entities section of the RIA, the Department estimates that 1,011 pension consultants serve the retirement market. The Department estimates that approximately 92 percent of these entities are small entities.600 As such, the Department estimates that 930 pension consultants would be affected by the proposed amendments. lotter on DSK11XQN23PROD with PROPOSALS3 Principal Company Underwriter The Department expects that some investment company principal underwriters for plans and IRAs rely on the existing PTE 84–24. The proposed amendment would exclude investment company principal underwriters for plans and IRAs currently relying on the existing PTE 84–24 for investment advice. As such, any principal company underwriter relying on the existing exemption for investment advice would be required to comply with PTE 2020– 02 for relief. In this analysis, the Department includes principal company underwriters in the affected entities for continued relief for the existing provisions of PTE 84–24 as well as the amended PTE 2020–02. As discussed in the Affected Entities section, the Department assumes that 10 investment company principal underwriters for plans and 10 investment company principal underwriters for IRAs will use this exemption once with one client plan. The Department estimates that approximately 97 percent of these 600 This is estimated on the percent of entities with annual receipts less than $45.5 million for the industry Third Party Administration of Insurance and Pension Funds, NAICS 524292. See NAICS Association, Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/ business-lists/counts-by-naics-code/; Small Business Administration, Table of Size Standards, Small Business Administration, (December 2022), https://www.sba.gov/document/support--table-sizestandards. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 entities are small entities.601 As a result, the Department estimates that all 10 of the estimated small investment company principal underwriters for plans and all 10 of the estimated small investment company principal underwriters for IRAs would be affected by the proposed amendments. Banks and Credit Unions The proposed amendments to PTE 80–83, PTE 75–1, and PTE 2020–02 would affect banks. The proposed amendments would exclude banks currently relying on the existing PTE 80–83 and PTE 75–1 for investment advice. Banks relying on the existing exemptions for investment advice would be required to comply with PTE 2020–02 for relief. Banks with discretionary control could still rely on PTE 80–83 and PTE 75–1. The Department estimates that approximately 77 percent of commercial banks are small banks.602 As discussed in the Affected Entities section of the RIA, the Department estimates that 4,096 banks would use the amended PTE 75–1, of which 3,135 commercial banks are estimated to be small.603 Additionally, in the Affected Entities section of the RIA, the Department estimates that 25 fiduciary-banks with public offering services would use the amended PTE 80–83, of which, 19 are estimated to be small.604 The Department recognizes that these estimates assume that the proportion of small banks using the aforementioned PTEs would be the same as the proposition of all banks using the PTEs. The Department recognizes that the banking industry within the United States is characterized by high market concentration.605 The Department 601 This is estimated on the percent of entities with less than $47.0 million for the industry Investment Banking and Securities Intermediation, NAICS 523150. See NAICS Association, Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/business-lists/counts-bynaics-code/. 602 This is estimated on the percent of commercial banks with assets less than $850 million. See Federal Deposit Insurance Corporation, FOIA RIS Data Bulk Download, Federal Deposit Insurance Corporation, (December 2022), https:// www.fdic.gov/foia/ris/; Small Business Administration, Table of Size Standards, Small Business Administration, (December 2022), https:// www.sba.gov/document/support--table-sizestandards. 603 The number of small commercial banks that would use PTE 75–1 is estimated as: (4,096 banks × 76.5%) = 3,135 small banks. 604 The number of small banks that would use PTE 80–83 is estimated as: (25 fiduciary-banks with public offering services × 76.5%) = 19 banks. 605 Jim DiSalvo, Banking Trends: Has the Banking Industry Become Too Concentrated?, Federal Reserve Bank of Philadelphia, (2023), https:// www.philadelphiafed.org/-/media/frbp/assets/ economy/articles/economic-insights/2023/q1/bt- PO 00000 Frm 00079 Fmt 4701 Sfmt 4702 75967 requests comment on whether small banks are equally as likely as large banks to rely on such exemptions. The Department requests comments on how many small banks would seek exemptive relief under PTE 80–83 and PTE 75–1. As discussed in the Affected Entities section of the RIA, the proposed amendments could also affect credit unions that offer IRAs. The Department estimates that there are approximately 4,782 credit unions.606 In 2023, the SBA estimated that there are 4,586 small credit unions.607 The Department requests comment on what proportion of small credit unions offer IRAs and what proportion sell share certificate products. Additionally, the Department requests comment on how many of these entities currently rely on PTE 2020–02, 75–1, and PTE 80–83 for investment advice. Mutual Fund Companies The proposed amendments would modify PTE 77–4 such that mutual fund company as their providing services to plans can no longer rely on the exemption when giving investment advice. Under the proposal, these mutual funds would need to rely on PTE 2020–02 for relief concerning investment advice. As discussed in the Affected entities section of the RIA, the Department estimates that 812 mutual fund companies would be affected by the proposed amendments to PTE 77–4. The Department estimates that approximately 98 percent of these mutual fund companies, or 796 mutual fund companies, are small.608 Mortgage Pool Sponsors PTE 83–1 provides relief for the sale of certificates in an initial issuance of certificates by the sponsor of a mortgage pool to a plan or IRA when the sponsor, trustee, or insurer of the mortgage pool is a fiduciary with respect to the plan or IRA assets invested in such certificates. The proposed amendments would exclude exemptive relief for investment advice. Under the proposal, these has-the-banking-industry-become-tooconcentrated.pdf. 606 For more information on how the number of credit unions is estimated, refer to the Affected Entities section of the RIA. 607 88 FR 18906 (March 29, 2023). 608 This is estimated on the percent of entities with annual receipts less than $40 million for the industry Open End Investment Fund, NAICS 525910. See NAICS Association, Count by NAICS Industry Sectors, NAICS Association, https:// www.naics.com/business-lists/counts-by-naicscode/; Small Business Administration, Table of Size Standards, Small Business Administration, (December 2022), https://www.sba.gov/document/ support--table-size-standards. E:\FR\FM\03NOP3.SGM 03NOP3 75968 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules entities would need to rely on PTE 2020–02 for relief concerning investment advice. The Department requests comment on how many small entities currently rely on PTE 83–1, and how many of these entities rely on PTE 83–1 for investment advice. 3. Impact of the Rule The Department believes the costs associated with the proposed amendments are modest because the proposal was developed in consideration of other regulatory conduct standards. The Department believes that many financial institutions and investment professionals have already developed compliance structures for similar regulatory standards. The Department does not expect that the proposal will impose a significant compliance burden on small entities. As discussed, the Department estimates that the proposal would impose costs of approximately $253.2 million in the first year and $216.2 million in each subsequent year, of which approximately $248.0 million in the first year and $212.7 million in each subsequent year would be imposed on small financial institutions. The table below summarizes the estimated aggregate cost for small entities due to the proposed amendments to each exemption. The following section describes estimated cost for each entity type for each exemption. TABLE 6—SUMMARY OF TOTAL COST AND AVERAGE PER-ENTITY COST BY EXEMPTION Total cost Per-entity cost Subsequent years First year Subsequent years First year PTE 84–24 ....................................................................................... PTE 2020–02 ................................................................................... Mass Amendments: PTE 75–1 .................................................................................. PTE 77–4 .................................................................................. PTE 80–83 ................................................................................ PTE 83–1 .................................................................................. PTE 1986–128 .......................................................................... $17,425,393 227,505,836 $14,733,328 194,922,497 $3,425 18,029 $2,896 2,757 2,594,856 0 0 0 444,296 2,594,856 0 0 0 444,296 763 0 0 0 242 763 0 0 0 242 Total ................................................................................... 247,970,380 212,694,976 22,459 6,657 Note: The sum of the columns may not sum to total due to rounding. lotter on DSK11XQN23PROD with PROPOSALS3 Preliminary Assumptions and Cost Estimate Inputs The Department also assumes affected entities will likely incur only incremental costs if they are already subject to rules or requirements from the Department or another regulator. The Department acknowledges that not all entities will decide to use the amended PTE 2020–02 and PTE 84–24 for transactions resulting from fiduciary investment advice. Some may instead rely on other existing exemptions that better align with their business models. However, for this cost estimation, the Department assumes that all eligible entities will use the PTE 2020–02 and PTE 84–24 for such transactions. The Department recognizes that this may result in an overestimate, as not all entities will necessarily rely on these exemptions. The Department does not have information on how many retirement investors—including plan beneficiaries, plan participants, and IRA owners— receive electronic disclosures from investment advice fiduciaries. For the purposes of this analysis, the Department assumes that the percent of retirement investors receiving electronic disclosures would be similar to the percent of plan participants receiving electronic disclosures under the Department’s 2020 and 2002 electronic VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 disclosure safe harbors.609 Accordingly, the Department estimates that 94.2 percent of the disclosures sent to retirement investors would be sent electronically, and the remaining 5.8 percent would be sent by mail.610 The Department requests comment on these assumptions. Additionally, the Department assumes that various types of personnel will perform the tasks associated with information collection requests at an hourly wage rate of $63.45 for clerical personnel, $128.11 for a top executive, $133.05 for a computer programmer, $158.94 for an insurance sales agent, $159.34 for a legal professional, $190.63 for a financial manager, and $219.23 for a financial adviser.611 609 85 FR 31884 (May 27, 2020); 67 FR 17263 (Apr. 9, 2002). 610 The Department estimates approximately 94.2 percent of retirement investors receive disclosures electronically. This is the sum of the estimated share of retirement investors receiving electronic disclosures under the 2002 electronic disclosure safe harbor (58.2 percent) and the estimated share of retirement investors receiving electronic disclosures under the 2020 electronic disclosure safe harbor (36 percent). 611 Internal Department calculation based on 2023 labor cost data. For a description of the Department’s methodology for calculating wage rates. See Employee Benefits Security Administration, Labor Cost Inputs Used in the Employee Benefits Security Administration, Office of Policy and Research’s Regulatory Impact Analyses and Paperwork Reduction Act Burden Calculations, Employee Benefits Security PO 00000 Frm 00080 Fmt 4701 Sfmt 4702 Cost Associated With PTE 2020–02 Summary of Affected Entities As discussed in the Affected Entities section of the Regulatory Flexibility Analysis, the Department estimates that 18,721 small financial institutions would be affected by the proposal, comprised of 1,835 broker-dealers, 15,775 registered investment advisers, 10 robo-advisers, 151 insurance companies, 20 investment company principal underwriters, and 930 pension consultants.612 Cost To Review the Rule The Department estimates that all 18,721 of the small financial institutions affected would each need to review the rule, as it applies to their business. The Department estimates that such a review will take a legal professional, on average, nine hours to review the rule, resulting in a total cost of $26.9 million.613 Administration, https://www.dol.gov/sites/dolgov/ files/EBSA/laws-and-regulations/rules-andregulations/technical-appendices/labor-cost-inputsused-in-ebsa-opr-ria-and-pra-burden-calculationsjune-2019.pdf. 612 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section of the Regulatory Flexibility Act analysis. 613 The burden is estimated as: (18,721 entities × 9 hours) = 168,489 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules Cost Associated With Disclosures The proposed amendments would require small entities to modify existing general disclosures and develop additional general disclosures to those required under the existing exemption. For more information on the changed requirements for each disclosure, refer to the descriptions in the preamble and RIA of this document. The Department estimates the marginal cost for each of the disclosure requirements as: • Drafting or updating a written acknowledgement that the financial institution and its investment professional are fiduciaries is estimated to result in an aggregate cost of approximately $123,647.614 • Drafting or updating a written description of service provided is estimated to result in an aggregate cost of $1.6 million in the first year.615 • Drafting the written statement of the Best Interest standard of care owed is estimated to result in an aggregate cost of $1.6 million in the first year.616 • Drafting a written statement informing the investor of their right to obtain a written description of the financial institution’s policies and procedures and information regarding costs, fees, and compensation is estimated to result in an aggregate cost of $1.6 million in the first year.617 • Preparing and sending the general disclosures described above is estimated to result in a de minimis marginal cost.618 • Preparing and sending requested written descriptions of policies and procedures and information regarding costs, fees, and compensation is estimated to result in an annual cost of $1.0 million.619 • Preparing disclosures for PEPs detailing any amounts the financial institution pays to or receives from the PPP or its affiliates, in addition to any conflicts of interest that arise in connection with the investment advice it provides to a PEP is estimated to result in an annual cost of approximately $118,230 in the first applied in the following calculation: (18,721 entities × 9 hours) × $159.34 = $26,847,037. 614 The number of financial entities needing to update their written acknowledgement is estimated as: (1,835 broker-dealers × 10%) + (15,775 registered investment advisers × 10%) + (151 insurers × 10%) = 1,776 financial institutions updating existing disclosures. The number of financial entities needing to draft their written acknowledgement is estimated as: (10 robo-advisers + 930 pension consultants + 20 investment company underwriters) = 960 financial institutions drafting new disclosures. The burden is estimated as: (1,776 financial institutions × (10 minutes ÷ 60 minutes)) + (960 financial institutions × (30 minutes ÷ 60 minutes)) = 776 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(1,776 financial institutions × (10 minutes ÷ 60 minutes)) + (960 financial institutions × (30 minutes ÷ 60 minutes)] × $159.34 = $123,647. For more information on the assumptions included in this calculation, refer to the RIA of this document. 615 The number of financial entities needing to update their written description of services is estimated as: (1,835 broker-dealers + 15,775 registered investment advisers + 151 insurers) = 17,761 financial institutions updating existing disclosures. The number of financial entities needing to draft their written description of services is estimated as: (10 robo-advisers + 930 pension consultants + 20 investment company underwriters) = 960 financial institutions drafting new descriptions. The burden is estimated as: (17,761 financial institutions × (30 minutes ÷ 60 minutes)) + (960 financial institutions × 1 hour) = 9,841 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(17,761 financial institutions × (30 minutes ÷ 60 minutes)) + (960 financial institutions × 1 hour)] × $159.34 = $1,567,985. For more information on the assumptions included in this calculation, refer to the RIA of this document. 616 The burden is estimated as: [(1,835 brokerdealers + 15,775 registered investment advisers) × (30 minutes ÷ 60 minutes)] + [(151 insurers + 10 robo-advisers + 930 pension consultants + 20 investment company underwriters) × 1 hour] = 9,896 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(1,835 broker-dealers + 15,775 registered investment advisers) × (30 minutes ÷ 60 minutes)] + [(151 insurers + 10 roboadvisers + 930 pension consultants, and 20 investment company underwriters) × 1 hour] × $159.34 = $1,576,828. For more information on the assumptions included in this calculation, refer to the RIA of this document. 617 The burden is estimated as: [(1,835 brokerdealers + 15,775 registered investment advisers) × (30 minutes ÷ 60 minutes)] + [(151 insurers + 10 robo-advisers + 930 pension consultants + 20 investment company underwriters) × 1 hour] = 9,916 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(1,835 broker-dealers + 15,775 registered investment advisers) × (30 minutes ÷ 60 minutes)] + [(151 insurers + 10 roboadvisers + 930 pension consultants, and 20 investment company underwriters) × 1 hour] × $159.34 = $1,580,015. For more information on the assumptions included in this calculation, refer to the RIA of this document. 618 Based on FOCUS data, the SEC reported that in 2018, there were 143,333,278 cumulative customer broker-dealer accounts. Of these accounts, the SEC estimates that the 287 small retail brokerdealers held 5,281 customer accounts. The Department used this to estimate that small brokerdealers hold 0.004 percent of the total customer accounts. The Department assumes that the market for other types of financial institutions matches the broker-dealer market and applied this percentage to all other accounts. Accordingly, the burden is estimated as: [(3,183,503 paper disclosures × 0.004%) × 2 pages] × $0.05 = $0.74. The Department considers this to be a de minimis cost. 619 The burden is estimated as: (18,721 financial institutions × 10 disclosures) × (5 minutes ÷ 60 minutes) = 15,601 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: [(18,721 financial institutions × 10 disclosures) × (5 minutes ÷ 60 minutes)] × $63.45 = $989,873. The material cost is estimated as: (18,721 financial institutions × 10 disclosures × 2 pages × $0.05) + (18,721 financial institutions × 10 disclosures × $0.66)) × (5.8%) = $8,252. The total cost is estimated as: $989,873 + $8,252 = $998,125. For more information on the assumptions included in this calculation, refer to the RIA of this document. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 PO 00000 Frm 00081 Fmt 4701 Sfmt 4702 75969 year.620 The Department estimates that this would result in 928 disclosures sent to employers of PEPs.621 This results in an annual cost of approximately $981.622 The Department estimates that the total cost for 18,721 small financial institutions to update their disclosure materials and distribute the newly required disclosures is $6.0 million during the first year and $1.0 million in each subsequent year. Cost Associated With Rollover Documentation and Disclosure As discussed in the cost section of the RIA, the Department estimates that, 3,119,832 rollovers would be affected.623 The Department lacks reliable data on the number of rollovers that would involve small financial institutions. For the purposes of this analysis, the Department assumes the percent of rollovers conducted by small institutions is proportional to the percent of small financial institutions. Accordingly, the Department estimates that 99 percent of these rollovers, or 3,088,633 rollovers, would involve small financial institutions. The Department requests comments on these assumptions. Applying these assumptions to the 18,721 small financial institutions, using the same methodology described above to calculate the rollover 620 The Department assumes that the percent of PEPs that are serviced by small institutions is proportionate the percent of financial institutions that are estimated to be small. This percentage is estimated as: (18,721 small financial institutions/ 19,290 financial institutions) = 97.1%. The number of PEPs services by small financial institutions is estimated as: (382 PEPs × 97.1%) = 371 PEPs. The burden is estimated as: (371 financial institutions × 2 hours) = 742 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (371 financial institutions × 2 hours) × $159.34 = $118,230. For more information on the assumptions included in this calculation, refer to the RIA of this document. 621 As discussed in the RIA, according to filings submitted to the Department by August 22, 2023, there are 955 employers in PEPs. The Department does not have data on how many of these disclosures are service by small financial institutions. For the purposes of this analysis, the Department estimates that the number of employers in PEPs serviced by small financial institutions is proportionate the number of PEPs serviced by small financial institutions. Accordingly, the Department estimates the number of disclosures sent to employers of PEPs in this context as: 955 PEPs × (371/382) = 928 PEPs. 622 The burden is estimated as: (928 PEPs × 1 minute) = 15 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (928 PEPs × 1 minute) × $63.45 = $981. The Department expects that these disclosures would be sent electronically. For more information on the assumptions included in this calculation, refer to the RIA of this document. 623 For more information on how the number of IRA rollovers is estimated, refer to the Affected Entities section of the RIA. E:\FR\FM\03NOP3.SGM 03NOP3 75970 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules documentation costs for all firms, the Department estimates a total annual cost of approximately $191.9 million.624 Costs Associated With Annual Report of Retrospective Review for Financial Institutions PTE 2020–02 requires financial institutions to conduct a retrospective review at least annually that is reasonably designed to prevent violations of and achieve compliance with the conditions of this exemption, Impartial Conduct Standards, and the policies and procedures governing compliance with the exemption. While entities covered by the existing exemption would not incur additional costs with this requirement, roboadvisers, pension consultants, and investment company underwrites, who are not covered under the existing exemption, would incur costs associated with conducting the annual review. This requirement is estimated to result in an annual aggregate cost of $0.2 million.625 Additionally, the Department estimates the cost for a certifying officer to review the report and certify the exemption would result in an estimated annual cost burden of approximately $366,000.626 Cost Associated With Written Policies and Procedures Entities that were not previously complying with PTE 2020–02 would incur the cost to develop policies and procedures in the first year. The requirements to maintain and review policies and procedures is estimated to result in an aggregate cost of $2.2 million in the first year 627 and $1.5 million in subsequent years.628 The proposed amendments would also require financial institutions to provide their complete policies and procedures to the Department upon request. Based on the number of past cases as well as current open cases that would merit such a request, the Department estimates that the Department would request a total of 165 policies and procedures in the first year and 50 policies and procedures in subsequent years. Assuming the number of requests from small institutions is proportionate to the number of small financial institutions, the Department estimates that it would request 160 policies and procedures in the first year and 49 in subsequent years.629 The Department estimates that the requirement would result an estimated cost of approximately $2,538 in the first year 630 and $777 in subsequent years.631 The cost for a firm receiving the request would be approximately $80 in years when a request is made and no cost in most years when no request is made. Summary of Total Cost The Department estimates that in order to meet the additional conditions of the amended PTE 2020–02, affected entities would incur a total cost of $227.5 million in the first year and $194.9 million in subsequent years. The cost by requirement and entity type is summarized in the table below. TABLE 7—THREE-YEAR AVERAGE COST BY TYPE OF ENTITY AND REQUIREMENT SEC registered investment adviser Broker-dealer lotter on DSK11XQN23PROD with PROPOSALS3 Rule Review: Total ....................................................... Per-Entity ............................................... Disclosure: Total ....................................................... Per-Entity ............................................... Rollover Disclosure: Total ....................................................... Per-Entity ............................................... Policies and Procedures: Total ....................................................... Per-Entity ............................................... Retrospective Review: Total ....................................................... Per-Entity ............................................... 21:24 Nov 02, 2023 Insurance company Robo-adviser Pension consultant Investment company underwriter $877,167 478 $3,571,765 478 $3,969,000 478 $72,181 478 $4,780 478 $444,559 478 $9,560 478 249,624 136 1,016,368 136 1,129,414 136 28,559 189 2,414 241 224,469 241 4,827 241 18,804,898 2 76,572,316 2 85,088,322 2 1,547,433 2 102,479 2 9,530,548 2 204,958 2 146,328 80 595,837 80 662,103 80 12,041 80 3,453 345 321,138 345 6,906 345 ........................ ........................ ........................ ........................ ........................ ........................ ........................ ........................ 6,043 604 562,032 604 12,087 604 624 The burden is estimated as: (3,088,633 rollovers × 48% × (30 minutes ÷ 60 minutes)) + (3,088,633 rollovers × 52% × (5 minutes ÷ 60 minutes)) = 875,113 hours. A labor rate of $219.23 is used for a personal financial adviser. The labor rate is applied in the following calculation: (3,088,633 rollovers × 48% × (30 minutes ÷ 60 minutes)) + (3,088,633 rollovers × 52% × (5 minutes ÷ 60 minutes)) × $219.23 = $191,850,954. For more information on the assumptions included in this calculation, refer to the RIA of this document. 625 The number of small entities not currently producing audit reports is estimated as: (10 roboadvisers + 930 pension consultants + 20 investment company underwriters) × 10% = 96 small entities. The number of small entities needing to modify existing audit reports is estimated as: (10 roboadvisers + 930 pension consultants + 20 investment company underwriters) × 90% = 864 small entities. The burden is estimated as: (96 financial institutions × 5 hours) + (864 financial institutions × 1 hour) = 1,344 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(96 financial institutions × 5 hours) + 864 financial institutions VerDate Sep<11>2014 Stateregistered investment adviser Jkt 262001 × 1 hour)] × $159.34 = $214,153. For more information on the assumptions included in this calculation, refer to the RIA of this document. 626 The burden is estimated as: (10 robo-advisers + 930 pension consultants + 20 investment company underwriters) × 2 hours = 1,920 hours. A labor rate of $190.63 is used for a financial manager. The labor rate is applied in the following calculation: (10 robo-advisers + 930 pension consultants + 20 investment company underwriters) × 2 hours) × $190.63 = $366,010. 627 The burden is estimated as: (17,761 × (30 minutes ÷ 60 minutes)) + (960 × 5 hours) = 13,681 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(17,761 × (30 minutes ÷ 60 minutes)) + (960 × 5 hours)] × $159.34 = $2,179,851. For more information on the assumptions included in this calculation, refer to the RIA of this document. 628 The burden is estimated as: (18,721 small financial institutions × (30 minutes ÷ 60 minutes)) = 9,361 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (18,721 small financial PO 00000 Frm 00082 Fmt 4701 Sfmt 4702 institutions × (30 minutes ÷ 60 minutes)) × $159.34 = $1,491,502. 629 The percent of financial institutions that are small is estimated as: (18,721 small financial institutions/19,290 financial institutions) = 97.1%. The number of policies and procedures requested from small financial entities in the first year is estimated as: (165 × 97.1%) = 160. The number of policies and procedures requested from small financial entities in the first year is estimated as: (50 × 97.1%) = 49. 630 The burden is estimated as: (160 × (15 minutes ÷ 60 minutes)) = 40 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (160 × (15 minutes ÷ 60 minutes)) × $63.45 = $2,538. For more information on the assumptions included in this calculation, refer to the RIA of this document. 631 The burden is estimated as: (49 × (15 minutes ÷ 60 minutes)) = 12 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (49 × (15 minutes ÷ 60 minutes)) × $63.45 = $777. For more information on the assumptions included in this calculation, refer to the RIA of this document. E:\FR\FM\03NOP3.SGM 03NOP3 75971 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules TABLE 7—THREE-YEAR AVERAGE COST BY TYPE OF ENTITY AND REQUIREMENT—Continued SEC registered investment adviser Broker-dealer Total: Total ....................................................... Per-Entity ............................................... Investment company underwriter 1,660,214 749 119,169 1,671 11,082,746 1,671 238,339 1,671 47.0 47.0 47.0 47.0 47.0 45.5 47.0 0.001% 0.001% 0.001% 0.002% 0.004% 0.004% 0.004% Cost To Review the Rule The Department estimates that all 5,087 of the small financial institutions affected would each need to review the rule, as it applies to their business. The Department estimates that such a review will take a legal professional, on average, two hours to review the rule, resulting in a total cost of $1.6 million in the first year.633 Costs Associated With Disclosures The proposed amendment would require small independent producers to provide disclosures to retirement investors before engaging in a transaction covered by this exemption. For more information on the changed requirements for each disclosure, refer to the descriptions in the preamble and RIA of this document. The Department estimates the marginal cost for each of the disclosure requirements as: • Drafting or updating a written acknowledgement that the financial institution and its investment professional are fiduciaries is estimated to result in an aggregate cost of approximately $10,000.634 lotter on DSK11XQN23PROD with PROPOSALS3 Pension consultant 90,848,839 696 Summary of Affected Entities As discussed in the Affected Entities section of the Regulatory Flexibility Analysis, the Department expects that 5,087 small financial entities would be affected by the proposed amendments, including 930 pension consultants, 20 investment company principal underwriters, 3,960 independent producers, and 177 insurance companies.632 632 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. 633 The burden is estimated as: (5,087 entities × 2 hours) = 10,174 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (5,087 entities × 2 hours) × $159.34 = $1,621,125. 634 The burden is estimated as: [177 financial institutions + (3,960 independent producers × 5%)] × (10 minutes ÷ 60 minutes) = 63 hours. A labor rate of approximately $159.34 is used for a legal Jkt 262001 Robo-adviser 81,756,286 696 Cost Associated With PTE 84–24 21:24 Nov 02, 2023 Insurance company 20,078,016 696 SBA: Threshold (in millions) ............................ Per-Entity Cost as a Percentage of SBA Threshold: VerDate Sep<11>2014 Stateregistered investment adviser • Drafting the written statement of the Best Interest standard of care owed is estimated to result in an aggregate cost $29,900.635 • Drafting or updating a written description of service provided is estimated to result in an aggregate cost of $0.3 million.636 • Drafting a written statement of the independent producer’s material conflicts of interest and the amount of insurance commission paid in connection with the purchase by a retirement investor of the recommended annuity is estimated to result in an aggregate cost of $0.6 million. 637 For small entities, the Department estimates that developing the disclosures described above would result in a total cost of $1.0 million the first year. professional. The labor rate is applied in the following calculation: [(177 financial institutions + 3,960 independent producers × 5%) × (10 minutes ÷ 60 minutes)] × $159.34 = $9,959. For more information on the assumptions included in this calculation, refer to the RIA of this document. 635 The burden is estimated as: [177 financial institutions + (3,960 independent producers × 5%)] × (30 minutes ÷ 60 minutes) = 188 hours. A labor rate of approximately $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(177 financial institutions + 3,960 independent producers × 5%) × (30 minutes ÷ 60 minutes)] × $159.34 = $29,876. For more information on the assumptions included in this calculation, refer to the RIA of this document. 636 The burden is estimated as: (3,960 independent producers × (30 minutes ÷ 60 minutes)) = 1,980 hours. A labor rate of approximately $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (3,960 independent producers × (30 minutes ÷ 60 minutes)) × $159.34 = $315,493. For more information on the assumptions included in this calculation, refer to the RIA of this document. 637 The burden is estimated as: (3,960 independent producers × 1 hour) = 3,960 hours. A labor rate of approximately $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (3,960 independent producers × 1 hour) × $159.34 = $630,986. For more information on the assumptions included in this calculation, refer to the RIA of this document. PO 00000 Frm 00083 Fmt 4701 Sfmt 4702 Cost Associated With Rollover Documentation and Disclosure The proposed amendment would require an independent producer to provide a rollover disclosure that is similar to the disclosure required in the proposed amendment to PTE 2020–02. As discussed in the RIA, the Department assumes that such disclosures would be prepared by the independent producer. The Department requests comment on whether this would be true for small independent producers. In the RIA, the Department estimates that 52,449 retirement investors would receive documentation on whether the recommended annuity is in their best interest each year.638 The Department does not have data on what proportion of rollovers would be produced by small independent producers. For the purposes of this analysis, the Department assumes that the proportion of rollovers advised by small independent producers is equal to the proportion of independent producers that are small. The Department estimates that 99 percent of rollovers would be produced by small independent producers.639 The Department estimates small independent producers would need to provide 51,925 rollover disclosures annually. This results in an estimated cost of approximately $8.3 million annually.640 These costs likely reflect an 638 For information on this estimate, refer to the estimate of IRAs affected by the proposed amendments to PTE 84–24 in the Affected Entities section of the RIA. 639 This is estimated on the percent of entities with annual receipts less than $15.0 million for the industry Insurance Agencies and Brokerages, NAICS 524210. See NAICS Association, Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/business-lists/counts-bynaics-code/.; Small Business Administration, Table of Size Standards, Small Business Administration, (December 2022), https://www.sba.gov/document/ support--table-size-standards. 640 The burden is estimated as: (51,925 rollovers × 1 hour) = 51,925 hours. A labor rate of approximately $158.94 is used for an independent producer. The labor rate is applied in the following calculation: (51,925 rollovers × 1 hour) × $158.94 E:\FR\FM\03NOP3.SGM Continued 03NOP3 75972 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules overestimate of the total cost, as it assumes that small independent producers would make the same number of recommended rollovers as the average independent producer. The Department requests comment on how many rollover recommendations a small independent producer is likely to make in a given year, on average. Costs Associated With the Provision of Disclosures to Retirement Investors The Department estimates that the number of disclosures that would need to be provided to retirement investors is equal to the number of rollover disclosures, or 51,925 disclosures. Preparing and sending the general disclosures described above is estimated to result in an estimated cost of approximately $18,968.641 Additionally, independent producers would be required to send the documentation to the insurance company. The Department expects that such documentation would be sent electronically and result in a de minimis burden. The Department requests comment on this assumption. lotter on DSK11XQN23PROD with PROPOSALS3 Costs Associated With the Retrospective Review The proposed amendment would require small insurance companies to conduct a retrospective review at least annually. The review would be required to be reasonably designed to prevent violations of and achieve compliance with (1) the Impartial Conduct Standards, (2) the terms of this exemption, and (3) the policies and procedures governing compliance with the exemption. The review would be required to evaluate the effectiveness of the supervision system, any noncompliance discovered in connection with the review, and corrective actions taken or recommended, if any. Insurance companies would be required to annually provide a written report that details the review to a senior executive officer for certification. Insurance companies would also be required to provide the independent producer with = $8,252,960. For more information on the assumptions included in this calculation, refer to the RIA of this document. 641 The labor cost is estimated as: (51,925 disclosures × 5.8% sent by mail × (5 minutes ÷ 60 minutes)) = 251 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (51,925 disclosures × 5.8% sent by mail × (5 minutes ÷ 60 minutes)) × $63.45 = $15,926. The material cost is estimated as: 3,012 rollovers resulting in a paper disclosure × [$0.66 postage + ($0.05 per page × 7 pages)] = $3,042. The total cost is estimated as: $15,926 + $3,042 = $18,968. For more information on the assumptions included in this calculation, refer to the RIA of this document. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 the underlying methodology and results of the retrospective review. As discussed in the RIA, the Department estimates that insurance companies would need to prepare a total of 12,000 retrospective reviews.642 The Department does not have data on the proportion of retrospective reviews that would be prepared by small insurance companies. For the purpose of this analysis, the Department assumes that the number of retrospective reviews prepared by small insurance companies is proportionate to the number of small insurance companies. This results in an estimate of 9,879 retrospective reviews.643 The Department estimates that conducting and drafting the retrospective review would result in an estimated annual cost of $1.6 million.644 Additionally, the Department estimates the cost for a certifying officer to review the report and certify the exemption would result in an estimated cost burden of $0.3 million.645 Finally, the Department estimates that the requirement to provide the methodology and results to each independent producer would result in an annual cost of approximately $52,200.646 Costs Associated With Policies and Procedures The proposed amendment would require insurance companies to establish, maintain, and enforce written policies and procedures for the review of each independent producer’s recommendation before an annuity is issued to a retirement investor. The insurance company’s policies and procedures must mitigate conflicts of 642 For more information on this estimate, refer to the RIA. 643 The number of retrospective reviews prepared by small insurance companies is estimated as: [12,000 × (177/215)] = 9,879 retrospective reviews. 644 This is estimated as: (9,879 retrospective reviews × 1 hour) = 9,879 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (9,879 retrospective reviews × 1 hour) × $159.34 = $1,574,120. For more information on the assumptions included in this calculation, refer to the RIA of this document. 645 The burden is estimated as: (9,879 retrospective reviews × (15 minutes ÷ 60 minutes)) = 2,470 hours. A labor rate of $128.11 is used for a top executive. The labor rate is applied in the following calculation: (9,879 retrospective reviews × (15 minutes ÷ 60 minutes)) × $128.11 = $316,400. For more information on the assumptions included in this calculation, refer to the RIA of this document. 646 This is estimated as: (9,879 retrospective reviews × (5 minutes ÷ 60 minutes)) = 823 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: (9,879 retrospective reviews × (5 minutes ÷ 60 minutes)) × $63.45 = $52,235. For more information on the assumptions included in this calculation, refer to the RIA of this document. PO 00000 Frm 00084 Fmt 4701 Sfmt 4702 interest to the extent that a reasonable person reviewing the policies and procedures and incentive practices as a whole would conclude that they do not create an incentive for the independent producer to place its interests, or those of the insurance, or any affiliate or related entity, ahead of the interests of the retirement investor. Insurance companies’ policies and procedures include a prudent process for determining whether to authorize an independent producer to sell the insurance company’s annuity contracts to retirement investors, and for taking action to protect retirement investors from independent producers who have failed or are likely to fail to adhere to the impartial conduct standards, or who lack the necessary education, training, or skill. Finally, insurance companies must provide their complete policies and procedures to the Department within 10 days upon request. Finally, insurance companies must provide their complete policies and procedures to the Department within 10 days upon request. The Department estimates that drafting or modifying the policies and procedures and procedures would result in an estimated cost of approximately $0.1 million in the first year.647 The requirement to review policies and procedures annually would result in an estimated cost of approximately $56,400 in subsequent years.648 Providing policies and procedures to the Department upon request is estimated to result in a de minimis annual cost.649 647 This is estimated as: (177 small insurance companies × 5 hours) = 885 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (177 small insurance companies × 5 hours) × $159.34 = $141,016. For more information on the assumptions included in this calculation, refer to the RIA of this document. 648 This is estimated as: (177 insurance companies × 2 hours) = 354 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: (177 insurance companies × 2 hours) × $159.34 = $56,406. For more information on the assumptions included in this calculation, refer to the RIA of this document. 649 The number of requests in the first year is estimated as 177 small insurance companies × (39 requests in PTE 2020–02/4,430 small financial institutions in PTE 2020–02) = 2 requests. The number of requests in subsequent years is estimated as: 177 insurance companies × (12 requests in PTE 2020–02/4,430 small financial institutions in PTE 2020–02) = 1 request. The burden is estimated as: ((2 × 15 minutes) ÷ 60 minutes) = 0.50 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: ((2 × 15 minutes) ÷ 60 minutes) × $63.45 = $31.73. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules Costs Associated With the Recordkeeping The proposed amendment would amend the current recordkeeping requirements to incorporate new provisions that are similar to the recordkeeping provision in PTE 2020– 02 for all entities relying on the exemption. The Department estimates that the additional time needed to maintain records for the financial institutions to be consistent with the exemption would require an insurance company and independent producer two hours annually, resulting in an estimated annual cost of $1.3 million.650 Additionally, the Department estimates that the requirement to distribute records upon request would result in an estimated annual cost of $3.1 million.651 75973 Summary of Total Cost The Department estimates that in order to meet the additional conditions of the amended PTE 84–24, affected entities would incur a total cost of $17.4 million in the first year and $14.7 million in subsequent years. The perentity cost by type of entity is broken down in the table below. TABLE 8—COST BY TYPE OF ENTITY AND REQUIREMENT, FIRST YEAR Independent producer Rule Review: Total .......................................................................................................... Per-Entity .................................................................................................. Disclosure: Total: ......................................................................................................... Per-Entity .................................................................................................. Policies and Procedures: Total .......................................................................................................... Per-Entity .................................................................................................. Retrospective Review: Total .......................................................................................................... Per-Entity .................................................................................................. Recordkeeping: Total .......................................................................................................... Per-Entity .................................................................................................. Financial institutions/ insurance companies Mutual fund underwriters $1,261,973 319 $296,372 319 $56,406 319 $6,374 319 9,239,440 2,434 ........................ ........................ 18,802 106 ........................ ........................ ........................ ........................ ........................ ........................ 141,048 1,115 ........................ ........................ ........................ ........................ ........................ ........................ 1,942,755 10,976 ........................ ........................ 4,405,817 397 ........................ ........................ 56,406 319 ........................ ........................ Total Total Cost ................................................................................................. Per-Entity Cost ......................................................................................... 14,907,230 3,960 296,372 319 2,215,417 12,835 6,374 319 SBA: Threshold (in millions) .............................................................................. Per-Entity Cost as a Percentage of SBA Threshold ................................ 15.0 0.021% 45.5 0.001% 47.0 0.027% 47.0 0.001% Costs Associated With the Mass Amendments Cost Associated With PTE 75–1 Summary of Affected Entities The amendment to PTE 75–1 would affect banks, reporting dealers, and broker-dealers registered under the Security Exchange Act of 1934. As discussed in the Affected Entities section above, the Department estimates that 3,403 financial institutions, comprised of 1,835 broker-dealers and 1,568 banks, would use PTE 75–1.652 Costs Associated With Disclosure Requirements in Part V The Department proposes to amend PTE 75–1 Part V to allow an investment advice fiduciary to receive reasonable lotter on DSK11XQN23PROD with PROPOSALS3 Insurance agents and pension consultants 650 This is estimated as: (3,960 independent producers + 177 insurance companies) × 2 hours = 8,274 hours. A labor rate of $158.94 is used for an independent producer. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(3,960 independent producers × 2 hours × $158.94) + (177 insurance companies × 2 hours × $159.34)] = $1,315,211. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 compensation for extending credit to a plan or IRA to avoid a failed purchase or sale of securities involving the plan or IRA if certain conditions are met.653 Prior to the extension of credit, the plan or IRA must receive written a disclosure, including the interest rate or other fees that will be charged on the credit extension as well as the method of determining the balance upon which interest will be charged. As discussed in the RIA, the Department expects that these disclosures are common business practice and would not create an additional burden on small brokerdealers or banks. Costs Associated With Recordkeeping in Parts II and V 651 The burden is estimated as: (3,960 independent producers × 10 requests) × (30 minutes ÷ 60 minutes) = 19,800 hours. A labor rate of $158.94 is used for an independent producer. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: [(3,960 independent producers × 10 requests) × (30 minutes ÷ 60 minutes)] × $158.94 = $3,147,012. 652 For more information on how the number of each type of entity is estimated, refer to the Affected Entities sections of the RIA and the Regulatory Flexibility Analysis. 653 For more information on these conditions, refer to the Preamble and RIA of this document. PO 00000 Frm 00085 Fmt 4701 Sfmt 4702 Additionally, the Department proposes to amend Parts II and V to adjust the recordkeeping requirement to shift the burden from plans and IRAs to financial institutions. The amended class exemption requires financial institutions engaging in the exempted transactions (rather than the plans or IRAs) to maintain all records pertaining to such transactions for six years and provide access to the records upon request to the specified parties. The Department estimates that the total cost for small financial institutions to maintain recordkeeping and provide access to records upon request is approximately $2.6 million annually E:\FR\FM\03NOP3.SGM 03NOP3 75974 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules and the per-firm cost is approximately $763 annually.654 Costs Associated With Removing Fiduciary Investment Advice From Parts III and IV Finally, the Department is proposing to amend Parts III and IV, which currently provide relief for investment advice fiduciaries, by removing fiduciary investment advice from the covered transactions. Investment advice providers would instead have to rely on the amended PTE 2020–02 for exemptive relief covering investment advice transactions. The Department believes that since investment advice providers were already required to provide records and documentation under PTE 2020–02, this amendment would not result in additional costs. Summary of Total Cost The Department estimates that in order to meet the additional conditions of the amended PTE 75–1, affected entities would annually incur a total cost of approximately $2.6 million and a per-firm cost of approximately $763. The per-entity cost by type of entity is broken down in the table below. TABLE 9—COST BY TYPE OF ENTITY AND REQUIREMENT Broker-dealers Recordkeeping: Total .......................................................................................................................................................... Per-Entity .................................................................................................................................................. $1,399,224 763 $1,195,631 763 Total: Total .......................................................................................................................................................... Per-Entity .................................................................................................................................................. 1,399,224 763 1,195,631 763 SBA Threshold (in millions) .............................................................................................................................. Per-Entity Cost as a Percentage of SBA Threshold ................................................................................ 47.0 0.0016% 850 0.0001% Cost Associated With PTE 77–4, PTE 80–83, and PTE 83–1 Summary of Affected Entities The amendment to PTE 77–4 would affect mutual fund companies. As discussed in the Affected Entities section, the Department estimates that 812 mutual fund companies would be affected by the amended PTE 77–4.655 PTE 80–83 allows banks to purchase, on behalf of employee benefit plans, securities issued by a corporation indebted to the bank that is a party in interest to the plan. The Department estimates that 19 small fiduciary-banks with public offering services would be affected by the amended PTE 80–83.656 PTE 83–1 provides relief for the sale of certificates in an initial issuance of certificates by the sponsor of a mortgage pool to a plan or IRA when the sponsor, trustee, or insurer of the mortgage pool is a fiduciary with respect to the plan or IRA assets invested in such certificates. Investment advice providers would instead have to rely on the amended PTE 2020–02 for exemptive relief covering investment advice transactions. The Department believes that since investment advice providers were already required to provide such documentation under these exemptions, these amendments would result in a de minimis change for investment advice providers. Thus, these amendments would not result in measurable additional costs. Cost Associated With PTE 86–128 The Department is proposing to amend PTE 77–4, PTE 80–83, and PTE 83–1 by removing fiduciary investment advice from the covered transactions. Summary of Affected Entities The amendment to PTE 86–128 would affect fiduciaries of employee benefit plans that affect or execute securities transactions and independent plan fiduciaries that authorize the plan or IRA. As discussed in the Affected Entities section, the Department estimates that 1,835 investment advice providers would be affected by the proposed amendments to PTE 86–128. As discussed in the RIA, the Department estimates that 10,000 IRAs, will engage in transactions covered under this class exemption, of which 210 are new IRAs.657 The Department 654 The burden is estimated as: (3,403 small financial institutions × 4 hours) = 13,612 hours. A labor rate of $190.63 is used for a financial manager. The labor rate is applied in the following calculation: (3,403 small financial institutions × 4 hours) × $190.63 = $2,594,856. 655 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. 656 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. 657 For more information on how the number of each type of entity is estimated, refer to the Affected Entities section. 658 Based on data from the NAICS Association for NAICS code 523120, the Departments estimate the percent of businesses within the industry of Securities Brokerage with less than $47 million in Summary of Total Cost lotter on DSK11XQN23PROD with PROPOSALS3 Commercial banks VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 PO 00000 Frm 00086 Fmt 4701 Sfmt 4702 estimates that 96.9 percent of these IRAs would be overseen by a small investment advice provider.658 As such, the Department estimates that, each year, there are 9,690 IRAs, of which 203 are new IRAs that would be overseen by a small investment advice provider.659 Costs Associated With Recordkeeping The Department is proposing to amend Section VI of PTE 86–128 to require financial institutions to maintain for six years the records necessary for the Department, IRS, plan fiduciary, contributing employer or employee organization whose members are covered by the plan, participants and beneficiaries and IRA owners to determine whether conditions of this exemption have been met. As discussed above, the Department estimates that 395 small-business investment advice providers will be affected by this recordkeeping requirement. Applying this assumption to the cost calculations described above, the Department estimates that the total cost for smallbusiness investment advice providers to maintain recordkeeping is $204,011 annual sales. (See NAICS Association. ‘‘Market Analysis Profile: NAICS Code Annual Sales.’’ https://www.naics.com/business-lists/counts-bynaics-code/.) 659 The number of IRAs overseen by a small investment provider is estimated as: 10,000 IRAs × 96.9% = 9,690 IRAs. The number of new IRAs overseen by a small investment provider is estimated as: 210 IRAs × 96.9% = 203 IRAs. E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules annually 660 and the per-firm cost is $111 annually. Cost Associated With the Written Authorization From the Authorizing Fiduciary to the Broker-Dealer Authorizing fiduciaries of IRAs entering into a relationship with an investment advice provider are required to provide the investment advice provider with advance written authorization to perform transactions for the IRA. As discussed in the Summary of Affected Entities section for this exemption in this analysis, the Department estimates that approximately 44 authorizing fiduciaries are expected to send an advance written authorization. Applying this assumption to the cost calculations described above, the Department estimates that the total cost to send an advance written authorization is approximately $9,169 annually.661 The per-transaction cost is $45 annually, and the per-firm cost is $5 annually. lotter on DSK11XQN23PROD with PROPOSALS3 Cost Associated With the Provision of Materials for Evaluation of Authorization of Transaction Prior to a written authorization being made, the financial institution must provide the authorizing fiduciary with a copy of the exemption, a form for termination of authorization, a description of placement practices, and any other reasonably available information. This information is assumed to be readily available. As described above, the Department assumes this information will be sent to the 203 IRAs that enter into an 660 The burden is estimated as: 1,835 brokerdealers × ((30 minutes + 15 minutes) ÷ 60 minutes) = 1,376 hours. The labor rates of $190.63 and $63.45 are used for a financial manager and a clerical worker, respectively. The labor rate is applied in the following calculation: (1,835 brokerdealers × (30 minutes ÷ 60 minutes) × $190.63 per hour) + (1,835 broker-dealers × (15 minutes ÷ 60 minutes) × $63.45) = $204,011. For more information on the assumptions included in this calculation, refer to the RIA of this document. 661 The burden for a legal professional to prepare the authorization form is estimated as: 203 IRAs × (15 minutes ÷ 60 minutes) per IRA = 51 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: 203 IRA × (15 minutes ÷ 60 minutes) per IRA × $159.34 per hour = $8,087. The burden of clerical staff to send the authorization is estimated as: 203 IRA × (5 minutes ÷ 60 minutes) per IRA = 16 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: 203 IRA × (5 minutes ÷ 60 minutes) per IRA × $63.45 = $1,073. The material cost and postage cost associated with the authorization is estimated as: 203 authorizations for IRAs × 5.8% paper × $0.76 = $9. Therefore, the total cost to send an advance written authorization is estimated as: $8,087 + $1,073 + $9 = $9,169. For more information on the assumptions included in this calculation, refer to the RIA of this document. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 agreement with a financial institution. Applying this assumption to the cost calculations described above, Department estimates that the total cost to send the materials is $1,085 annually.662 The per-transaction cost is $5 annually, and the per-firm cost is $0.59 annually. Cost Associated With the Provision of an Annual Termination Form Financial institutions must annually supply each authorizing fiduciary with a form expressly providing an election to terminate the written authorization. The Department estimates that 395 investment advice providers would prepare the termination form, and 9,690 IRAs would receive the form. Applying these assumptions to the cost calculations described above, Department estimates that the total cost to prepare and send the annual termination form is approximately $197,857 annually.663 The pertransaction cost is $20 annually, and the per-firm cost is $108 annually. Transaction Reporting The investment advice provider engaging in a covered transaction must give the authorizing fiduciary either a confirmation slips for each securities transaction or a quarterly report containing specified information. As discussed above, the provision of the confirmation is already required under SEC regulations. Therefore, if the transaction reporting requirement is satisfied by sending confirmation slips, 662 The burden for a clerical worker to prepare the information is estimated as: 203 IRAs × (5 minutes ÷ 60 minutes) per IRA = 17 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: 203 IRAs × (5 minutes ÷ 60 minutes) per IRA × $63.45 per hour = $1,073. The material and postage cost are estimated as: 203 IRAs × 5.8% paper × (7 pages × $0.05 per page + $0.66 for postage) = $12. Therefore, the total cost to send the materials is estimated as: $1,073 + $12 = $1,085. For more information on the assumptions included in this calculation, refer to the RIA of this document. 663 The burden for a legal professional to prepare the forms is estimated as: 1,835 broker-dealers × (30 minutes ÷ 60 minutes) = 918 hours. A labor rate of $159.34 is used for a legal professional. The labor rate is applied in the following calculation: 1,835 broker-dealers × (30 minutes ÷ 60 minutes) × 159.34 = $146,194. The burden for a clerical worker to prepare and send the forms is estimated as: 9,900 IRAs × (5 minutes ÷ 60 minutes) = 808 hours. A labor rate of $63.45 is used for a clerical worker. The labor rate is applied in the following calculation: 9,690 IRAs × (5 minutes ÷ 60 minutes) × $63.45 = $51,236. The material and postage cost associated with the forms is estimated as: 9,690 IRAs × 5.8% paper × (2 pages × $0.05 per page + $0.66 for postage) = $427. Therefore, total cost to prepare and send the annual termination form is estimated as: $146,194 + $51,236 + $427 = $197,857. For more information on the assumptions included in this calculation, refer to the RIA of this document. PO 00000 Frm 00087 Fmt 4701 Sfmt 4702 75975 no additional hour and cost burden will occur. Annual Statement Broker-dealers are required to send an annual report to each authorizing fiduciary containing the same information as the quarterly report and all security transaction-related charges, the brokerage placement practices, and a portfolio turnover ratio. The Department assumes this information could be sent together. Therefore, the clerical staff hours required to prepare and distribute the report has been included with the provision of annual termination form requirement, and no additional burden has been reported. However, collecting and generating the information required for the annual report is reported as a burden. As discussed above, the Department estimates that 2,100 IRAs will receive an annual report. Applying these assumptions to the cost calculations described above, the Department estimates that the total cost to collect and generate information for the annual report is $141 annually.664 The peraccount cost is $0.01 annually, and the per-firm cost is $0.08 annually. Report of Commissions Paid A discretionary trustee must provide each authorizing fiduciary with an annual report that separately shows the commissions paid to affiliated brokers and non-affiliated brokers on both a total dollar basis and a cents-per-share basis. The burden to prepare and distribute the report is included with the provision of annual termination form requirement, because both items are required to be sent annually. However, the collection and generation of the information for the quarterly report is reported as a burden. As described above, the Department estimates that 2,100 IRAs will receive a report of the commissions paid. Applying this assumption to the cost calculations described above, the Department estimates that the total cost to collect and generate information for the report of commission paid is $56 annually.665 The per-account cost is 664 The mailing cost is estimated as: 5 pages × $0.05 per page = $0.25. The mailing rate is applied in the following calculation: 9,690 IRAs × 5.8% paper × $0.25 = $141. For more information on the assumptions included in this calculation, refer to the RIA of this document. 665 The mailing cost is estimated as: 2 pages × $0.05 per page = $0.10. The mailing cost is applied in the following calculation: 9,690 IRAs × 5.8% × $0.10 = $56. For more information on the assumptions included in this calculation, refer to the RIA of this document. E:\FR\FM\03NOP3.SGM 03NOP3 75976 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules $0.01 annually, and the per-firm cost is less than $0.03 annually. Financial institutions are also required to report total of all transaction-related charges incurred by the plan in connection with covered transactions, the allocation of such charges among various persons, as well as a conspicuous statement about the negotiability of brokerage commissions and an estimate of future commission rates to the plan fiduciaries. The information must be tracked, assigned to specific plans, and reported. As described above, the Department estimates that 9,690 IRAs will be affected by this requirement. Applying this assumption to the cost calculations described above, the Department estimates that the total cost to report this information is $31,977 annually.666 The per-account cost is $3.30 annually, and the per-firm cost is $17 annually. This results in a total annual cost of $32,033.667 Summary of Total Cost The Department estimates that in order to meet the additional conditions of the amended PTE 86–128, affected entities would annually incur a total cost of $444,296 and a per-firm cost of $242. The per-entity cost is broken down in the table below. TABLE 10—COST BY TYPE OF ENTITY AND REQUIREMENT Total cost Recordkeeping ................................................................................................................................................. Written Authorization from the Authorizing Fiduciary to the Broker-Dealer .................................................... Provision of Materials for Evaluation of Authorization of Transaction ............................................................ Annual Termination Form ................................................................................................................................ Annual Statement ............................................................................................................................................ Report of Commissions Paid ........................................................................................................................... $204,011 9,169 1,085 197,857 141 32,033 $111 5 0.59 108 0.08 17 Total .......................................................................................................................................................... 444,296 242 SBA Threshold (in millions) ............................................................................................................................................................. Per-Entity Cost as a Percentage of SBA Threshold ....................................................................................................................... 47.0 0.0005% 4. Duplicate, Overlapping, or Relevant Federal Rules The rules in ERISA and the Code that govern advice on the investment of retirement assets overlap with SEC rules that govern the conduct of investment advisers and broker-dealers that advise retail investors. The Department considered conduct standards set by other regulators, such as SEC, NAIC, and FINRA, in developing the proposal, with the goal of avoiding overlapping or duplicative requirements. If the requirements overlap, compliance with the other disclosure or recordkeeping requirements can be used to satisfy the exemption, as long as the conditions are satisfied. lotter on DSK11XQN23PROD with PROPOSALS3 Per-entity cost 5. Description of Alternatives Considered Section 604 of the RFA requires the Department to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities. The Department tried to align the requirements in this proposal with the requirements set by other regulators to minimize regulatory burden. The Department considered not amending PTE 2020–02 and leaving the exemption in its present form. The Department supports the existing PTE 666 This burden is estimated as: 9,690 IRAs × $3.30 = $31,977. For more information on the assumptions included in this calculation, refer to the RIA of this document. 667 This burden is estimated as: $56 + $31,977 = $32,033. VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 2020–02 and has retained its core components in the amendment, including the Impartial Conduct Standards and the requirement for strong policies and procedures. However, the Department believes that additional protections are necessary to ensure that fiduciary investment advice providers adhere to the stringent standards outlined in PTE 2020–02. Therefore, the proposed amendments clarify and tighten the existing text of PTE 2020–02 to enhance the disclosure requirements and strengthen the disqualification provisions. The Department has considered requiring financial institutions to disclosure the sources of third-party compensation received in connection with recommended investment products on a public web page in PTE 2020–02. When considering this requirement, the Department discussed exempting small financial institutions from this disclosure. The Department estimates that such a disclosure would cost small entities $4.8 million 668 with an average per-entity cost of $1,064. The Department requests comment on whether small financial institutions current provide website disclosures or have the technological infrastructure to do so. I. Unfunded Mandate Reform Act Title II of the Unfunded Mandates Reform Act of 1995 669 requires each federal agency to prepare a written statement assessing the effects of any federal mandate in a proposed or final rule that may result in an expenditure of $100 million or more (adjusted annually for inflation with the base year 1995) in any one year by state, local, and tribal governments, in the aggregate, or by the private sector. That threshold is approximately $177 million in 2023. For purposes of the Unfunded Mandates Reform Act, this proposal is expected to have an impact on the private sector. For the purposes of the proposal, the RIA shall meet the UMRA obligations. 668 This estimate is based on the assumption that satisfying this requirement would require a computer programmer to spend, on average, 8 hours. A labor rate of $133.05 is used for a computer programmer professional. The cost is estimated as: (4,512 small financial institutions × 8 hours) × $133.05 = $4,802,573. 669 Unfunded Mandates Reform Act of 1995, Public Law 104–4, 109 Stat. 48, (1995). PO 00000 Frm 00088 Fmt 4701 Sfmt 4702 J. Federalism Statement Executive Order 13132 outlines the fundamental principles of federalism. It also requires federal agencies to adhere to specific criteria in formulating and implementing policies that have ‘‘substantial direct effects’’ on the states, the relationship between the national government and states, or on the distribution of power and responsibilities among the various levels of government. Federal agencies promulgating regulations that have these federalism implications must E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules consult with state and local officials throughout the process of developing the proposed regulation. As discussed throughout this analysis, this proposed regulatory action would affect the insurance industry pertaining to annuities. These entities are also regulated by states, many of whom, as discussed in the discussion of the regulatory baseline, have taken regulatory or legislative actions. The Department has carefully considered the regulatory landscape in the states and worked to ensure that its proposed regulations would not impose obligations on advisers that are inconsistent with their responsibilities under state law, including the obligations imposed in states that based their laws on the NAIC Model Regulation. Nor would these proposed regulations impose obligations or costs on the state regulators. As discussed above, however, the Department has increased the protections afforded by many of these laws, consistent with its own responsibilities under ERISA, and has endeavored to lend greater uniformity on the provision of advice to retirement investors, so that advisers covered by the rule must all abide by a uniform fiduciary standard. The Department has had discussions with state insurance regulators and stateregulated parties about these issues including the need to ensure that retirement investors have sufficient protection when receiving investment advice. The Department expects to continue discussions with state insurance regulators to ensure that this proposed regulation complements the protections provided by the NAIC Model Rule. The Department also expects to continue its discussion with state securities regulators. lotter on DSK11XQN23PROD with PROPOSALS3 Authority This regulation is proposed pursuant to the authority in section 505 of ERISA (Pub. L. 93–406, 88 Stat. 894 (Sept. 2, 1974); 29 U.S.C. 1135) and section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713 (Oct. 17, 1978)), 3 CFR, 1978 Comp. 332, effective December 31, 1978 (44 FR 1065 (Jan. 3, 1979)), 3 CFR, 1978 Comp. 332, 5 U.S.C. App. 237, and under Secretary of Labor’s Order No. 1– 2011, 77 FR 1088 (Jan. 9, 2012). List of Subjects in 29 CFR Part 2510 Employee benefit plans, Employee Retirement Income Security Act, Pensions, Plan assets. For the reasons set forth in the preamble, the Department is proposing to amend part 2510 of subchapter B of Chapter XXV of Title 29 of the Code of Federal Regulations as follows: VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 PART 2510—DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, AND G OF THIS CHAPTER 1. The authority citation for part 2510 is revised to read as follows: ■ Authority: 29 U.S.C. 1002(1)–(8), 1002(13)– (16), 1002(20), 1002(21), 1002(34), 1002(37), 1002(38), 1002(40)–(44), 1031, and 1135; Div. O, Title I, Sec. 101, Pub. L. 116–94, 133 Stat. 2534 (Dec. 20, 2019); Div. T, Title I, Sec. 105, Pub. L. 117–328, 136 Stat. 4459 (Dec. 29, 2022); Secretary of Labor’s Order 1–2011, 77 FR 1088 (Jan. 9, 2012); Secs. 2510.3–21, 2510.3–101 and 2510.3–102 also issued under Sec. 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 237 (E.O. 12108, 44 FR 1065 (Jan. 3, 1979)), and 29 U.S.C. 1135 note. Section 2510.3–38 also issued under Sec. 1(b) Pub. L. 105–72, 111 Stat. 1457 (Nov. 10, 1997). 2. Revise § 2510.3–21 to read as follows: ■ § 2510.3–21 Definition of ‘‘Fiduciary.’’ (a)–(b) [Reserved] (c) Investment advice. (1) For purposes of section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (the Act), section 4975(e)(3)(B) of the Internal Revenue Code (Code), and this paragraph, a person renders ‘‘investment advice’’ with respect to moneys or other property of a plan or IRA if the person makes a recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property (as defined in paragraph (f)(10) of this section) to the plan, plan fiduciary, plan participant or beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary (retirement investor), and the person satisfies paragraphs (c)(1)(i), (ii), or (iii) of this section: (i) 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; (ii) 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 PO 00000 Frm 00089 Fmt 4701 Sfmt 4702 75977 (iii) The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations. (iv) For purposes of this paragraph, when advice is directed to a plan or IRA fiduciary, the relevant retirement investor is both the plan or IRA and the fiduciary. (v) Written statements by a person disclaiming status as a fiduciary under the Act, the Code, or this section, or disclaiming the conditions set forth in paragraph (c)(1)(ii) of this section, will not control to the extent they are inconsistent with the person’s oral communications, marketing materials, applicable State or Federal law, or other interactions with the retirement investor. (2) A person who is a fiduciary with respect to a plan or IRA by reason of rendering investment advice (as defined in paragraph (c)(1) of this section) for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan or IRA, or having any authority or responsibility to do so, shall not be deemed to be a fiduciary regarding any assets of the plan or IRA with respect to which such person does not have any discretionary authority, discretionary control, or discretionary responsibility, does not exercise any authority or control, does not render investment advice (as defined in paragraph (c)(1) of this section) for a fee or other compensation, and does not have any authority or responsibility to render such investment advice, provided that nothing in this paragraph shall be deemed to: (i) Exempt such person from the provisions of section 405(a) of the Act concerning liability for fiduciary breaches by other fiduciaries with respect to any assets of the plan; or (ii) Exclude such person from the definition of the term ‘‘party in interest’’ (as set forth in section 3(14)(B) of the Act) or ‘‘disqualified person’’ (as set forth in section 4975(e)(2) of the Code) with respect to any assets of the plan or IRA. (d) Execution of securities transactions. (1) A person who is a broker or dealer registered under the Securities Exchange Act of 1934, a reporting dealer who makes primary markets in securities of the United States Government or of an agency of the United States Government and reports daily to the Federal Reserve Bank of New York its positions with respect to such securities and borrowings thereon, or a bank supervised by the United States or a State, shall not be deemed to be a E:\FR\FM\03NOP3.SGM 03NOP3 lotter on DSK11XQN23PROD with PROPOSALS3 75978 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules fiduciary, within the meaning of section 3(21)(A) of the Act or section 4975(e)(3)(B) of the Code, with respect to a plan or an IRA solely because such person executes transactions for the purchase or sale of securities on behalf of such plan or IRA in the ordinary course of its business as a broker, dealer, or bank, pursuant to instructions of a fiduciary with respect to such plan or IRA, if: (i) Neither the fiduciary nor any affiliate of such fiduciary is such broker, dealer, or bank; and (ii) The instructions specify (A) The security to be purchased or sold, (B) A price range within which such security is to be purchased or sold, or, if such security is issued by an openend investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1, et seq.), a price which is determined in accordance with Rule 22c–1 under the Investment Company Act of 1940 (17 CFR 270.22c– 1), (C) A time span during which such security may be purchased or sold (not to exceed five business days), and (D) The minimum or maximum quantity of such security which may be purchased or sold within such price range, or, in the case of a security issued by an open-end investment company registered under the Investment Company Act of 1940, the minimum or maximum quantity of such security which may be purchased or sold, or the value of such security in dollar amount which may be purchased or sold, at the price referred to in paragraph (d)(1)(ii)(B) of this section. (2) A person who is a broker-dealer, reporting dealer, or bank which is a fiduciary with respect to a plan or IRA solely by reason of the possession or exercise of discretionary authority or discretionary control in the management of the plan or IRA or the management or disposition of plan or IRA assets in connection with the execution of a transaction or transactions for the purchase or sale of securities on behalf of such plan or IRA which fails to comply with the provisions of paragraph (d)(1) of this section shall not be deemed to be a fiduciary regarding any assets of the plan or IRA with respect to which such broker-dealer, reporting dealer or bank does not have any discretionary authority, discretionary control, or discretionary responsibility, does not exercise any authority or control, does not render investment advice (as defined in paragraph (c)(1) of this section) for a fee or other compensation, and does not have any authority or responsibility to VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 render such investment advice, provided that nothing in this paragraph shall be deemed to: (i) Exempt such broker-dealer, reporting dealer, or bank from the provisions of section 405(a) of the Act concerning liability for fiduciary breaches by other fiduciaries with respect to any assets of the plan; or (ii) Exclude such broker-dealer, reporting dealer, or bank from the definition, of the term ‘‘party in interest’’ (as set forth in section 3(14)(B) of the Act) or ‘‘disqualified person’’ (as set forth in section 4975(e)(2) of the Code) with respect to any assets of the plan or IRA. (e) For a fee or other compensation, direct or indirect. For purposes of section 3(21)(A)(ii) of the Act and section 4975(e)(3)(B) of the Code, a person provides investment advice ‘‘for a fee or other compensation, direct or indirect,’’ if the person (or any affiliate) receives any explicit fee or compensation, from any source, for the advice or the person (or any affiliate) receives any other fee or other compensation, from any source, in connection with or as a result of the recommended purchase, sale, or holding of a security or other investment property or the provision of investment advice, including, though not limited to, commissions, loads, finder’s fees, revenue sharing payments, shareholder servicing fees, marketing or distribution fees, mark ups or mark downs, underwriting compensation, payments to brokerage firms in return for shelf space, recruitment compensation paid in connection with transfers of accounts to a registered representative’s new broker-dealer firm, expense reimbursements, gifts and gratuities, or other non-cash compensation. A fee or compensation is paid ‘‘in connection with or as a result of’’ such transaction or service if the fee or compensation would not have been paid but for the recommended transaction or the provision of advice, including if eligibility for or the amount of the fee or compensation is based in whole or in part on the recommended transaction or the provision of advice. (f) Definitions. For purposes of this section— (1) The term ‘‘affiliate’’ means any person directly or indirectly, through one or more intermediaries, controlling, controlled by, or under common control with such person; any officer, director, partner, employee, representative, or relative (as defined in paragraph (f)(12) of this section) of such person; and any corporation or partnership of which such person is an officer, director, or partner. PO 00000 Frm 00090 Fmt 4701 Sfmt 4702 (2) The term ‘‘control’’ means the power to exercise a controlling influence over the management or policies of a person other than an individual. (3) The term ‘‘IRA’’ means any account or annuity described in Code section 4975(e)(1)(B) through (F), including, for example, an individual retirement account described in section 408(a) of the Code and a health savings account described in section 223(d) of the Code. (4) The term ‘‘IRA owner’’ means, with respect to an IRA, either the person who is the owner of the IRA or the person for whose benefit the IRA was established. (5) The term ‘‘IRA fiduciary’’ means a person described in section 4975(e)(3) of the Code with respect to an IRA. (6) The term ‘‘plan’’ means any employee benefit plan described in section 3(3) of the Act and any plan described in section 4975(e)(1)(A) of the Code. (7) The term ‘‘plan fiduciary’’ means a person described in section (3)(21)(A) of the Act and/or 4975(e)(3) of the Code with respect to a plan. For purposes of this section, a participant or beneficiary of the plan who is receiving advice is not a ‘‘plan fiduciary’’ with respect to the plan. (8) The term ‘‘plan participant’’ or ‘‘participant’’ means, for a plan described in section 3(3) of the Act, a person described in section 3(7) of the Act. (9) The term ‘‘beneficiary’’ means, for a plan described in section 3(3) of the Act, a person described in section 3(8) of the Act. (10) The phrase ‘‘recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property’’ means recommendations: (i) As to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, as to investment strategy, or as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred, or distributed from the plan or IRA; (ii) As to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., account types such as brokerage versus advisory) or voting of proxies appurtenant to securities; and E:\FR\FM\03NOP3.SGM 03NOP3 Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS3 (iii) As to rolling over, transferring, or distributing assets from a plan or IRA, including recommendations as to whether to engage in the transaction, the amount, the form, and the destination of such a rollover, transfer, or distribution. (11) 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. (12) The term ‘‘relative’’ means a person described in section 3(15) of the Act and section 4975(e)(6) of the Code or a brother, a sister, or a spouse of a brother or sister. (g) Applicability. Effective December 31, 1978, section 102 of the Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 237, transferred the authority of the Secretary of the Treasury to promulgate regulations of the type published herein to the Secretary of Labor. Accordingly, in addition to defining a ‘‘fiduciary’’ for purposes of section 3(21)(A)(ii) of the Act, this section applies to the parallel provision in section 4975(e)(3)(B) of the Code, which defines a ‘‘fiduciary’’ of a plan defined in Code section 4975 (including an IRA) for purposes of the prohibited transaction provisions in the Code. For example, a person who satisfies paragraphs (c)(1) and (e) of this section in connection with a recommendation to a retirement investor that is an employee benefit plan as defined in section 3(3) of the Act, a fiduciary of such a plan, or a participant or beneficiary of such plan, including a recommendation concerning the rollover of assets currently held in a plan to an IRA, is a fiduciary subject to Title I of the Act. (h) Continued applicability of State law regulating insurance, banking, or securities. Nothing in this section shall be construed to affect or modify the provisions of section 514 of Title I of the Act, including the savings clause in section 514(b)(2)(A) for State laws that regulate insurance, banking, or securities. Signed at Washington, DC, this 24th day of October, 2023. Lisa M. Gomez, Assistant Secretary, Employee Benefits Security Administration, Department of Labor. [FR Doc. 2023–23779 Filed 11–2–23; 8:45 am] BILLING CODE 4510–29–P VerDate Sep<11>2014 21:24 Nov 02, 2023 Jkt 262001 8540, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor (this is not a tollfree number). SUPPLEMENTARY INFORMATION: DEPARTMENT OF LABOR Employee Benefits Security Administration 29 CFR Part 2550 [Application No. D–12057] ZRIN 1210–ZA32 Proposed Amendment to Prohibited Transaction Exemption 2020–02 Employee Benefits Security Administration, U.S. Department of Labor. ACTION: Notice of Proposed Amendment to Class Exemption PTE 2020–02. AGENCY: This document contains a notice of pendency before the Department of Labor (the Department) of a proposed amendment to class prohibited transaction exemption (PTE) 2020–02, which provides relief for certain compensation received by investment advice fiduciaries. The proposed amendment would affect participants and beneficiaries of Plans, IRA owners, and fiduciaries with respect to such Plans and IRAs. DATES: Public Comments. Comments are due on or before January 2, 2024. Public Hearing. The Department anticipates holding a public hearing approximately 45 days following the date of publication in the Federal Register. Specific information regarding the date, location, and submission of requests to testify will be published in a notice in the Federal Register. Applicability Date. The Department proposes to make the final amendment effective 60 days after it is published in the Federal Register. ADDRESSES: All written comments concerning the proposed amendment should be sent to the Employee Benefits Security Administration, Office of Exemption Determinations, U.S. Department of Labor through the Federal eRulemaking Portal and identified by Application No. D–12057: Federal eRulemaking Portal: Visit https://www.regulations.gov. Follow the instructions for sending comments. Docket: For access to the docket to read background documents or comments, including the plain-language summary of the proposal required by the Providing Accountability Through Transparency Act of 2023, please go to the Federal eRulemaking Portal at https://www.regulations.gov. See SUPPLEMENTARY INFORMATION below for additional information regarding comments. FOR FURTHER INFORMATION CONTACT: Susan Wilker, telephone (202) 693– SUMMARY: PO 00000 Frm 00091 Fmt 4701 Sfmt 4702 75979 Comment Instructions Warning: All comments received will be included in the public record without change and will be made available online at https:// www.regulations.gov, including any personal information provided, unless the comment includes information claimed to be confidential or other information whose disclosure is restricted by statute. If you submit a comment, EBSA recommends that you include your name and other contact information, but DO NOT submit information that you consider to be confidential, or otherwise protected (such as Social Security number or an unlisted phone number), or confidential business information that you do not want publicly disclosed. However, if EBSA cannot read your comment due to technical difficulties and cannot contact you for clarification, EBSA might not be able to consider your comment. Additionally, the https:// www.regulations.gov website is an ‘‘anonymous access’’ system, which means EBSA will not know your identity or contact information unless you provide it. If you send an email directly to EBSA without going through https://www.regulations.gov, your email address will be automatically captured and included as part of the comment that is placed in the public record and made available on the internet. Background The proposed amendment to PTE 2020–02 would provide additional protections for employee benefit plans described in ERISA section 3(3) and any plan described in Code section 4975(e)(1)(A) (Plans) and investors and additional clarity for investment advice fiduciaries seeking to receive compensation for their advice, including as a result of advice to roll over assets from a Plan to an individual retirement account (IRA), and to engage in principal transactions, that would otherwise violate the prohibited transaction provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA) and Internal Revenue Code (Code) section 4975. As described elsewhere in this edition of the Federal Register, the Department is proposing to amend the regulation defining when a person renders ‘‘investment advice for a fee or other compensation, direct or indirect’’ with E:\FR\FM\03NOP3.SGM 03NOP3

Agencies

[Federal Register Volume 88, Number 212 (Friday, November 3, 2023)]
[Proposed Rules]
[Pages 75890-75979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-23779]

[[Page 75889]]

Vol. 88

Friday,

No. 212

November 3, 2023

Part IV

Department of Labor

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Employee Benefits Security Administration

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29 CFR Parts 2510, et al.

Retirement Security Rule: Definition of an Investment Advice Fiduciary;
Proposed Rule

Federal Register / Vol. 88, No. 212 / Friday, November 3, 2023 /
Proposed Rules

[[Page 75890]]

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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: Proposed rule.

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SUMMARY: This document contains a proposed amendment to the regulation
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 proposal also would amend the
parallel regulation defining for purposes of Title II of ERISA, a
``fiduciary'' of a plan defined in Internal Revenue Code (Code) section
4975, including an individual retirement account. The Department also
is publishing elsewhere in today's Federal Register proposed 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:
Public Comments. Comments are due on or before January 2, 2024.
Public Hearing. The Department anticipates holding a public hearing
approximately 45 days following the date of publication in the Federal
Register. Specific information regarding the date, location, and
submission of requests to testify will be published in the Federal
Register.

ADDRESSES: You may submit written comments, identified by RIN 1210-
AC02, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for sending comments.
Mail: Office of Regulations and Interpretations, Employee
Benefits Security Administration, Room N-5655, U.S. Department of
Labor, 200 Constitution Ave. NW, Washington, DC 20210, Attention:
Definition of Fiduciary--RIN 1210-AC02.
Instructions: All submissions must include the agency name and
Regulatory Identifier Number (RIN) for this rulemaking. If you submit
comments electronically, do not submit paper copies.
Warning: Do not include any personally identifiable information or
confidential business information that you do not want publicly
disclosed. Comments are public records posted on the internet as
received and can be retrieved by most internet search engines.
Docket: For access to the docket to read background documents,
including the plain-language summary of the proposed rule of not more
than 100 words in length required by the Providing Accountability
Through Transparency Act of 2023, or comments, go to the Federal
eRulemaking Portal at https://www.regulations.gov. Comments will be
available to the public, without charge, online at https://www.regulations.gov and https://www.dol.gov/agencies/ebsa and at the
Public Disclosure Room, Employee Benefits Security Administration, Room
N-1513, 200 Constitution Ave, NW, Washington, DC 20210.

FOR FURTHER INFORMATION CONTACT:
For questions regarding the proposed rule: contact Luisa
Grillo-Chope, Office of Regulations and Interpretations, Employee
Benefits Security Administration (EBSA), 202-693-8510. (Not a toll-free
number).
For questions regarding the prohibited transaction
exemptions: contact Susan Wilker, Office of Exemption Determinations,
EBSA, 202-693-8540. (Not a toll-free number).
For questions regarding the Regulatory Impact Analysis:
contact James Butikofer, Office of Research and Analysis, EBSA, 202-
693-8434. (Not a toll-free number).
Customer Service Information: Individuals interested in obtaining
information from the Department of Labor concerning Title I of ERISA
and employee benefit plans may call the Employee Benefits Security
Administration (EBSA) Toll-Free Hotline, at 1-866-444-EBSA (3272) or
visit the Department of Labor's website (https://www.dol.gov/agencies/ebsa).

SUPPLEMENTARY INFORMATION:

A. Executive Summary

The Department of Labor is proposing a new regulatory definition of
an investment advice fiduciary for purposes of Title 1 and Title II of
the Employee Retirement Income Security Act (ERISA). As compared to the
existing regulatory definition, which dates to 1975, the proposal
better reflects the text and the purposes of the statute and better
protects the interests of retirement investors, consistent with the
mission of the Department's Employee Benefits Security Administration
to ensure the security of the retirement, health, and other workplace-
related benefits of America's workers and their families.
The Department proposes that a person would be an investment advice
fiduciary under Title I and Title II of ERISA if they provide
investment advice or make an investment recommendation to a retirement
investor (i.e., a plan, plan fiduciary, plan participant or
beneficiary, IRA, IRA owner or beneficiary or IRA fiduciary); the
advice or recommendation is provided ``for a fee or other compensation,
direct or indirect,'' as defined in the proposed rule; and the person
makes the recommendation in one of the following contexts:

The person either directly or indirectly (e.g., through
or together with any affiliate) has discretionary authority or
control, whether or not pursuant to an agreement, arrangement, or
understanding, with respect to purchasing or selling securities or
other investment property for the retirement investor;
The person either directly or indirectly (e.g., through
or together with any affiliate) makes investment recommendations to
investors on a regular basis as part of their business and the
recommendation is provided under circumstances indicating that the
recommendation is based on the particular needs or individual
circumstances of the retirement investor and may be relied upon by
the retirement investor as a basis for investment decisions that are
in the retirement investor's best interest; or
The person making the recommendation represents or
acknowledges that they are acting as a fiduciary when making
investment recommendations.

The proposal is designed to ensure that ERISA's fiduciary standards
uniformly apply to all advice that retirement investors receive
concerning investment of their retirement assets in a way that ensures
that retirement investors' reasonable expectations are honored when
receiving advice from financial professionals who hold themselves out
as trusted advice providers. The Department's proposal fills an
important gap in those advice relationships where advice is not
currently required to be provided in the retirement investor's best
interest, and the investor may not be aware of that fact.
Together with proposed amendments to administrative exemptions 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

[[Page 75891]]

proposal is intended to protect the interests of retirement investors
by requiring investment advice providers to adhere to stringent conduct
standards and mitigate their conflicts of interest. The proposals'
compliance obligations are generally consistent with the best interest
obligations set forth in the Securities and Exchange Commission's
(SEC's) 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 proposals will stem from the uniform application of the ERISA
fiduciary standard and exemption conditions to investment advice to
retirement investors. Under the proposals, advice providers would be
subject to a common fiduciary standard that would reduce retirement
investor exposure to conflicted advice that erodes investment returns
and would be obligated to adhere to protective conflict-mitigation
requirements.\1\ Requiring advice providers to compete under a common
fiduciary standard will be especially beneficial with respect to those
transactions that currently are not uniformly covered by fiduciary
protections consistent with ERISA's high standards, including
recommendations to roll over assets from a workplace retirement plan to
an IRA (e.g., in those cases in which the advice provider is not
subject to Federal securities law standards and, as is often the case,
does not have an ongoing and preexisting relationship with the
customer); investment recommendations with respect to many commonly
purchased retirement annuities, such as fixed index annuities; and
investment recommendations to plan fiduciaries.
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\1\ The references in this document to a ``fiduciary'' are
intended to mean an ERISA fiduciary unless otherwise stated.
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B. Background

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

ERISA\2\ is a ``comprehensive statute designed to promote the
interests of employees and their beneficiaries in employee benefit
plans.'' \3\ Under the statutory framework, Title I of ERISA imposes
duties and restrictions on individuals 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 they also must discharge their
duties with respect to a plan ``solely in the interest of the
participants and beneficiaries.'' \4\
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\2\ 29 U.S.C. 1001, et seq.
\3\ Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 90 (1983).
\4\ 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.''
\5\ These prohibitions broadly forbid a fiduciary from ``deal[ing] with
the assets of the plan in his own interest or for his own account,''
and ``receiv[ing] any consideration for his own personal account from
any party dealing with such plan in connection with a transaction
involving the assets of the plan.'' \6\ Congress also gave the
Department authority to grant conditional administrative exemptions
from the prohibited transaction provisions, but only if the Department
finds that the exemption is (1) administratively feasible for the
Department, (2) in the interests of the plan and of its participants
and beneficiaries, and (3) protective of the rights of participants and
beneficiaries of such plan.\7\
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\5\ Harris Trust Sav. Bank v. Salomon Smith Barney Inc., 530
U.S. 238, 241-42 (2000) (citation and quotation marks omitted).
\6\ ERISA section 406(b)(1), (3), 29 U.S.C. 1106(b)(1), (3).
\7\ ERISA section 408(a), 29 U.S.C. 1108(a).
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Title II of ERISA, codified in the Code,\8\ governs the conduct of
fiduciaries to plans defined in Code section 4975(e)(1), which includes
IRAs.\9\ 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.\10\ Under
the Reorganization Plan No. 4 of 1978, which Congress subsequently
ratified in 1984,\11\ the Department was generally granted authority to
interpret the fiduciary definition and issue administrative exemptions
from the prohibited transaction provisions in Code section 4975.\12\
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\8\ This proposal 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 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.
\9\ For purposes of the proposed 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 would
apply only with respect to employee pension benefit plans and IRAs
that are retirement savings vehicles. As discussed herein, the rule
would apply with respect to plans as defined in Title I and Title II
of ERISA that make investments. In this regard, see also proposed
paragraph (f)(11) 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.''
\10\ 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.''
\11\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
\12\ 5 U.S.C. App. (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; therefore, the
determination of who is a ``fiduciary'' is of central importance. ERISA
includes a statutory definition of a fiduciary at section 3(21)(A),
which provides that a person is a fiduciary with respect to a plan to
the extent the person (i) exercises any discretionary authority or
discretionary control respecting management of such plan or exercises
any authority or control respecting management or disposition of its
assets, (ii) renders investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of
such plan, or has any authority or responsibility to do so, or (iii)
has any discretionary authority or discretionary responsibility in the
administration of such plan.\13\ The same

[[Page 75892]]

definition of a fiduciary is in Code section 4975(e)(3).\14\
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\13\ ERISA section 3(21)(A), 29 U.S.C. 1002(21)(A).
\14\ 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 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, prohibitions on conflicts of interest, and 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 savers.
In 1975, shortly after ERISA was enacted, the Department issued a
regulation at 29 CFR 2510.3-21(c)(1) that defined the circumstances
under which a person renders ``investment advice'' to an employee
benefit plan within the meaning of section 3(21)(A)(ii) of ERISA, such
that said person would be a fiduciary under ERISA.\15\ The regulation
narrowed the plain and expansive language of 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. The Department of the Treasury issued a virtually identical
regulation under Code section 4975(e)(3), at 26 CFR 54.4975-9(c)(1),
which applies to plans defined in Code section 4975.\16\
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\15\ 40 FR 50842 (Oct. 31, 1975).
\16\ 40 FR 50840 (Oct. 31, 1975). The issuance of this
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 themselves). In 1975,
IRAs had only recently been created (by ERISA itself), and 401(k) plans
did not yet exist. Retirement assets were principally held in pension
funds controlled by large employers and professional money managers.
Now, IRAs and participant-directed plans, such as 401(k) plans, have
become more common retirement vehicles as opposed to traditional
pension plans, and rollovers of employee benefit plan assets to IRAs
are commonplace. Individuals, regardless of their financial literacy,
have thus become increasingly responsible for their own retirement
savings.
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 or be aware of and guard against the investment advice
provider's conflicts of interest. However, as a result of the five-part
test in the 1975 rule, many investment professionals, consultants, and
financial advisers have no obligation to adhere to the fiduciary
standards in Title I of ERISA or to the prohibited transaction rules,
despite the critical role they play in guiding plan and IRA
investments. In many situations, this disconnect serves to undermine
the reasonable expectations of retirement investors in today's
marketplace; a retirement investor may reasonably expect that the
advice they are receiving is fiduciary advice even when 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 prohibited transaction exemption (PTE).
Recently, other regulators have recognized the need for change in
the regulation of investment recommendations and have imposed enhanced
conduct standards on financial professionals that 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, which addressed the conduct standards applicable to
investment advisers under the Investment Advisers Act of 1940 (Advisers
Act).\18\ As the SEC has repeatedly stated, ``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\
---------------------------------------------------------------------------

\17\ Regulation Best Interest: The Broker-Dealer Standard of
Conduct, 84 FR 33318 (July 12, 2019).
\18\ Commission Interpretation Regarding Standard of Conduct for
Investment Advisers, 84 FR 33669 (July 12, 2019).
\19\ Regulation Best Interest release, 84 FR 33318, 33330 (July
12, 2019).
\20\ Id. at 33318.
---------------------------------------------------------------------------

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 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 goal of the NAIC working group 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

[[Page 75893]]

interests above consumers' interests.'' \22\ According to the NAIC, as
of August 23, 2023, 43 jurisdictions have implemented the revisions to
the model regulation.\23\
---------------------------------------------------------------------------

\21\ Available at www.naic.org/store/free/MDL-275.pdf.
\22\ See https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard.
\23\ NAIC Annuity Suitability & Best Interest Standard web page,
https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard.
---------------------------------------------------------------------------

These regulatory efforts 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.\24\ After
careful review of the existing regulatory landscape, the Department too
has concluded that existing regulations should be revised to reflect
current realities in light of the text and purposes of Title I of ERISA
and the Code.
---------------------------------------------------------------------------

\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 6.5.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).
---------------------------------------------------------------------------

In the current landscape, the existing 1975 regulation no longer
serves ERISA's purpose to protect the interests of retirement
investors, especially 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 sophisticated 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, 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 interest. Like these other regulators, the
Department has concluded that it is appropriate to revisit the existing
regulatory structure to ensure that it properly and uniformly 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 rules,
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 (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 five-part
test had been created in a very different context and investment advice
marketplace. 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.
---------------------------------------------------------------------------

\25\ Definition of the Term ``Fiduciary''; Conflict of Interest
Rule--Retirement Investment Advice, 81 FR 20946 (Apr. 8, 2016). The
Department issued its first proposal to amend the regulatory
definition of an investment advice fiduciary in 2010. 75 FR 65263
(Oct. 22, 2010). The first proposed rulemaking provided for a 90-day
comment period, from October 22, 2010, through January 20, 2011. The
comment period was extended for 14 days. The Department held a
public hearing in Washington, DC, on March 1-2, 2011, after which
the Department welcomed public comment for 15 days in order for
commenters to supplement hearing testimony or otherwise provide
additional comments. That proposal was withdrawn, and the Department
issued a second proposal in 2015 along with related proposed
prohibited transaction exemptions and proposed amendments to
existing exemptions. 80 FR 21928 (Apr. 20, 2015). The 2015 proposal
and proposed related exemptions initially provided for 75-day
comment periods, ending on July 6, 2015, but the Department extended
the comment periods to July 21, 2015. Before finalizing the 2015
proposals, the Department held a public hearing in Washington, DC on
August 10-13, 2015, at which over 75 speakers testified. The
transcript of the hearing was made available on September 8, 2015,
and the Department provided additional opportunity for interested
persons to submit comments on the proposal and proposed related
exemptions or on the transcript until September 24, 2015. A total of
over 3,000 comment letters were received on the 2015 proposals.
There were also over 300,000 submissions made as part of 30 separate
petitions submitted on the proposals. These comments and petitions,
which came from consumer groups, plan sponsors, financial services
companies, academics, elected government officials, trade and
industry associations, and others, were both in support of and in
opposition to the 2015 proposals.
---------------------------------------------------------------------------

The Department identified the ``regular basis'' element \26\ in the
five-part test as a particularly important example of the 1975
regulation's shortcomings. 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 the Act's protective purpose. The Department pointed to
examples of transactions in which a 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.
---------------------------------------------------------------------------

\26\ 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.'' 29 CFR 2510.3-
21(c)(1)(ii)(B).
---------------------------------------------------------------------------

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. 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. 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.
In adopting the 2016 Final Rule, the Department presented an
economic

[[Page 75894]]

analysis demonstrating that investment advice providers are compensated
in ways that create conflicts of interest, which can bias investment
advice and erode plan and IRA investment results.\27\ The Department
noted that many of the consultants and advisers who provide investment-
related advice and recommendations received compensation from the
financial institutions whose investment products they recommend, and
that this can give the consultants and advisers a strong bias,
conscious or unconscious, to favor investments that provide them
greater compensation rather than those that may be most appropriate for
the retirement investors. The Department also found that consolidation
of the financial services industry and developments in compensation
arrangements multiplied the opportunities for self-dealing and reduced
the transparency of fees. Most significantly, the Department explained
in its analysis that, in the absence of the 2016 Final Rule, the
underperformance associated with conflicts of interest in the mutual
funds segment alone could have cost IRA investors between $95 billion
and $189 billion over the following 10 years and between $202 billion
and $404 billion over the following 20 years. While these projected
losses were substantial, they represented only a portion of what IRA
investors stood to lose as a result of conflicted investment advice.
---------------------------------------------------------------------------

\27\ U.S. Department of Labor, Fiduciary Investment Advice
Regulatory Impact Analysis (2016), available at https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
---------------------------------------------------------------------------

The Department expected that compliance with the 2016 Final Rule
would deliver large gains for retirement investors by reducing these
losses. The Department cited evidence that holding broker-dealer
representatives to fiduciary standards at the State level does not
impair access to their services. Additionally, the Department noted
that financial services firms already were moving toward more fee-based
advice models, considering flatter compensation models, and integrating
technology. The Department anticipated that the rule would accelerate
these types of innovations for the benefit of plan and IRA investors.
The 2016 Final Rule defined an investment advice fiduciary for
purposes of Title I or 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. 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.
One main issue highlighted in the 2016 Final Rule involved the
protection of retirement investors in the context of recommendations to
roll over assets from workplace retirement plans to IRAs.\28\ As the
Department noted, decisions to take a benefit distribution or engage in
rollover transactions are among the most, if not the most, important
financial decisions that plan participants and beneficiaries and IRA
owners and beneficiaries are called upon to make. The Department
explained that when an individual is a participant in a workplace
retirement plan, their employer or other plan sponsor has both the
incentive and the fiduciary duty to facilitate sound investment
choices, while in an IRA, both good and bad investment choices are more
numerous, and investment advice providers often operate under conflicts
of interest. The Department illustrated the consequence of these
rollovers to both individuals and investment advice providers, by
pointing out that rollovers from employee benefit plans to IRAs were
expected to approach $2.4 trillion cumulatively from 2016 through
2020.\29\ Investment advice providers have a strong economic incentive
to recommend that investors roll over assets into one of their
institutions' IRAs, whether from a plan or from an IRA account at
another financial institution, or even between different account types.
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.\30\
---------------------------------------------------------------------------

\28\ See 81 FR 20946, 20964 (Apr. 8, 2016).
\29\ Id. at 20949 fn. 7 (citing Cerulli Associates, ``U.S.
Retirement Markets 2015'').
\30\ Id.
---------------------------------------------------------------------------

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) \31\ and the Class
Exemption for Principal Transactions in Certain Assets Between
Investment Advice Fiduciaries and Employee Benefit Plans and IRAs
(Principal Transactions Exemption).\32\ 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.
---------------------------------------------------------------------------

\31\ 81 FR 21002 (Apr. 8, 2016).
\32\ 81 FR 21089 (Apr. 8, 2016).
---------------------------------------------------------------------------

The new exemptions included conditions designed to protect the
interests of the retirement investors receiving advice. 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. 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. 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.
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.\33\
---------------------------------------------------------------------------

\33\ 81 FR 21139 (Apr. 8, 2016); 81 FR 21147 (Apr. 8, 2016); 81
FR 21181 (Apr. 8, 2016); 81 FR 21208 (Apr. 8, 2016).
---------------------------------------------------------------------------

3. Litigation Over the 2016 Rulemaking

The 2016 Final Rule and related new and amended exemptions
(collectively, the 2016 Rulemaking) was challenged in multiple
lawsuits. In National Association for Fixed Annuities v. Perez, a
district court in the District of

[[Page 75895]]

Columbia upheld the 2016 Rulemaking in the context of a broad challenge
on multiple grounds.\34\ 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.' '' \35\
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.\36\
---------------------------------------------------------------------------

\34\ 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).
\35\ NAFA, 217 F. Supp. 3d at 23, 27-28.
\36\ 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).
---------------------------------------------------------------------------

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 \37\ and vacated the 2016
Rulemaking in toto, in Chamber of Commerce v. United States Department
of Labor (Chamber).\38\ 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.'' \39\
---------------------------------------------------------------------------

\37\ 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.'').
\38\ See Chamber, 885 F.3d 360 (5th Cir. 2018). But see id. at
391 (``Noting 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).
\39\ Id. at 369 (citing Nationwide Mut. Ins. Co. v. Darden, 503
U.S. 318, 322 (1992)); see id. at 376 (``In short, whether one looks
at DOL's original regulation, the SEC, Federal and state legislation
governing investment adviser fiduciary status vis-[agrave]-vis
broker-dealers, or case law tying investment advice for a fee to
ongoing relationships between adviser and client, the answer is the
same: `investment advice for a fee' was widely interpreted hand in
hand with the relationship of trust and confidence that
characterizes fiduciary status.''). But see id. at 392 (``One area
in which Congress has departed from the common law of trusts is with
the statutory definition of `fiduciary.' ERISA does not define
`fiduciary' `in terms of formal trusteeship, but in functional terms
of control and authority over the plan, . . . thus expanding the
universe of persons subject to fiduciary duties . . .'') (Stewart,
C.J., dissenting) (quoting Mertens v. Hewitt Assocs., 508 U.S. 248,
262 (1993)). As discussed herein, in the period since the Fifth
Circuit decision, the SEC and the National Association of Insurance
Commissioners (NAIC) have moved forward with strengthened standards
for recommendations provided by broker-dealers and insurance agents,
respectively.
---------------------------------------------------------------------------

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.'' \40\
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.\41\ Under the
Code, IRA investors do not have a private right of action.\42\ Instead,
the primary remedy for a violation of the prohibited transaction
provisions under the Code is the assessment of an excise tax.\43\ 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.\44\
---------------------------------------------------------------------------

\40\ Id. at 384.
\41\ Id.
\42\ See id.
\43\ Code section 4975(a), (b).
\44\ Chamber, 885 F.3d 360, 384-85 (5th Cir. 2018); see Code
section 4975.
---------------------------------------------------------------------------

4. Field Assistance Bulletin No. 2018-02

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).\45\ 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.
In adopting the temporary enforcement policy, the Department cited
uncertainty about fiduciary obligations and the scope of exemptive
relief following the court's opinion that could disrupt existing
investment advice arrangements to the detriment of retirement plans,
retirement investors, and financial institutions, as well as the
significant resources some financial institutions had devoted towards
compliance with the BIC Exemption and the Principal Transactions
Exemption.
---------------------------------------------------------------------------

\45\ Available at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-02.
---------------------------------------------------------------------------

5. Subsequent Actions by the Department

On July 7, 2020, the Department proposed a new prohibited
transaction class exemption under Title I and Title II of ERISA for
investment advice fiduciaries with respect to employee benefit plans
and IRAs, called ``Improving Investment Advice for Workers &
Retirees.'' \46\ The proposal stated it was in response to informal
industry feedback seeking a permanent administrative class exemption
based on FAB 2018-02.\47\ On the same day, 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.\48\ 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.
---------------------------------------------------------------------------

\46\ 85 FR 40834 (July 7, 2020).
\47\ Id. at 40835.
\48\ 85 FR 40589 (July 7, 2020).
---------------------------------------------------------------------------

On December 18, 2020, the Department adopted the Improving

[[Page 75896]]

Investment Advice for Workers & Retirees exemption as PTE 2020-02.\49\
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. The exemption expressly covers
prohibited transactions resulting from both rollover advice and advice
on how to invest assets within a plan or IRA, and imposes new
conditions on investment advice fiduciaries providing such advice. In
particular, PTE 2020-02 mirrors the core of the BIC and Principal
Transaction exemptions' requirements of best interest standards of
conduct and policies and procedures to ensure the advice is provided
consistent with those standards.
---------------------------------------------------------------------------

\49\ 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 an employee
benefit plan to an IRA would constitute fiduciary investment advice
under the 1975 regulation's five-part test. As in the 2016 Rulemaking,
the Department again made clear in 2020 that rollover recommendations
were a central concern in the regulation of fiduciary investment
advice. Accordingly, the Department emphasized the importance to a
retirement investor of the rollover decision, as well as the fact that
investment advice providers may have a strong economic incentive to
recommend that investors roll over assets into one of their
institutions' IRAs.
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 regulatory test, constitutes
fiduciary investment advice. The preamble interpretation also discussed
when a recommendation to roll over assets from an employee benefit plan
to an IRA would satisfy the ``regular basis'' requirement.
Additionally, the preamble set forth the Department's interpretation of
the 1975 regulation's requirement of ``a mutual agreement, arrangement,
or understanding'' that the investment advice will serve as ``a primary
basis for investment decisions.'' In April 2021, the Department issued
Frequently Asked Questions (FAQs) that, among other things, summarized
aspects of the preamble interpretation.\50\
---------------------------------------------------------------------------

\50\ New Fiduciary Advice Exemption: PTE 2020-02 Improving
Investment Advice for Workers & Retirees Frequently Asked Questions,
https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.
---------------------------------------------------------------------------

The Department's preamble interpretation and certain FAQs were
challenged in two lawsuits filed after the issuance of PTE 2020-02.\51\
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 future proceedings.\52\ 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 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.\53\
---------------------------------------------------------------------------

\51\ 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).
\52\ Am. Sec. Ass'n. v. U.S. Dep't of Labor, 2023 WL 1967573, at
* 22-23.
\53\ 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 proposal, the district court judge has not yet taken action
regarding the magistrate judge's report and recommendations.
---------------------------------------------------------------------------

6. 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 investment 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 a best interest standard
applicable to broker-dealers when making a recommendation of any
securities transaction or investment strategy involving securities to
retail customers.\54\ The SEC also issued its SEC Investment Adviser
Interpretation regarding the conduct standards applicable to investment
advisers under the Advisers Act.\55\ As part of the package, the SEC
adopted new Form CRS, which requires registered investment advisers
under the Advisers Act and registered broker-dealers to provide retail
investors with a short relationship summary with specified information
(SEC Form CRS).\56\
---------------------------------------------------------------------------

\54\ 84 FR 33318 (July 12, 2019).
\55\ 84 FR 33669 (July 12, 2019).
\56\ Form CRS Relationship Summary; Amendments to Form ADV, 84
FR 33492 (July 12, 2019).
---------------------------------------------------------------------------

According to the SEC, these actions were designed to enhance and
clarify the standards of conduct applicable to broker-dealers and
investment advisers, help retail investors better understand and
compare the services offered and make an informed choice of the
relationship best suited to their needs and circumstances, and foster
greater consistency in the level of protections provided by each
regime, particularly at the point in time that a recommendation is
made.\57\
---------------------------------------------------------------------------

\57\ Regulation Best Interest release, 84 FR 33318, 33321 (July
12, 2019).
---------------------------------------------------------------------------

The SEC's Regulation Best Interest enhanced the broker-dealer
standard of conduct ``beyond existing suitability obligations.'' \58\
According to the SEC, this
---------------------------------------------------------------------------

\58\ Id. at 33318.

[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.\59\
---------------------------------------------------------------------------

\59\ 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:

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;
Have a reasonable basis to believe that the
recommendation is in the best interest of a particular retail
customer based on that

[[Page 75897]]

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
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.\60\
---------------------------------------------------------------------------

\60\ Id. at 33372.

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

Identify and at a minimum disclose, or eliminate, all
conflicts of interest associated with such recommendations;
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;
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; and
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.\61\
---------------------------------------------------------------------------

\61\ Id. at 33476.

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.'' \62\
---------------------------------------------------------------------------

\62\ 17 CFR 240.15l-1.
---------------------------------------------------------------------------

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.'' \63\ The SEC emphasized that, ``[i]mportantly, regardless
of whether a retail investor chooses a broker-dealer or an investment
adviser (or both), the retail investor will be entitled to a
recommendation (from a broker-dealer) or advice (from an investment
adviser) that is in the best interest of the retail investor and that
does not place the interests of the firm or the financial professional
ahead of the interests of the retail investor.'' \64\ The SEC also
noted that the standard of conduct cannot be satisfied through
disclosure alone.\65\
---------------------------------------------------------------------------

\63\ Regulation Best Interest release, 84 FR 33318, 33320 (July
12, 2019).
\64\ Id. at 33321.
\65\ Id. at 33390.
---------------------------------------------------------------------------

The best interest standard in 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
an investment strategy involving securities (including account
recommendations).'' According to the SEC, this language encompasses
recommendations to roll over or transfer assets in a workplace
retirement plan account to an IRA, and recommendations to take a plan
distribution.\66\ 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.\67\
---------------------------------------------------------------------------

\66\ Id. at 33337.
\67\ 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
Investment Advisers Act.\68\ 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.'' \69\ 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.'' \70\ The fiduciary duty under the Federal securities
laws requires an adviser ``to adopt the principal's goals, objectives,
or ends.'' \71\ The SEC stated:
---------------------------------------------------------------------------

\68\ 84 FR 33669 (July 12, 2019).
\69\ Id. at 33671 (footnote omitted).
\70\ Id. at 33670.
\71\ 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.\72\
---------------------------------------------------------------------------

\72\ Id. (footnote omitted).

The SEC further stated, ``[t]he investment adviser's fiduciary duty
is broad and applies to the entire adviser-client relationship.'' \73\
---------------------------------------------------------------------------

\73\ Id at 33670. See also id. n 17 citing authorities where the
Commission previously recognized the broad scope of section 206 of
the Advisers Act in a variety of contexts.
---------------------------------------------------------------------------

The SEC also adopted a new required disclosure of a ``Form CRS
Relationship Summary,'' under which registered investment advisers
under the Advisers Act and broker-dealers must provide retail investors
with certain information about the nature of their relationship with
their financial professional. One of the purposes of the Form CRS is to
help retail investors better understand and compare the services and
relationships that investment advisers and broker-dealers offer in a
way that is distinct from other required disclosures under the Federal
securities laws.\74\ Form CRS also includes a link to a dedicated page
on the SEC's investor education website, Investor.gov, which offers
educational information about broker-dealers and investment advisers,
and other materials.\75\
---------------------------------------------------------------------------

\74\ 84 FR 33492, 33493 (July 12, 2019).
\75\ Id. SEC staff has since issued guidance on Regulation Best
Interest, Form CRS, and related interpretations, including staff
bulletins on care obligations, conflicts of interest, and account
recommendations for retail investors, which are available at https://www.sec.gov/regulation-best-interest.
---------------------------------------------------------------------------

State Legislative and Regulatory Developments
Also, since the vacatur of the Department's 2016 Rulemaking, there
have been legislative and regulatory developments at the State level
involving conduct standards. 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.'' \76\
---------------------------------------------------------------------------

\76\ 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).

---------------------------------------------------------------------------

[[Page 75898]]

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.\77\
According to the NAIC, as of August 23, 2023, 43 jurisdictions have
implemented the revisions to the model regulation.\78\
---------------------------------------------------------------------------

\77\ Available at www.naic.org/store/free/MDL-275.pdf.
\78\ NAIC Annuity Suitability & Best Interest Standard web page,
https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard.
---------------------------------------------------------------------------

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.\79\ 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:
---------------------------------------------------------------------------

\79\ A producer is defined in section 5.L. of the 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.

\80\ NAIC Model Regulation, at section 6(A)(1)(a).

The 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.'' \81\ ``Material conflict of interest'' is
defined as ``a financial interest of the producer in the sale of an
annuity that a reasonable person would expect to influence the
impartiality of a recommendation,'' but the definition expressly carves
out ``cash compensation or non-cash compensation'' from treatment as
sources of conflicts of interest.\82\ 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.\83\
---------------------------------------------------------------------------

\81\ Id. at section 6(A)(3).
\82\ Id. at section 5(I).
\83\ Id. at section 4(B)(1).
---------------------------------------------------------------------------

The NAIC expressly disclaimed that its standard creates fiduciary
obligations, and the obligations in the Model Regulation differ in
significant respects from those applicable to broker-dealers in the
SEC's Regulation Best Interest.\84\ For example, in addition to
disregarding compensation as a source of conflicts of interest, the
specific care, disclosure, conflict of interest, and documentation
requirements do not expressly incorporate the obligation not to put the
producer's or insurer's interests before the customer's interests, even
though compliance with their terms is treated as meeting the ``best
interest'' standard. Similarly, the 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 . . . .'' \85\ 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.
---------------------------------------------------------------------------

\84\ Section 6(d) of the 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)).
\85\ Id. at section 6(A)(1)(a)(iii).
---------------------------------------------------------------------------

These regulatory changes cover many, but not all, of the assets
held by retirement plans. Further, the SEC's Regulation Best Interest
and the NAIC Model Regulation are each limited in important ways in
terms of application to advice provided to ERISA plan fiduciaries
although this is not the case with the Advisers Act fiduciary
obligations. 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).\86\ The NAIC Model Regulation does not apply to
transactions involving contracts used to fund an employee pension or
welfare plan covered by ERISA.\87\ The Department believes that
retirement investors and the regulated community are best served by an
ERISA fiduciary standard that applies uniformly to all investments that
retirement investors may make with respect to their retirement
accounts. Amendments to the ERISA regulation are necessary to achieve
that result.
---------------------------------------------------------------------------

\86\ 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.
\87\ NAIC Model Regulation, at section 4(B)(1).
---------------------------------------------------------------------------

7. Coordination With Other Agencies

Under Title I and Title II of ERISA, the Department has primary
responsibility for the regulation of 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 fiduciary coverage
broadly and imposed stringent obligations on fiduciaries, including
prohibitions on conflicted transactions that do not have direct
analogues under the securities and insurance laws. The fiduciary
standards 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 proposed
regulatory approach 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 across different categories of
investment advice providers and advisory relationships.
At the same time, however, many stakeholders have stressed the need
to harmonize the Department's efforts with potential rulemaking and
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, commenters have urged coordination with other agencies
regarding IRA products and services.
As the SEC has adopted regulatory standards for broker-dealers that
are

[[Page 75899]]

based on fiduciary principles of care and loyalty also applicable to
investment advisers under the Advisers Act, and the NAIC has adopted a
model law that includes a best interest standard, the Department
believes that it is possible to honor 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, as contemplated by Title I and Title II
of ERISA, and avoid the imposition of obligations that conflict with
investment professionals' obligations under other applicable laws. In
particular, in the Department's view, PTE 2020-02 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 PTE.
Nevertheless, to better understand whether the proposed rule and
exemptions would subject investment advice providers to requirements
that conflict with or add to their obligations under other Federal
laws, the Department has continued consulting and coordinating with the
SEC; other securities, banking, and insurance regulators; the
Department of the Treasury, including the Federal Insurance Office; and
the Financial Industry Regulatory Authority (FINRA), the independent
regulatory authority of the broker-dealer industry.
The Department has also continued consulting and coordinating with
the Department of the Treasury and the Internal Revenue Service (IRS),
particularly on the subject of IRAs, and will continue to do so through
the rulemaking process. Although the Department 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's 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.

C. Purpose of the Proposed Rule and Summary of the Major Provisions

1. Purpose of the Proposed Rule

Since the 1975 rule was adopted, developments in retirement savings
vehicles and in the investment advice marketplace have altered the way
retirement investors interact with investment advice providers. In
1975, retirement plans were primarily defined benefit plans, which were
typically managed by sophisticated investment 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 investment professionals, including broker-
dealers, advisers subject to the Advisers Act, insurance agents, and
others on how to make complex decisions about the management of
retirement assets.
These individual investors have far greater responsibility for
decisions about their retirement savings than was true in 1975, when
investment professionals directly managed plan investments. Individual
investors routinely depend on the quality of the advice they receive
from financial professionals who commonly hold themselves out as
trusted advice providers. Because these professionals have inherent
conflicts of interest, however, there is an ever-present danger that
the investment advice the retirement investor receives will be driven,
not by the best interest of the investor, but by the financial
interests of the investment professional or firm whom they depend upon
for advice that is in their interest.
Certainly, when an investment professional satisfies all five
conditions of the 1975 regulation with respect to a given instance of
advice, the investment professional is properly treated as a fiduciary
in accordance with the parties' reasonable understanding of the nature
of their relationship. However, the 1975 test, as applied to the
current marketplace is underinclusive because it fails to capture many
circumstances in which an investor would reasonably believe they were
receiving advice from an investment professional who was rendering
services to the investor based upon the investor's 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 work to defeat legitimate retirement
investor expectations of impartial advice and allow some advice
relationships to occur where there is no best interest standard.
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. 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 current regulation. This proposal attempts
to reconcile the regulatory text with the both the reasonable
expectations of the retirement investor along with the statutory text
and purpose.
The proposed revised definition of an investment advice fiduciary
under ERISA, as discussed in detail below, is consistent with the
express text of the statutory definition and better protects the
interests of retirement investors. The proposal 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 an
investment professional who is acting in the investor's best interest,
rather than merely promoting their own competing financial interests at
the investor's expense.
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. The
specific duties imposed on fiduciaries by 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 securities 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

[[Page 75900]]

appropriately constructed regulatory definition of an investment advice
fiduciary under Title I and Title II of ERISA is essential.
While Congress enacted ERISA to give special protections to
retirement investors based on the central importance of retirement
assets to individuals' financial security and the broader marketplace,
ERISA's regulation of advice has failed to keep up with changes in the
marketplace, in marked contrast to other regulatory regimes. As noted
above, the Department's proposal follows the acts of other regulators
who have similarly recognized the need to change the standards
applicable to investment professionals to reflect current realities. It
is appropriate that the Department, too, update its regulation to
reflect the current marketplace, and to ensure that ERISA and the Code
serve their protective purposes. 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. As many Courts have
noted, ERISA's obligations are the ``highest known to the law.'' \88\
The 1975 rule as applied to current market conditions, however,
undermines ERISA's protective goals and defeats legitimate investor
expectations of professional advice based upon their best interest. As
discussed in more detail in the RIA, some retirement investors remain
vulnerable to harm from conflicts of interest in the investment advice
they receive because of the outdated 1975 regulation. The Department,
as opposed to other regulators, remains uniquely positioned to create a
regulatory definition of an investment advice fiduciary under ERISA
that is uniformly applicable to all the types of investments that
retirement investors make.
---------------------------------------------------------------------------

\88\ Donovan v. Bierwirth, 680 F.2d 263, 272 n. 8 (2d. Cir.
1982), cert denied, 459 U.S. 1069 (1982).
---------------------------------------------------------------------------

For example, the Department's proposal fills an important gap
regarding advice to plans and plan fiduciaries. Advice from broker-
dealers to plans and plan fiduciaries is not protected by the SEC's
Regulation Best Interest. And the NAIC Model Regulation does not apply
to transactions involving contracts used to fund retirement plans
covered by ERISA. The fiduciary advice definition in Title I and Title
II of ERISA, however, extends more broadly to cover advice to plan and
IRA fiduciaries as well as plan participants, beneficiaries, and IRA
owners and beneficiaries. This provides important protections to the
retirement investors saving through these plans. The proposed rule
would apply uniformly to advice to retirement investors within the
ambit of Title I and Title II of ERISA, as is consistent with the text
of the statutory definition which draws no distinctions between these
different categories of retirement investors.
The proposal also takes on special importance in creating uniform
standards for investment transactions that are not covered by the
Federal securities laws. Some types of plan and IRA investments, such
as real estate, fixed indexed annuities, certificates of deposit, and
other bank products, may not be subject to the SEC's Regulation Best
Interest, and 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. An
update to the regulatory definition of an investment advice fiduciary,
for purposes of Title I and Title II of ERISA, will enhance protections
of retirement investors. This approach reflects both the statutory
text, which adopts a uniform approach to all assets held in tax-
advantaged retirement plans, as well as sound public policy. When
investment professionals hold themselves out to retirement investors as
making recommendations based on the retirement investors' best
interests, their recommendations should be driven by a uniform
fiduciary obligation, and not by perceptions that one category of
investment product is subject to lower regulatory standards than
another.
Since ERISA's enactment, the Department has been expressly given
the authority under Title I of ERISA 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,\89\ which Congress ratified in
1984,\90\ 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.\91\ 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
proposal to honor the text and purposes of Title I and Title II of
ERISA.
---------------------------------------------------------------------------

\89\ 5 U.S.C. App. 1 (2018).
\90\ Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19, 1984).
\91\ Sec. 102, 5 U.S.C. App. 1.
---------------------------------------------------------------------------

2. Summary of the Major Provisions of the Proposed Rule

The Department proposes that a person would be an investment advice
fiduciary 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 provides the advice or makes the recommendation in
one of the following contexts:

\92\ This proposed rule is accompanied by proposals (published
elsewhere in the Federal Register) related to prohibited transaction
exemptive relief. The proposals would amend existing PTEs, including
PTE 2020-02, that allow, subject to protective conditions,
investment advice fiduciaries to receive compensation and engage in
transactions that otherwise would be prohibited. Unlike the PTEs
that were a part of the 2016 Rulemaking, these PTEs do not, and the
amendments would not, include required contracts or warranties that
the Fifth Circuit objected to. These prohibited transaction
exemptions also do not exempt a party from status as a fiduciary,
and therefore, the proposals do not affect the scope of the
regulatory definition of an investment advice fiduciary. Rather, the
exemption proposals involve an exercise of the statutory authority
afforded to the Department by Congress to grant administrative
relief from the strict prohibited transaction provisions in Title I
and Title II of ERISA for beneficial transactions involving plans
and IRAs. See section 408(a) of ERISA (requiring the Department to
make findings before granting an exemption that the exemption is
administratively feasible, in the interests of the plan or IRA and
of its participants and beneficiaries, and protective of the rights
of participants and beneficiaries of such plan or IRA); section
4975(c)(2) of the Code (same).

[[Page 75901]]

---------------------------------------------------------------------------

It is important to note that each required component of the new
proposed regulatory definition would have to be satisfied with respect
to any particular recommendation for the recommendation to constitute
fiduciary investment advice. In accordance with the statute, fiduciary
status is determined on a transactional basis. Under the statutory
text, a person is a fiduciary with respect to advice ``to the extent .
. . [they] render[] investment advice for a fee or other compensation,
direct or indirect.'' The proposed rule, like the statute, applies
fiduciary status on a transaction-by-transaction basis. One is only a
fiduciary ``to the extent'' the person making the recommendation meets
the rule's requirements with respect to the particular advice
transaction at issue.
The Department believes the test that it is proposing here better
honors the statute and retirement investors' legitimate expectations of
impartial investment advice from trusted advice providers than the 1975
rule, while avoiding the danger of sweeping too broadly and covering
recommendations that Congress might not have intended to cover.
The Department's proposal is also intended to be responsive to the
Fifth Circuit's emphasis on relationships of trust and confidence. The
current proposal is much more narrowly tailored than the 2016 Final
Rule, which treated as fiduciary advice, any compensated investment
recommendation as long as it was directed to a specific retirement
investor regarding the advisability of a particular investment or
management decision with respect to securities or other investment
property of the plan or IRA. In contrast, the proposal provides that
fiduciary status would attach only if compensated recommendations are
made in certain specified contexts, each of which describes
circumstances in which the retirement investor can reasonably place
their trust and confidence in the advice provider. The Department
believes the approach in this proposal is consistent with the statutory
definition that applies fiduciary status on a functional (and
therefore, transactional) basis.\93\
---------------------------------------------------------------------------

\93\ Mertens v. Hewitt Assocs., 508 U.S. 248 (1993). In this
regard, the Department notes that the SEC's Regulation Best Interest
also applies on a transactional basis. As stated by the SEC, ``the
provision of recommendations in a broker-dealer relationship is
generally transactional and episodic, and therefore the final rule
requires that broker-dealers act in the best interest of their
retail customers at the time a recommendation is made and imposes no
duty to monitor a customer's account following a recommendation.''
84 FR 33318, 33331 (July 12, 2019).
---------------------------------------------------------------------------

The proposed regulatory definition of an investment advice
fiduciary includes the following paragraphs, which are discussed in
greater detail below. Paragraph (c) of the proposed 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.

3. Covered Advice and Recommendations

Paragraph (c)(1) of the proposed regulation provides that a person
renders ``investment advice'' with respect to moneys or other property
of a plan or IRA if the person makes a recommendation of any securities
or other investment transaction or any investment strategy involving
securities or other investment property to the plan, plan fiduciary,
plan participant or beneficiary, IRA, IRA owner or beneficiary, or IRA
fiduciary, subject to certain specified criteria. Paragraphs (c)(1)(i),
(ii), and (iii) set forth three alternative contexts under which
covered recommendations would constitute investment advice for purposes
of the statutory definitions of an investment advice fiduciary in Title
I and Title II of ERISA. As discussed herein, under each of these three
contexts, the Department believes that retirement investors could
reasonably place their trust and confidence in the advice provider. The
proposal also makes clear that fiduciary status under Title I and/or
Title II of ERISA may result from recommendations to any of the
relevant plan actors, including not only the plan fiduciary, but also
plan participants, IRA owners, and their beneficiaries. This is
consistent with the Department's longstanding position that advice to a
plan participant or beneficiary is advice to the plan.\94\
---------------------------------------------------------------------------

\94\ IB 96-1, 29 CFR 2509.96-1. For purposes of this definition,
a participant or beneficiary of the plan is not a ``plan fiduciary''
with respect to the plan.
---------------------------------------------------------------------------

Paragraph (c)(1)(i)
In the first context, which is set forth in proposed paragraph
(c)(1)(i), a person renders fiduciary ``investment advice'' within the
meaning of ERISA section 3(21) if the person rendering advice 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.
This proposed provision is similar to a provision in the 1975 rule
that provides for investment advice fiduciary status if a covered
recommendation is made and the person making the recommendation either
directly or indirectly has ``discretionary authority or control,
whether or not pursuant to an agreement, arrangement, or understanding,
with respect to purchasing or selling securities or property for the
plan.'' \95\ The proposal would broaden this provision by referencing
securities or other investment property of the retirement investor, not
just an investment through a plan or IRA.
---------------------------------------------------------------------------

\95\ See 29 CFR 2510.3-21(c)(1)(ii)(A) and 26 CFR 54.4975-
9(c)(1)(ii)(A) (emphasis added). See also paragraph (d) of the
proposal, which provides that a person is not a fiduciary merely
because they have certain specific discretion in connection with the
execution of securities transactions.
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Persons that have discretionary authority or control over the
investment of a retirement investor's assets necessarily are in a
relationship of trust and confidence with respect to the retirement
investor.\96\ Further, like the 1975 provision, the proposal would
extend to circumstances in which the person making the recommendation
``indirectly (e.g., through or together with any affiliate)'' has
discretionary authority or control over securities or other investment
property; in this context, the use of ``indirectly'' generally refers
to an arrangement in which an affiliate has discretionary authority or
control.
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\96\ As discussed below, the proposed rule would not impose on a
fiduciary an automatic fiduciary obligation to continue to monitor
an investment or a retirement investor's activities to ensure the
recommendations remain prudent and appropriate for the plan or IRA.
The extent of a monitoring obligation would depend on whether the
facts and circumstances indicate that the fiduciary has undertaken
that responsibility. A fiduciary that assumes discretion over plan
or IRA assets, however, would generally be viewed as assuming a
monitoring obligation.
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Paragraph (c)(1)(ii)
The second context, in proposed paragraph (c)(1)(ii), sets forth
that a person provides fiduciary ``investment advice'' if the person
making the recommendation directly or indirectly (e.g., through or
together with an affiliate) makes investment recommendations to
investors on a

[[Page 75902]]

regular basis as part of their business and the recommendation is
provided under circumstances indicating 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.
The proposed provision applies only to advice rendered by a person
who makes investment recommendations to investors ``on a regular basis
as part of their business.'' As compared to the ``regular basis'' prong
of the 1975 regulation, which the Department believes can work to
undermine the current reasonable expectations of retirement investors,
this proposed provision is properly focused on whether the advice
provider is in the business of providing investment recommendations.
The proposal's updated regular basis requirement avoids concerns that
the rule could sweep so broadly as to cover, for example, the car
dealer who suggests that a consumer finance a purchase by tapping into
retirement funds. Retirement investors would not typically view such
persons as making investment recommendations based on the retirement
investors' individual financial interests, and the rule would not treat
them as fiduciaries. Similarly, the human resources employees of a plan
sponsor would not be considered investment advice fiduciaries under the
proposed regulatory definition, because they do not regularly make
investment recommendations to investors as part of their business.\97\
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\97\ The Department also would not consider salaries of human
resources employees of the plan sponsor to be a fee or other
compensation in connection with or as a result of the educational
services and materials that they provide to plan participants and
beneficiaries. Further, the proposed rule does not alter the
principles articulated in ERISA Interpretive Bulletin 75-8, D-2 (29
CFR 2509.75-8) (IB 75-8). IB 75-8 provides that persons who perform
purely administrative functions for an employee benefit plan, within
a framework of policies, interpretations, rules, practices and
procedures made by other persons, but who have no power to make
decisions as to plan policy, interpretations, practices or
procedures, are not fiduciaries with respect to the plan by virtue
of those purely ministerial functions.
---------------------------------------------------------------------------

However, the proposal's regular basis requirement would not defeat
legitimate investor expectations by automatically excluding one-time
advice from treatment as fiduciary investment advice.\98\ For example,
the proposed rule would treat an insurance agent's recommendation to
invest a retiree's retirement savings in an annuity as fiduciary advice
if the agent regularly makes investment recommendations to investors,
and the circumstances indicate that the recommendation is based on the
retiree's particular needs and circumstances and may be relied upon for
making an investment decision that is in the investor's best interest.
Similarly, if the agent told the retiree that they were rendering
fiduciary advice, the proposal would treat the recommendation as
fiduciary advice even if was one-time advice. Over time, the Department
has become concerned that 1975 regulation's regular basis test 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.
---------------------------------------------------------------------------

\98\ As 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).
---------------------------------------------------------------------------

By limiting the scope of those who may be an investment advice
fiduciary to those who make investment recommendations as a regular
part of their business, the Department believes that the proposed
definition is appropriately tailored to those advice providers in whom
retirement investors may reasonably place their trust and confidence.
Whether someone gives investment recommendations on a regular basis as
part of their business is an objective test based on the totality of
facts and circumstances.\99\ The Department invites comment on this
approach, including the extent to which the Department should consider
the investor's understandings as to whether the adviser regularly makes
investment recommendations as part of their business. The Department
seeks comment regarding examples of financial professionals who may be
reasonably viewed by investors as giving investment advice but would
not in fact meet the requirements laid out in this provision.
---------------------------------------------------------------------------

\99\ The reference to ``investment recommendations'' here and
elsewhere in the proposal does not indicate that the proposal is
limited to broker-dealers, or parties who regularly provide advice
or make recommendations in the securities or banking industries. The
scope of the regulation would extend to recommendations involving
securities or other investment property. Therefore, for example,
insurance agents who regularly make recommendations to customers
with respect to the purchase of annuity contracts would be
considered to make investment recommendations to investors on a
regular basis as part of their business. Proposed paragraph (f)(11)
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.
---------------------------------------------------------------------------

Proposed paragraph (c)(1)(ii) further provides that, to count as
fiduciary advice, the recommendation must be 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.''
This provision of the proposal is similar to, but improves upon,
the parts of the 1975 regulation that require a ``mutual agreement,
arrangement or understanding'' that the advice will serve as ``a
primary basis'' for the retirement investor's investment decisions.
Instead of the ``mutual agreement, arrangement, or understanding''
requirement--which over time has encouraged investment professionals to
hold themselves out as trusted advisers while disclaiming fiduciary
status in the fine print--the proposal would focus on the objective
``circumstances'' surrounding the recommendation, including how the
investment professional held themselves out to the retirement investor
and described the services offered. The Department believes that the
proposed language will better avoid loopholes and fine print
disclaimers, while properly focusing on a reasonable understanding of
the nature of their relationship.
Further, the proposal does not include the 1975 regulation's
``primary basis'' requirement, which has proved difficult to interpret
and untethered from the extent to which the recommendation was
presented as advice upon which the investor could rely in making a
decision.\100\ Instead, the proposal has a requirement that the
circumstances indicate that the recommendation ``may be relied upon by
the retirement investor as a basis for investment decisions that are in
the retirement investor's best interest.'' Recommendations that meet
this test can be outcome-determinative for the investor and are
appropriately treated as fiduciary advice when the elements of the
proposed rule are satisfied.
---------------------------------------------------------------------------

\100\ See Preamble to Prohibited Transaction Exemption 2020-02,
Improving Investment Advice for Workers & Retirees, 85 FR 82798,
82808 (Dec. 18, 2020) (discussing comments on whether the test
focuses on ``a'' primary basis or ``the'' primary basis).
---------------------------------------------------------------------------

In determining whether proposed paragraph (c)(1)(ii) is satisfied,
the Department intends to examine the

[[Page 75903]]

ways investment advice providers market themselves and describe their
services. For example, some stakeholders have previously expressed
concern that investment advice providers that adopt titles such as
financial consultant, financial planner, and wealth manager, are
holding themselves out as acting in positions of trust and confidence
while simultaneously disclaiming status as an ERISA fiduciary.\101\ In
the Department's view, an investment advice provider's use of such
titles routinely involves holding themselves out as making investment
recommendations that will be based on the particular needs or
individual circumstances of the retirement investor and may be relied
upon as a basis for investment decisions that are in the retirement
investor's best interest.
---------------------------------------------------------------------------

\101\ See id. at 82803.
---------------------------------------------------------------------------

Of course, whether a recommendation is provided under circumstances
indicating that it is based on the particular needs or individual
circumstances of the retirement investor and that it may be relied upon
as a basis for investment decisions that are in the retirement
investor's best interest is only part of the consideration. Even if a
recommendation satisfies a portion of the definition, it is not
fiduciary investment advice unless each aspect is satisfied (e.g., to
satisfy paragraph (c)(1)(ii), the person must also (directly or
indirectly) make investment recommendations on a regular basis as part
of their business).
The Department invites comments on the extent to which particular
titles are commonly perceived to convey that the investment
professional is providing individualized recommendations that may be
relied upon as a basis for investment decisions in a retirement
investor's best interest (and if not, why such titles are used). The
Department also requests comment on whether other types of conduct,
communication, representation, and terms of engagement of investment
advice providers should merit similar treatment.
Paragraph (c)(1)(iii)
The third context identified in the proposal, in proposed paragraph
(c)(1)(iii), is if the person making recommendations represents or
acknowledges that they are acting as a fiduciary when making investment
recommendations. An investment advice provider that acknowledges
fiduciary status has expressly agreed that the customer may place trust
and confidence in them. Furthermore, as discussed in the Fifth
Circuit's opinion, honesty is a general premise of a common law
fiduciary relationship.\102\ This provision of the proposal would
ensure that parties making a fiduciary representation or acknowledgment
cannot subsequently deny their fiduciary status if a dispute arises,
but rather must honor their words.
---------------------------------------------------------------------------

\102\ Chamber, 885 F.3d 360, 370 (5th Cir. 2018) (citing George
M. Turner, Revocable Trusts Sec. 3:2 (Sept. 2016 Update)).
---------------------------------------------------------------------------

For purposes of the proposal, paragraph (c)(1)(iii) is not limited
to the circumstances in which the person specifically represents that
they are a fiduciary for purposes of Title I or Title II of ERISA, or
specifically cites any particular statutory provisions. It is enough
that the investment advice provider told the retirement investor that
the investment advice or investment recommendations were or will be
made in a fiduciary capacity. As with the other contexts identified in
proposed paragraph (c)(1), this is intended to align fiduciary status
with the retirement investor's reasonable expectations. A retirement
investor who is told by a person that the person will be acting as a
fiduciary reasonably and appropriately places their trust and
confidence in such a person.
In the retirement context, the Department has stressed the
importance of clarity regarding the nature of an advice relationship
and has encouraged retirement investors to ask advice providers about
their status as an ERISA fiduciary with respect to retirement accounts
and seek a written statement of the advice provider's fiduciary status.
The Department's FAQs entitled Choosing the Right Person to Give You
Investment Advice: Information for Investors in Retirement Plans and
Individual Retirement Accounts state ``A written statement helps ensure
that the fiduciary nature of the relationship is clear to both you and
the investment advice provider at the time of the transaction, and
limits the possibility of miscommunication.'' \103\
---------------------------------------------------------------------------

\103\ Available at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/choosing-the-right-person-to-give-you-investment-advice.
---------------------------------------------------------------------------

Many retirement investors may receive a written fiduciary
acknowledgment due to compliance obligations of an investment advice
provider. For example, retirement investors that are plan fiduciaries
entering into an investment advice services arrangement on behalf of
the plan are likely to receive an acknowledgment of fiduciary status
from the provider as part of the disclosure obligations under ERISA
section 408(b)(2) and the regulations thereunder.\104\ Further, an
upfront written acknowledgment of fiduciary status is a requirement of
several prohibited transaction exemptions available to investment
advice fiduciaries, including the statutory exemption added by Congress
at ERISA section 408(b)(14) \105\ and the Department's broad
administrative exemption, PTE 2020-02.\106\
---------------------------------------------------------------------------

\104\ 29 CFR 2550.408b-2(c)(1)(iv)(B).
\105\ See ERISA section 408(g)(6)(A)(vii), 29 U.S.C.
1108(g)(6)(A)(vii) (``[T]he fiduciary adviser [must] provide[] to a
participant or a beneficiary before the initial provision of the
investment advice with regard to any security or other property
offered as an investment option, a written notification (which may
consist of notification by means of electronic communication) . . .
that the adviser is acting as a fiduciary of the plan in connection
with the provision of the advice . . . .'').
\106\ Section II(b)(1).
---------------------------------------------------------------------------

As discussed in the preamble to PTE 2020-02, the Department
believes that parties seeking to provide investment advice to
retirement investors and relying on the exemption should, at a minimum,
make a conscious up-front determination of whether they are acting as
fiduciaries; tell their retirement investor customers that they are
rendering advice as fiduciaries; and, based on their conscious decision
to act as fiduciaries, implement and follow the exemption's
conditions.\107\
---------------------------------------------------------------------------

\107\ 85 FR 82798, 82827 (Dec. 18, 2020).
---------------------------------------------------------------------------

Disclaimers
Paragraph (c)(1)(v) of the proposal addresses the impact of
disclaimers on parties' status as investment advice fiduciaries. The
proposed paragraph provides that written statements by a person
disclaiming status as a fiduciary under the Act, the Code, or this
regulation, or disclaiming any of the conditions set forth in paragraph
(c)(1)(ii), will not control to the extent they are inconsistent with
the person's oral communications, marketing materials, applicable State
or Federal law, or other interactions with the retirement investor. The
Department's intent in including this paragraph in the proposal is to
permit parties to define the nature of their relationship, but also to
ensure that any disclaimer be consistent with oral communications or
actions, marketing material, State and Federal law, and other
interactions based on all relevant facts and circumstances. When the
disclaimer is at odds with the investment advice provider's oral
communications, marketing material, State or Federal law, or other
interactions, the disclaimer is insufficient to defeat the retirement
investor's legitimate expectations.\108\
---------------------------------------------------------------------------

\108\ This discussion of disclaimers applies to the regulation
proposed herein, defining an investment advice fiduciary, and would
not extend to a circumstance in which a financial professional has
investment discretion over a retirement investor's assets.

---------------------------------------------------------------------------

[[Page 75904]]

4. Recommendations Regarding Securities Transactions or Other
Investment Transactions or Investment Strategies

The definition of ``investment advice'' in proposed paragraph
(c)(1) requires that there be ``a recommendation regarding securities
transactions or other investment transactions or investment
strategies.''
Recommendation
Whether a person has made a ``recommendation'' is a threshold
element in establishing the existence of fiduciary investment advice.
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. The analysis would apply equally to a communication
that is made orally or in writing and would include electronic
communications. The determination of whether a recommendation has been
made would be an objective rather than a subjective inquiry.
In this regard, the more individually tailored the communication is
to a specific retirement investor or investors about, for example, a
security, investment property, or investment strategy, the more likely
the communication will be viewed as a recommendation; however, the
Department cautions that the fact that a communication is made to a
group rather than an individual would not be dispositive of whether a
recommendation exists. Additionally, 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. Furthermore, 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. Even if an
action rises to the level of a recommendation, the advice is only
fiduciary investment advice if the rest of the regulatory test is met.
In evaluating whether a recommendation has been made under the
proposal, the Department intends to take an approach similar to that
taken by the SEC and FINRA in the broker-dealer context. In the SEC's
Regulation Best Interest, the SEC stated that it would apply the term
as currently interpreted with respect to broker-dealer regulation for
purposes of the suitability obligations, to achieve efficiencies for
broker-dealers.\109\ The Department likewise believes that efficiencies
will apply if it adopts a similar approach.
---------------------------------------------------------------------------

\109\ Regulation Best Interest release, 84 FR 33318, 33335 (July
12, 2019); see id. at fn. 161 (providing citations to relevant FINRA
guidance, including on the definition and contours of the term
``recommendation'').
---------------------------------------------------------------------------

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.'' \110\
---------------------------------------------------------------------------

\110\ Id.

The SEC did not include a formal definition of a recommendation in
Regulation Best Interest, based on its view that the concept of a
recommendation is fact-specific and not conducive to an express
definition.\111\ In drafting this proposal, the Department has worked
to ensure alignment with the regulatory regimes of the SEC and other
regulatory agencies, and is proposing a similar approach.
---------------------------------------------------------------------------

\111\ Id.
---------------------------------------------------------------------------

In the Department's view, the framework established by the SEC for
broker-dealers is consistent with ordinary understandings of ``advice''
and familiar to the broker-dealers that are regulated by the SEC.
Accordingly, the Department would consider a recommendation for
purposes of the SEC's Regulation Best Interest as a recommendation for
purposes of this proposed regulation. The Department seeks comment on
whether the approach taken in the proposal is sufficiently clear, or
whether an express definition would be preferable.
Definition of the phrase ``recommendation of any securities
transaction or other investment transaction or any investment strategy
involving securities or other investment property.''
Proposed paragraph (f)(10) defines the phrase ``recommendation of
any securities transaction or other investment transaction or any
investment strategy involving securities or other investment
property.'' This phrase largely parallels the language in the SEC's
Regulation Best Interest, which applies to broker-dealers'
``recommendation of any securities transaction or investment strategy
involving securities (including account recommendations).'' \112\ The
phrase's broader reference to ``other investment property'' reflects
the differences in jurisdiction between the SEC and the Department.
---------------------------------------------------------------------------

\112\ 17 CFR 240.15l-1(a)(1).
---------------------------------------------------------------------------

Under proposed paragraph (f)(10), the phrase ``recommendation of
any securities transaction or other investment transaction or any
investment strategy involving securities or other investment property''
is defined as recommendations:

As to the advisability of acquiring, holding, disposing
of, or exchanging, securities or other investment property, as to
investment strategy, or as to how securities or other investment
property should be invested after the securities or other investment
property are rolled over, transferred, or distributed from the plan
or IRA;
As to the management of securities or other investment
property, including, among other things, recommendations on
investment policies or strategies, portfolio composition, selection
of other persons to provide investment advice or investment
management services, selection of investment account arrangements
(e.g., account types such as brokerage versus advisory) or voting of
proxies appurtenant to securities; and
As to rolling over, transferring, or distributing
assets from an employee benefit plan or IRA, including
recommendations as to whether to engage in the transaction, and the
amount, the form, and the destination of such a rollover, transfer,
or distribution.

Components of these proposed covered recommendations are discussed
below.
Recommendations Involving Securities, Other Investment Property, and
Investment Strategy
Paragraph (f)(10)(i) of the proposal describes, as covered
recommendations, recommendations as to ``the advisability of acquiring,
holding, disposing of, or exchanging, securities or other investment
property, as to investment strategy, or as to how securities or other
investment property should be invested after the securities or other
investment property are rolled over, transferred, or

[[Page 75905]]

distributed from the plan or IRA.'' Similar to the SEC and FINRA, the
Department intends to interpret ``investment strategy'' broadly, to
include ``among others, recommendations generally to use a bond ladder,
day trading . . . or margin strategy involving securities, irrespective
of whether the recommendations mention particular securities.'' \113\
---------------------------------------------------------------------------

\113\ Regulation Best Interest release, 84 FR 33318, 33339 (July
12, 2019) (citing FINRA Rule 2111.03 and FINRA Regulatory Notice 12-
25, available at https://www.finra.org/rules-guidance/notices/12-2).
---------------------------------------------------------------------------

The reference to ``other investment property'' is intended to
capture other investments made by plans and IRAs that are not
securities. This includes, but would not be limited to, non-securities
annuities, banking products, and digital assets (regardless of status
as a security). The Department does not see any basis for
differentiating advice regarding investments in CDs, including
investment strategies involving CDs (e.g., laddered CD portfolios),
from other investment products, and therefore would interpret paragraph
(f)(10) to cover such recommendations.
The Department proposes that the term investment property, however,
not include health insurance policies, disability insurance policies,
term life insurance policies, and other property to the extent the
policies or property do not contain an investment component. This is
confirmed in a proposed definition of ``investment property'' in
paragraph (f)(11). Although there can be situations in which a person
recommending group health or disability insurance, for example,
effectively exercises such control over the decision that the person is
functionally exercising discretionary control over the management or
administration of the plan as described in ERISA section 3(21)(A)(i) or
section 3(21)(A)(iii), the Department does not believe that the
definition of investment advice in ERISA's statutory text is properly
interpreted or understood to cover a recommendation to purchase group
health, disability, term life insurance, or similar insurance policies
that do not have an investment component.
Recommendations as to How Securities or Other Investment Property
Should Be Invested After Rollover, Transfer, or Distribution
Proposed paragraph (f)(10)(i) also references recommendations ``as
to how securities or other investment property should be invested after
the securities or other investment property are rolled over,
transferred, or distributed from the plan or IRA.'' This proposed
provision addresses an important concern of the Department that
investment advice providers should not be able to avoid fiduciary
responsibility for a rollover recommendation by focusing solely on the
investment of assets after they are rolled over from the plan. In many
or most cases, a recommendation to a plan participant or beneficiary
regarding the investment of securities or other investment property
after a rollover, transfer, or distribution involves an implicit
recommendation to the participant or beneficiary to engage in the
rollover, transfer, or distribution. Certainly, a prudent and loyal
fiduciary generally could not make a recommendation on how to invest
assets currently held in a plan after a rollover, without even
considering the logical alternative of leaving the assets in the plan
or evaluating how that option compares with the retirement investor's
likely investment experience post-rollover. A fiduciary would violate
ERISA's 404 obligations if it recommended that a retirement investor
roll the money out of the plan without proper consideration of how the
money might be invested after the rollover.
Moreover, even in those relatively rare circumstances in which
there is no implicit rollover recommendation, advice to a plan
participant on how to invest assets currently held in an ERISA-covered
plan is ``advice with respect to moneys or other property of such
plan'' within the meaning of section 3(21)(A)(ii) of ERISA, inasmuch as
the assets at issue are still held by the plan. The Department requests
comments on the proposed language, and on whether this approach will
appropriately protect the interests of plan participants and
beneficiaries, or whether another approach would be more protective.
Recommendations on Strategies, Management of Securities or Other
Investment Property, and Account Types
Paragraph (f)(10)(ii) of the proposed rule describes, as covered
recommendations, recommendations as to the management of securities or
other investment property, including, among other things,
recommendations on investment policies or strategies, portfolio
composition, selection of other persons to provide investment advice or
investment management services, selection of investment account
arrangements (e.g., account types such as brokerage versus advisory),
or the voting of proxies appurtenant to securities. The statutory text
broadly refers to ``investment advice . . . with respect to any moneys
or other property of such plan.'' Recommendations as to investment
management or strategy fall within the most straightforward reading of
the statutory text. Accordingly, the proposed regulation makes clear
that covered investment advice is not artificially limited solely to
recommendations to buy, sell, or hold particular securities or
investment property to the exclusion of all the other important
categories of investment advice that investment professionals routinely
provide.
This provision of the proposed regulation also makes clear that
recommendations as to the selection of investment account arrangements
would be covered. Accordingly, a recommendation to move from a
commission-based account to an advisory fee-based account (or vice
versa) would be a covered recommendation. The provision is consistent
with the SEC's Regulation Best Interest and the Advisers Act's
fiduciary obligations.\114\
---------------------------------------------------------------------------

\114\ 17 CFR 240.15l-1(a)(1) (``A broker, dealer, or a natural
person who is an associated person of a broker or dealer, when
making a recommendation of any securities transaction or investment
strategy involving securities (including account recommendations) to
a retail customer, shall 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, or natural person
who is an associated person of a broker or dealer making the
recommendation ahead of the interest of the retail customer.'')
(emphasis added); SEC Investment Adviser Interpretation, 84 FR at
33674 (``An adviser's fiduciary duty applies to all investment
advice the investment adviser provides to clients, including advice
about investment strategy, engaging a sub-adviser, and account
type.'').
---------------------------------------------------------------------------

Recommendation on the Selection of Other Persons To Provide Investment
Advice or Investment Management
Proposed paragraph (f)(10)(ii) extends to recommendations as to
``selection of other persons to provide investment advice or investment
management services.'' Consistent with the Department's longstanding
position, the proposed regulation would cover the recommendation of
another person to be entrusted with investment advice or investment
management authority over retirement assets. Such recommendations are
often critical to the proper management and investment of those assets
and are fiduciary in nature if the other conditions of the proposed
definition are satisfied. Recommendations of investment advisers or
managers are no different than recommendations of investments that the
plan or IRA may acquire and are often, by virtue of the track record or

[[Page 75906]]

information surrounding the capabilities and strategies that are
employed by the recommended fiduciary, inseparable from recommendations
as to the types of investments that the plan or IRA will acquire. For
example, the assessment of an investment fund manager or management is
often a critical part of the analysis of which fund to pick for
investing plan or IRA assets.
Under this proposal, the Department does not intend to suggest,
however, that a person could become a fiduciary merely by engaging in
the normal activity of marketing themselves as a potential fiduciary to
be selected by a plan fiduciary or IRA owner, without making a
recommendation of a securities transaction or other investment
transaction or any investment strategy involving securities or other
investment property. Touting the quality of one's own advisory or
investment management services would not trigger fiduciary obligations.
This view is made clear by the language in proposed paragraph
(f)(10)(ii) that extends to recommendations of ``other persons'' to
provide investment advice or investment management services.
However, this discussion should not be read to exempt a person from
being a fiduciary with respect to any of the investment recommendations
covered by proposed paragraphs (c)(1) and defined in proposed paragraph
(f)(10). There is a line between an investment advice provider making
claims as to the value of its own advisory or investment management
services in marketing materials, on the one hand, and making
recommendations to retirement investors on how to invest or manage
their savings, on the other. An investment advice provider can
recommend that a retirement investor enter into an advisory
relationship with the provider without acting as a fiduciary. But when
the investment advice provider recommends, for example, that the
investor pull money out of a plan or invest in a particular fund, that
advice may be given in a fiduciary capacity even if part of a
presentation in which the provider is also recommending that the person
enter into an advisory relationship. As proposed, the complete facts
and circumstances surrounding each piece of advice would be considered.
The Department believes that this is consistent with the functional
fiduciary test laid out in the statute in which an entity is an
investment advice fiduciary to the extent that they satisfy the
definition. Just because one piece of advice is not fiduciary
investment advice (here, the ``hire me'' recommendation) does not mean
that the rest of the advice is necessarily excluded from the definition
(here, the advice to pull money out of the plan and invest in a
particular fund). The investment advice fiduciary could not prudently
recommend that a plan participant roll money out of a plan into
investments that generate a fee for the fiduciary but leave the
participant in a worse position than if the participant had left the
money in the plan. Thus, when a recommendation to ``hire me''
effectively includes a recommendation on how to invest or manage plan
or IRA assets (e.g., whether to roll assets into an IRA or plan or how
to invest assets if rolled over), that recommendation would need to be
evaluated separately under the provisions in the proposed
regulation.\115\
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\115\ The Department believes this approach is consistent with
the SEC's approach in Regulation Best Interest. In FAQs, the SEC
described a scenario involving broker-dealer communications with a
prospective retail customer that would not rise to the level of a
recommendation. However, the SEC cautioned that a recommendation
made in the context of a ``hire me'' conversation or otherwise would
be subject to Regulation Best Interest. See Questions on Regulation
Best Interest, available at https://www.sec.gov/tm/faq-regulation-best-interest.
---------------------------------------------------------------------------

Proxy Voting Appurtenant to Ownership of Shares of Corporate Stock
Proposed paragraph (f)(10)(ii) also extends to recommendations as
to the ``voting of proxies appurtenant to securities.'' The Department
has long viewed the exercise of ownership rights as a fiduciary
responsibility; consequently, advice or recommendations on the exercise
of proxy or other ownership rights are appropriately treated as
fiduciary in nature if the other conditions of the regulation are
satisfied.\116\
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\116\ See Fiduciary Duties Regarding Proxy Voting and
Shareholder Rights, 85 FR 81658 (Dec. 16, 2020) (``In connection
with proxy voting, the Department's longstanding position is that
the fiduciary act of managing plan assets includes the management of
voting rights (as well as other shareholder rights) appurtenant to
shares of stock.'').
---------------------------------------------------------------------------

Similar to other types of broad, generalized guidance that would
not rise to the level of investment advice, however, guidelines or
other information on voting policies for proxies that are provided to a
broad class of investors without regard to a client's individual
interests or investment policy and that are not directed or presented
as a recommended policy for the plan or IRA to adopt, would not rise to
the level of a covered recommendation under the proposal. Similarly, a
recommendation addressed to all shareholders in an SEC-required proxy
statement in connection with a shareholder meeting of a company whose
securities are registered under Section 12 of the Exchange Act, for
example, soliciting a shareholder vote on the election of directors and
the approval of other corporate action, would not, under the proposed
rule, constitute fiduciary investment advice from the person who
creates or distributes the proxy statement.
Recommendations on Rollovers, Benefit Distributions, or Transfers From
Plan or IRA
Proposed paragraph (f)(10)(iii) describes, as a category of covered
recommendations, recommendations ``as to rolling over, transferring, or
distributing assets from an employee benefit plan or IRA, including
recommendations as to whether to engage in the transaction, and the
amount, the form, and the destination of such a rollover, transfer, or
distribution.'' This aspect of the proposal is consistent with the
Department's longstanding interest in protecting retirement investors
in the context of a recommendation to roll over employee benefit plan
assets to an IRA, as well as other recommendations to roll over,
transfer, or distribute assets from a plan or IRA.
The Department continues to believe that decisions to take a
benefit distribution or engage in rollover transactions are among the
most, if not the most, important financial decisions that plan
participants and beneficiaries, and IRA owners and beneficiaries are
called upon to make. The Department continues to believe that advice
provided in connection with a rollover decision, even if not
accompanied by a specific recommendation on how to invest assets,
should be treated as fiduciary investment advice. A distribution
recommendation involves either advice to change specific investments in
the plan or to change fees and services directly affecting the return
on those investments. Even if the assets would not be covered by Title
I or Title II of ERISA when they are moved outside the plan or IRA, the
recommendation to change the plan or IRA investments is investment
advice under Title I or Title II of ERISA.
Thus, recommendations on distributions (including rollovers or
transfers into another plan or IRA) or recommendations to entrust plan
assets to a particular IRA provider would fall within the scope of
investment advice in this proposed regulation, and would be covered by
Title I of ERISA, including the enforcement provisions of section
502(a). Further, in the Department's view, the evaluation of whether a
recommendation constitutes

[[Page 75907]]

fiduciary investment advice should be the same regardless of whether it
is a recommendation to take a distribution or make a rollover to an IRA
or a recommendation not to take a distribution or to keep assets in a
plan.
The proposal's approach also aligns with the SEC's Regulation Best
Interest and Advisers Act fiduciary obligations, which extend to
account recommendations generally as well as recommendations to roll
over or transfer assets from one type of account to another.\117\
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\117\ Regulation Best Interest release, 84 FR 33318, 33339 (July
12, 2019); SEC Investment Adviser Interpretation, 84 FR 33669, 33674
(July 12, 2019).
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5. Application of Paragraph (c)(1)

The proposal provides a general rule under which investment advice
providers could determine their status through application of the facts
and circumstances surrounding their interactions with their customers.
To aid parties in conducting the analysis, the Department provides the
following discussion of the application of the general rule in certain
common circumstances and requests comment on the discussion. The
Department also seeks comment on whether any adjustment should be made
to the regulatory text to address issues discussed herein.
Sophisticated Retirement Investors
The proposed regulation does not include any special provision for
recommendations to sophisticated advice recipients. Rather, under the
proposal, fiduciary status would turn on the application of proposed
paragraph (c)(1). In the absence of investment discretion (see proposed
paragraph (c)(1)(i)) or a fiduciary acknowledgment (see proposed
paragraph (c)(1)(iii)), the investment advice provider's fiduciary or
non-fiduciary status would depend on the parties' understandings under
the particular facts and circumstances (see proposed paragraph
(c)(1)(ii)).
The Department acknowledges that some commenters in previous
rulemakings have asserted that a specific ``counterparty'' provision is
necessary to avoid limiting plan and IRA investors' choices in
investment transactions.\118\ Commenters have suggested that the
Department should adopt certain metrics, such as wealth or income, as
conclusively establishing that the retirement investor has sufficient
expertise and sophistication to foreclose fiduciary status of an advice
provider. The Department is unaware, however, of compelling evidence
that wealth and income are strong proxies for financial sophistication
or inconsistent with a relationship of trust and confidence.\119\
Moreover, and independently, nothing in the statute's text suggests
that Congress intended to categorically deny fiduciary protection to
``sophisticated investors.'' Instead of a specific ``counterparty''
provision or a provision for sophisticated plan- and IRA-level
fiduciaries, proposed paragraph (c)(1)(ii) generally states an
appropriate test for fiduciary status to apply to a covered
recommendation, even if made to a plan or IRA fiduciary. To the extent
counterparties wish to avoid fiduciary status, they can avoid
structuring their relationships to fall within the circumstances
described in that subparagraph.
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\118\ The 2016 Final Rule provided that, subject to specified
conditions, certain transactions with independent fiduciaries with
financial expertise would not constitute fiduciary investment
advice. 81 FR 20946, 20980 (Apr. 8, 2016).
\119\ High net worth investors and sophisticated investors are
not carved out of protections under the SEC's Regulation Best
Interest or the Advisers Act fiduciary duty.
---------------------------------------------------------------------------

In the context of ``wholesaling'' activity, which involves
communications by product manufacturers or other financial service
providers to financial intermediaries who then directly advise plans,
participants, beneficiaries, and IRA owners and beneficiaries, the
Department believes that communications to financial intermediaries
would typically fall outside the scope of proposed paragraph (c)(1)(ii)
because they would not involve recommendations based on the particular
needs or individual circumstances of the plan or IRA serviced by the
intermediary. There may also be other circumstances in which
application of proposed paragraph (c)(1)(ii) would not result in a
covered recommendation being treated as fiduciary investment advice. In
general, however, the Department envisions that proposed paragraph
(c)(1)(ii) would apply broadly to recommendations to plan and IRA
fiduciaries acting on behalf of plans and IRAs.
More fundamentally, the Department rejects the purported dichotomy
between a mere ``sales'' recommendation to a counterparty, on the one
hand, and advice, on the other, in the context of the retail market for
investment products. As reflected in recent regulatory developments
from both the SEC and NAIC, financial service industry marketing
materials, and the industry's comment letters reciting the guidance
they provide to investors, sales and advice typically go hand in hand
in the retail market.
In the Department's view, the updated conduct standards adopted by
the SEC and the NAIC also reflect an acknowledgment of the fact that
broker-dealers and insurance agents commonly provide paid investment
and annuity recommendations to their customers. 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.'' \120\ The NAIC Model
Regulation, section 6.5.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.'' Further, ``cash compensation'' is
defined 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.'' \121\ When
retirement investors talk to investment advice providers about the
investments they should make, they commonly pay for, and receive,
advice within the meaning of the statutory definition.
---------------------------------------------------------------------------

\120\ 84 FR 33318, 33319 (July 12, 2019).
\121\ NAIC Model Rule section 5.B. (emphasis added).
---------------------------------------------------------------------------

Platform Providers and Pooled Employer Plans
Platform providers are entities that offer a platform or selection
of investment alternatives to participant-directed individual account
plans and their fiduciaries who choose the specific investment
alternatives that will be made available to participants for investing
their individual accounts. In connection with such offerings, platform
providers may provide investment advice, or they may simply provide
general financial information such as information on the historic
performance of asset classes and of the investment alternatives
available through the provider.
In the case of a platform provider, application of the proposed
regulation may often focus on whether the communications fall within
the threshold definition of a ``recommendation.'' As discussed in
section 4, whether a recommendation exists under the proposal will turn
on the degree to which a communication is

[[Page 75908]]

``individually tailored'' to the retirement investor or investors, 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. Therefore, the inquiry may
turn on whether the provider presents the investments on the platform
as having been selected for and appropriate for the investor (i.e., the
plan and its participants and beneficiaries). In this regard, platform
providers who merely identify investment alternatives using objective
third-party criteria (e.g., expense ratios, fund size, or asset type
specified by the plan fiduciary) to assist in selecting and monitoring
investment alternatives, without additional screening or
recommendations based on the interests of plan or IRA investors, would
not be considered under the proposal to be making a recommendation.
In the Department's view, this same analysis is likely to apply in
the context of pooled employer plans (PEPs), which are individual
account plans established or maintained for the purpose of providing
benefits to the employees of two or more employers, authorized in the
Setting Every Community Up for Retirement Enhancement (SECURE)
Act.\122\ PEPs are required to designate a pooled plan provider (PPP)
who is a named fiduciary of the PEP.\123\ PPPs are in a unique
statutory position in that they are granted full discretion and
authority to establish the plan and all of its features, administer the
plan, act as a fiduciary, hire service providers, and select
investments and investment managers. When a PPP or another service
provider interacts with an employer about investment options under the
plan, whether they have made a recommendation under the proposal will
turn, in part, on whether they present the investments as selected for,
and appropriate for, the plan, its participants, or beneficiaries.
---------------------------------------------------------------------------

\122\ ERISA section 3(43), 29 U.S.C. 1002(43).
\123\ ERISA Section 3(43)(B), 29 U.S.C. 1002(43)(B).
---------------------------------------------------------------------------

Swaps and Security-Based Swaps
Swaps and security-based swaps are a broad class of financial
transactions defined and regulated under amendments to the Commodity
Exchange Act and the Securities Exchange Act of 1934 (Securities
Exchange Act) by the Dodd-Frank Act. Section 4s(h) of the Commodity
Exchange Act \124\ and section 15F of the Securities Exchange Act \125\
establish similar business conduct standards for dealers and major
participants in swaps or security-based swaps. Special rules apply for
swap and security-based swap transactions involving ``special
entities,'' a term that includes employee benefit plans covered under
ERISA. Under the business conduct standards in the Commodity Exchange
Act as added by the Dodd-Frank Act, swap dealers or major swap
participants that act as counterparties to ERISA plans must, among
other conditions, have a reasonable basis to believe that the plans
have independent representatives who are fiduciaries under ERISA.\126\
Similar requirements apply for security-based swap transactions.\127\
The CFTC and the SEC have issued final rules to implement these
requirements.\128\
---------------------------------------------------------------------------

\124\ 7 U.S.C. 6s(h).
\125\ 15 U.S.C. 78o-10(h).
\126\ 7 U.S.C. 6s(h)(5); 17 CFR 23.450.
\127\ 15 U.S.C. 78o-10(h)(4), (5).
\128\ See 17 CFR 23.400-451; Business Conduct Standards for Swap
Dealers and Major Swap Participants With Counterparties, 77 FR 9734
(Feb. 17, 2012); 17 CFR 240.15Fh-3-h-6; Business Conduct Standards
for Security-Based Swap Dealers and Major Security-Based Swap
Participants, 81 FR 29960 (May 13, 2016).
---------------------------------------------------------------------------

In the Department's view, when Congress enacted the swap and
security-based swap provisions in the Dodd-Frank Act, including those
expressly applicable to ERISA-covered plans, it did not intend to
broadly impose ERISA fiduciary status on the plan's counterparty as it
engaged in regulated conduct as part of the swap or security-based swap
transaction with the employee benefit plan. The Department conferred
with both the CFTC and the SEC at the time of those agencies'
rulemakings, and assured harmonization of any change in the ERISA
fiduciary advice regulation so as to avoid unintended consequences.
The Department makes the same assurance with respect to this
proposed regulation. The disclosures required of plans' counterparties
under the business conduct standards would not generally constitute a
``recommendation'' as defined in the proposal, or otherwise compel the
dealers or major participants to act as fiduciaries in swap and
security-based swap transactions conducted pursuant to section 4s of
the Commodity Exchange Act and section 15F of the Securities Exchange
Act. This includes disclosures regarding material risks,
characteristics, incentives and conflicts of interest; disclosures
regarding the daily mark of a swap or security-based swap and a
counterparty's clearing rights; disclosures necessary to ensure fair
and balanced communications; and disclosures regarding the capacity in
which a swap or security-based swap dealer or major swap participant is
acting when a counterparty to a special entity, as required by the
business conduct standards.
This is not to say that a dealer or major participant would
necessarily fall outside the scope of the proposed regulation if, in
addition to providing the disclosures mandated above, it also chose to
make specific investment recommendations to plan clients. In that
circumstance, a swap dealer could become a fiduciary by virtue of their
voluntary decision to make individualized investment recommendations to
an ERISA-covered plan if the subparagraph's conditions were met.\129\
To the extent dealers wish to avoid fiduciary status under the
proposal, however, they can structure their relationships to avoid
making such investment recommendations to plans. Additionally, clearing
firms would not be investment advice fiduciaries under the proposed
rule merely as a result of providing such services as valuations,
pricing, and liquidity information. As discussed in greater detail in
the next section, the proposed rule does not include valuation and
similar services as a category of covered recommendations.
---------------------------------------------------------------------------

\129\ The business conduct standards do not preclude a swap
dealer from giving advice if it chooses to do so. See, e.g., 17 CFR
23.434 (imposing requirements on swap dealers that recommend a swap
or trading strategy involving a swap to a counterparty); see also 17
CFR 240.15Fh-3(f) (similar provision applicable to security-based
swap dealers).
---------------------------------------------------------------------------

Valuation of Securities and Other Investment Property
This proposed rule does not include valuation services, appraisal
services, or fairness opinions as categories of covered
recommendations. In this regard, the Department notes that the
definition of ``recommendation of any securities transaction or other
investment transaction or any investment strategy involving securities
or other investment property'' in proposed paragraph (f)(10) does not
include reference to any of these functions. Accordingly, the provision
of valuation services, appraisal services, or fairness opinions would
not, in and of themselves, lead to fiduciary status under the proposed
rule. The Department continues to believe issues related to valuation
are best addressed through a separate rulemaking.

[[Page 75909]]

6. For a Fee or Other Compensation, Direct or Indirect

Paragraph (e) of the proposal includes a definition of ``for a fee
or other compensation, direct or indirect,'' for purposes of section
3(21)(A)(ii) of ERISA and section 4975(e)(3)(B) of the Code. The
proposal provides:

[A] person provides investment advice ``for a fee or other
compensation, direct or indirect,'' if the person (or any affiliate)
receives any explicit fee or compensation, from any source, for the
advice or the person (or any affiliate) receives any other fee or
other compensation, from any source, in connection with or as a
result of the recommended purchase, sale, or holding of a security
or other investment property or the provision of investment advice,
including, though not limited to, commissions, loads, finder's fees,
revenue sharing payments, shareholder servicing fees, marketing or
distribution fees, mark ups or mark downs, underwriting
compensation, payments to brokerage firms in return for shelf space,
recruitment compensation paid in connection with transfers of
accounts to a registered representative's new broker-dealer firm,
expense reimbursements, gifts and gratuities, or other non-cash
compensation. A fee or compensation is paid ``in connection with or
as a result of'' such transaction or service if the fee or
compensation would not have been paid but for the recommended
transaction or provision of advice, including if eligibility for or
the amount of the fee or compensation is based in whole or in part
on the recommended transaction or the provision of advice.

This proposed definition is consistent with the preamble of the
1975 regulation, which states that ``a fee or other compensation,
direct or indirect'' includes all fees or other compensation ``incident
to the transaction in which the investment advice to the plan has been
rendered or will be rendered,'' including, for example, brokerage
commissions, mutual fund sales commissions, and insurance sales
commissions.\130\
---------------------------------------------------------------------------

\130\ 40 FR 50842 (Oct. 31, 1975); 41 FR 56760, 56762 (Dec. 29,
1976).
---------------------------------------------------------------------------

As the Department explained in the preamble when it proposed the
exemption now at PTE 77-9: \131\
---------------------------------------------------------------------------

\131\ 41 FR 56760, 56762 (Dec. 29, 1976).

[T]he Department and the [IRS] stated in the preamble sections
of the notices announcing the adoption of the [1975 fiduciary
definition] regulations that, until a more definitive statement is
issued, the phrase ``fee or other compensation, direct or indirect''
for the rendering of investment advice for purposes of section
3(21)(A)(ii) of the Act and section 4975(e)(3)(B) of the Code should
be deemed to include all fees or other compensation incidental to
the transaction in which the investment advice to the plan has been
rendered or will be rendered, and may therefore include insurance
and mutual fund sales commissions. The Department and the [IRS] have
not modified or revised this position, notwithstanding the contrary
---------------------------------------------------------------------------
views expressed in several of the applications for class exemption.

This proposed definition is also consistent with, for example,
guidance the Department provided just eight years after the 1975
regulation was finalized. Specifically, an association that represented
broker-dealers asked the Department to ``clarify the status of broker-
dealers under ERISA.'' \132\ The association posited that fiduciary
status under ERISA section 3(21)(A)(ii) (the ``fee or other
compensation, direct or indirect'' provision) would not attach to
broker-dealers ``unless the broker-dealer provides investment advice
for distinct, non-transactional compensation.'' \133\ The Department
rejected this interpretation of ERISA section 3(21)(A)(ii). The
Department stated that, based on the facts and circumstances presented
by each case,
---------------------------------------------------------------------------

\132\ U.S. Department of Labor, Adv. Op. 83-60A (Nov. 21, 1983),
available at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1983-60a.
\133\ Id.

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.\134\
---------------------------------------------------------------------------

\134\ Id.; see Letter from the Department of Labor to the
Securities Industry Association (Mar. 1, 1984) (declining to modify
this position); see also IB 96-1, 61 FR 29586, 29589 at fn. 3 (June
11, 1996) (``The Department has expressed the view that, for
purposes of section 3(21)(A)(ii), such fees or other compensation
need not come from the plan and should be deemed to include all fees
or other compensation incident to the transaction in which the
investment advise [sic] has been or will be rendered.'' (citations
omitted)).

As the proposed regulation makes clear, however, there must be a
link between the transaction-based compensation and the investment
professional's recommendation. Under the terms of the proposal, the
compensation is treated as paid ``in connection with or as a result
of'' the provision of advice only if it would not have been paid but
for the recommended transaction or the provision of advice, or if the
investment advice provider's eligibility for the compensation (or its
amount) is based in whole or part on the recommended transaction or the
provision of advice.
Under the proposed definition, any fee that is paid explicitly for
the provision of investment advice would fall within the proposed
definition of ``for a fee or other compensation, direct or indirect.''
This would include, for example, a fee paid to an investment adviser
under the Advisers Act based on the retirement investor's assets under
management.
A fee or other compensation received in connection with an
investment transaction also would fall within the proposed definition
of ``for a fee or other compensation, direct or indirect.'' This
treatment of investment compensation is in accord with the actions of
other State and Federal regulators, and with the modern marketplace for
investment advice in which brokers and insurance agents can do far more
than merely execute transactions or close sales. Investment
professionals are commonly compensated for their advice through the
payment of transaction-based fees, such as commissions, which are
contingent on the investor's decision to engage in the recommended
transaction.
The SEC acknowledged this in the Regulation Best Interest release,
noting 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. ''\135\ The SEC discussion further contemplated that
commissions compensate broker-dealers for their recommendations, and
may be the preferred method of investment advice compensation with
respect to certain transactions. As an example, the SEC stated that
retail customers seeking a long-term investment may determine that
``paying a one-time commission to a broker-dealer recommending such an
investment is more cost effective than paying an ongoing advisory fee
to an investment adviser merely to hold the same investment.'' \136\
The Department agrees that there are benefits to ensuring a wide range
of compensation structures remain available to retirement investors.
---------------------------------------------------------------------------

\135\ Regulation Best Interest release, 84 FR 33318, 33319 (July
12, 2019).
\136\ Id.
---------------------------------------------------------------------------

Likewise, the NAIC Model Regulation acknowledged that insurance
agents make recommendations and might be compensated for their
recommendations through commissions. The NAIC Model Regulation 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.'' \137\ The definition of ``cash compensation'' in the model
regulation is: ``any discount, concession, fee, service fee,

[[Page 75910]]

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.'' \138\
---------------------------------------------------------------------------

\137\ NAIC Model Regulation, at Section 6, 5. M.
\138\ Id. at Section 5. B.
---------------------------------------------------------------------------

When an investment professional meets the five-part test set out in
the 1975 rule, or the fiduciary definition set forth in this proposal,
the services rendered by the professional include individualized
advice, and the compensation, including commission payments, is not
merely for execution of a sale, but for the professional advice
provided to the investor, as uniformly recognized by the Department's
previous guidance and by other State and Federal regulators.\139\
---------------------------------------------------------------------------

\139\ E.g., U.S. Department of Labor, Adv. Op. 83-60A (Nov. 21,
1983), available at https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/1983-60a.
---------------------------------------------------------------------------

The statutory exemption for investment advice to participants and
beneficiaries of individual account plans set forth in ERISA section
408(b)(14) similarly recognizes that compensation for advice often
comes in the form of commissions and transaction-based
compensation.\140\ Accordingly, the exemption applies to transactions
``in connection with the provision of investment advice described in
section 3(21)(A)(ii)'' including ``the direct or indirect receipt of
fees or other compensation by the fiduciary adviser or an affiliate
thereof . . . . in connection with the provision of the advice or in
connection with an acquisition, holding, or sale of a security or other
property available as an investment under the plan pursuant to the
investment advice.'' \141\
---------------------------------------------------------------------------

\140\ 29 U.S.C. 1108(b)(14). See Code section 4975(d)(17)
(parallel statutory exemption).
\141\ 29 U.S.C. 1108(b)(14) (emphasis added).
---------------------------------------------------------------------------

As has been true since the Department first proposed regulations
under this section in 1975 and as discussed above, the Department
understands the phrase ``for a fee or other compensation, direct or
indirect'' to encompass a broad array of compensation incident to the
transaction.\142\ The Department requests comments on this portion of
the proposal, including whether additional examples would be helpful.
---------------------------------------------------------------------------

\142\ See Findings, Conclusions, and Recommendations of the
United States Magistrate Judge, Federation of Americans for Consumer
Choice v. U.S. Dep't of Labor, No. 3:22-CV-00243-K-BT, 2023 WL
5682411, at *21 (N.D. Tex. June 30, 2023) (``The expansive choice of
investment advice `for other compensation' indicates an intent to
cover any transaction where the financial professional may receive
conflicted income if they are acting as a trusted adviser.'')
---------------------------------------------------------------------------

7. Other Definitions in the Proposed Rule

In addition to the definitions discussed above, proposed paragraph
(f) would define a variety of other pertinent terms for purposes of the
proposed rule. The definitions generally track other definitions within
Title I and Title II of ERISA and the Federal securities laws. The
definitions in proposed paragraph (f), not otherwise discussed above,
are: ``affiliate'' (similar to that of paragraph (e)(1) of the 1975
rule); and ``control'' (similar to that of paragraph (e)(2) of the 1975
rule). ``Plan'' refers to any plan described under section 3(3) of
ERISA and any plan described in section 4975(e)(1)(A) of the Code. For
purposes of the proposal ``IRA'' refers to any account or annuity
described in Code section 4975(e)(1)(B) through (F), including, for
example, an individual retirement account described in section 408(a)
of the Code and a health savings account described in section 223(d) of
the Code.\143\ ``Plan fiduciary'' would use the same definition as
described in section (3)(21)(A) of the Act and section 4975(e)(3) of
the Code; for these purposes, a participant or beneficiary of the plan
who is receiving advice is not a ``plan fiduciary'' with respect to the
plan. Under the proposed rule ``relative'' refers to a person described
in section 3(15) of the Act and section 4975(e)(6) of the Code and also
includes a sibling, or a spouse of a sibling. ``Plan participant'' or
``participant'' (for a plan described in section 3(3) of ERISA), would
be a person described in section 3(7) ERISA.
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\143\ The definition of an IRA would also include an individual
retirement annuity described in Code section 408(b), an Archer MSA
described in Code section 220(d), and a Coverdell education savings
account described in Code section 530. 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).
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8. Scope of Investment Advice Fiduciary Duty

Paragraph (c)(2) of the proposal confirms that a person who is a
fiduciary with respect to a plan or IRA by reason of rendering
investment advice is not deemed to be a fiduciary regarding any assets
of the plan or IRA with respect to which that person does not have or
exercise any discretionary authority, control, or responsibility or
with respect to which the person does not render or have authority to
render investment advice defined by the proposed rule. On the other
hand, nothing in paragraph (c)(2) exempts such a person from the
provisions of section 405(a) of the Act concerning liability for
violations of fiduciary responsibility by other fiduciaries or excludes
such person from the definition of party in interest under section
3(14)(B) of the Act or section 4975(e)(2) of the Code. This provision
is unchanged from the current 1975 regulation.
The Department further notes that, if a person's recommendations
relate to the advisability of acquiring or exchanging securities or
other investment property in a particular transaction, the proposed
rule does not impose on the person an automatic fiduciary obligation to
continue to monitor the investment or the retirement investor's
activities to ensure the recommendations remain prudent and appropriate
for the plan or IRA. Instead, the obligation to monitor the investment
on an ongoing basis would be a function of the reasonable expectations,
understandings, arrangements, or agreements of the parties.
Also, as has been made clear by the Department, there are a number
of ways to provide fiduciary investment advice without engaging in
transactions prohibited by Title I or Title II of ERISA because of the
conflicts of interest they pose. For example, an investment advice
provider can structure the fee arrangement to avoid a prohibited
transaction (and the related conflicts of interest) by offsetting third
party payments against direct fees agreed to by the retirement
investor, as explained in advisory opinions issued by the
Department.\144\ If there is not a prohibited transaction, then there
is no need to comply with the terms of an exemption, though an
investment advice fiduciary with respect to a Title I plan would still
be required to comply with the statutory duties including prudence and
loyalty.
---------------------------------------------------------------------------

\144\ U.S. Department of Labor, Adv. Op. 97-15A (May 22, 1997).
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Proposed paragraph (d) of the regulation is identical to paragraph
(d) of the 1975 regulation, apart from updated references. The
paragraph specifically provides that the mere execution of a securities
transaction at the direction of a plan or IRA owner would not be deemed
to be fiduciary activity. The regulation's scope remains limited to
advice relationships, as delineated in its text, and does not cover
transactions that are executed pursuant to specific direction in which
no advice is provided. The Department seeks comment as to whether any
updates to paragraph (d) are necessary.

[[Page 75911]]

9. Interpretive Bulletin 96-1

The proposed regulation does not include a specific provision
addressing investment education. Investment education is addressed in
the Department's IB 96-1, which was reinstated in 2020.\145\ IB 96-1
provides examples of four categories of information and materials
regarding participant-directed individual account plans--plan
information, general financial and investment information, asset
allocation models, and interactive investment materials--that do not
constitute investment advice. This is the case irrespective of who
provides the information (e.g., plan sponsor, fiduciary, or service
provider), the frequency with which the information is shared, the form
in which the information and materials are provided (e.g., on an
individual or group basis, in writing or orally, or via video or
computer software), or whether an identified category of information
and materials is furnished alone or in combination with other
identified categories of information and materials. The IB states that
there may be many other examples of information, materials, and
educational services, which, if furnished to participants and
beneficiaries, would not constitute ``investment advice.''
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\145\ 85 FR 40589 (July 7, 2020).
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Although the Department issued IB 96-1 when the 1975 rule was in
effect, the Department believes that the IB would continue to provide
accurate guidance under the proposed regulation. If the proposed rule
is finalized, the IB would continue to correctly describe the types of
educational information and materials that should not be treated as
``recommendations'' subject to the fiduciary advice definition.
Although the IB specifically applies in the context of participants and
beneficiaries in participant-directed individual account plans, the
Department believes that the analysis it presents is valid regardless
of whether the retirement investor is a plan participant, beneficiary,
IRA owner, IRA beneficiary, or fiduciary.
One important example of investment education is the provision of
information about the benefits of increasing contributions to an
employee benefit plan. Under IB 96-1, the provision of information on
``the benefits of plan participation'' and the ``benefits of increasing
plan contributions'' are both examples of ``plan information.'' The
Department confirms that, for purposes of the proposal, the provision
of such information would not trigger fiduciary status.
In the 2016 Final Rule, the Department incorporated the provisions
of IB 96-1 into the regulatory text; as a result, certain provisions
were specifically applicable to transactions involving IRAs. In
addition, the Department made a few changes to the provisions. The
Department clarified and expanded the category in IB 96-1 from
``General Financial and Investment Information'' to ``General
financial, investment, and retirement information.'' The revised
category included information on ``[g]eneral methods and strategies for
managing assets in retirement (e.g., systemic withdrawal payments,
annuitization, guaranteed minimum withdrawal benefits).'' This change
was intended to improve retirement security by facilitating the
provision of information and education relating to retirement needs
that extend beyond a participant's or beneficiary's date of retirement.
Such information would be considered non-fiduciary education as long as
the provider did not recommend a specific investment or investment
strategy.\146\
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\146\ 81 FR 20946, 20977 (Apr. 8, 2016).
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The Department cautions however, that to the extent a provider goes
beyond providing education and gives investment advice on a specific
investment or investment strategy, it is not appropriate to broadly
exempt those communications from fiduciary liability. The Department
believes that such an approach would be especially inappropriate in
cases in which a service provider offers ``educational'' services that
systematically exceed the boundaries of education. In such cases, when
firms or individuals make specific investment recommendations to plan
participants, they should adhere to basic fiduciary norms of prudence
and loyalty and take appropriate measures to protect plan participants
and beneficiaries from the potential harm caused by conflicts of
interest.
An employer or other plan sponsor would not, however, become an
investment advice fiduciary under the proposal merely because the
employer or plan sponsor engaged a service provider to provide
investment advice or because a service provider engaged to provide
investment education crossed the line and provided investment advice in
a particular case. On the other hand, whether the service provider
renders fiduciary advice or non-fiduciary education, the proposed rule
does not change the well-established fiduciary obligations that arise
in connection with the selection and monitoring of plan service
providers.\147\ Even if the service provider crosses the line and makes
investment recommendations that go beyond mere ``education,'' the
service provider will only be treated as an investment advice fiduciary
to the extent that the full proposed regulatory definition is
satisfied. Depending on the facts and circumstances, whether a service
provider is an investment advice fiduciary under the proposal may
require an inquiry into whether that service provider has held itself
out as a fiduciary, whether that service provider regularly provides
investment advice as part of the provider's business, whether such
advice is individualized, and whether the service provider received a
fee or compensation (directly or indirectly) in connection with the
advice.
---------------------------------------------------------------------------

\147\ See IB 96-1, Section (e) ``Selection and Monitoring of
Educators and Advisors.''
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The Department seeks comment on this discussion of investment
education. Do commenters agree that the examples of investment
education information and materials identified in IB 96-1 and in the
provisions of the 2016 Final Rule regarding investment education do not
constitute a ``recommendation'' as described under the proposed rule?
Further, do commenters believe that IB 96-1 provides sufficient and
appropriate guidance in conjunction with the provisions in this
proposal, or do commenters support amending IB 96-1 or incorporating
any of its provisions into the final regulation?

10. Application to Code Section 4975

Certain provisions of Title I of ERISA, such as those relating to
participation, benefit accrual, and prohibited transactions, also
appear in Title II of ERISA, codified in the Code. This parallel
structure ensures that the relevant provisions apply to Title I plans,
whether or not they are ``plans'' defined in section 4975 of the Code,
and to tax-qualified plans and IRAs, regardless of whether they are
subject to Title I of ERISA. With regard to prohibited transactions,
the ERISA Title I provisions generally authorize recovery of losses
from, and imposition of civil penalties on, the responsible plan
fiduciaries, while the Title II provisions impose excise taxes on
persons engaging in the prohibited transactions. The definition of
fiduciary is the same in section 4975(e)(3)(B) of the Code as the
definition in section 3(21)(A)(ii) of ERISA, and, as noted above, the
Department's 1975 regulation defining fiduciary investment advice is
virtually identical to the regulation

[[Page 75912]]

defining the term ``fiduciary'' under the Code.
To rationalize the administration and interpretation of the
parallel provisions in Title I and Title II of ERISA, Reorganization
Plan No. 4 of 1978 divided the interpretive and rulemaking authority
for these provisions between the Secretaries of Labor and of the
Treasury.\148\ Under the Reorganization Plan, which was prepared by the
President and transmitted to Congress pursuant to the provisions of
Chapter 9 of Title 5 of the United States Code, the Department of Labor
has authority to interpret the prohibited transaction provisions and
the definition of a fiduciary in the Code. ERISA's prohibited
transaction rules, sections 406 to 408,\149\ apply to Title I plans,
and the Code's corresponding prohibited transaction rules, 26 U.S.C.
4975(c), apply to tax-qualified pension plans, as well as other tax-
advantaged arrangements, such as IRAs, that are not subject to the
fiduciary responsibility and prohibited transaction rules in Title I of
ERISA.\150\ In accordance with the above discussion, paragraph (g) of
the proposal, entitled ``Applicability'' provides that the regulation
defines a ``fiduciary'' both for purposes of ERISA section 3(21)(A)(ii)
and for the parallel provision in Code section 4975(e)(3)(B).
---------------------------------------------------------------------------

\148\ 5 U.S.C. App. (2018).
\149\ 29 U.S.C. 1106-1108.
\150\ Reorganization Plan No. 4 of 1978 also transferred to the
Secretary of Labor the authority to grant administrative exemptions
from the prohibited transaction provisions in section 4975 of the
Code. See section 4975(c)(2) of the Code.
---------------------------------------------------------------------------

Proposed paragraph (g) explains the applicability of Title I of
ERISA and the Code in the specific context of rollovers. As that
paragraph explains, ``a person who satisfies paragraphs (c)(1) and (e)
of this section in connection with a recommendation to a retirement
investor that is an employee benefit plan as defined in section 3(3) of
the Act, a fiduciary of such a plan, or a participant or beneficiary of
such a plan, including a recommendation concerning the rollover of
assets currently held in a plan to an IRA, is a fiduciary subject to
the provisions of Title I of the Act.'' With this example, the
Department intends to clarify the application of Title I to
recommendations made regarding rollovers from a Title I plan under the
proposal. As discussed above, the Department had earlier taken a
contrary position in the Deseret Letter, which was withdrawn.

11. State Law

Proposed paragraph (h) is entitled ``Continued applicability of
state law regulating insurance, banking, or securities'' and provides
``[n]othing in this section shall be construed to affect or modify the
provisions of section 514 of Title I of the Act, including the savings
clause in section 514(b)(2)(A) for State laws that regulate insurance,
banking, or securities.'' This paragraph of the proposal acknowledges
that ERISA section 514 expressly saves State regulation of insurance,
banking, and securities from ERISA's express preemption provision, and
confirms that the regulation is not intended to change the scope or
effect of ERISA section 514, including the savings clause in ERISA
section 514(b)(2)(A) for State regulation of insurance, banking, or
securities.

D. Severability

The Department is considering whether this proposal could continue
to work even if certain aspects of the proposal were struck down by a
court. In determining whether any aspects of this proposal could be
severable the Department is focused on the text and purpose of ERISA.
The Department requests comments regarding whether this proposal would
be workable and appropriate if certain aspects were severed, or why it
would not be workable or appropriate. Specifically, the Department is
interested in hearing which aspects of the rule the public believes
could or could not be severed, and the rationale behind those views.
The Department expects to consider severability as it reviews comments
and drafts a final rule.
The Department generally intends discrete aspects of this
regulatory package to be severable. For example, in the event that this
regulatory package is finalized with both an updated regulatory
definition of a fiduciary and amendments to the PTEs, the Department
intends that the updated regulatory definition of a fiduciary would
survive even if a court vacated any of the amendments to the PTEs
leaving in place the previously granted versions of those PTEs.

E. Effective Date

The Department proposes to make the rule effective 60 days after
publication of a final rule in the Federal Register. The Department
requests comment on this proposed timeframe and whether parties believe
that additional time is needed before the rule becomes applicable.

F. Regulatory Impact Analysis

This section analyzes the economic impact of the proposed rule and
proposed amendments to the following class administrative exemptions
(PTEs) providing relief from the prohibited transaction rules that are
applicable to fiduciaries under Title I of ERISA and the Code: PTEs
2020-02, 84-24, 75-1, 77-4, 80-83, 83-1, and 86-128. The Department is
publishing the proposed amendments to the PTEs elsewhere in this issue
of today's Federal Register. Collectively, the proposed rule and
amendments to the PTEs are referred to as ``the proposal'' for this
section.
Employment-based retirement plans and IRAs are critical to the
retirement security of millions of America's workers and their
families. Because retirement investors often lack financial expertise,
professional investment advice providers often play an important role
in guiding their investment decisions. Prudent professional advice
helps consumers set and achieve appropriate retirement savings and
decumulation goals more effectively than consumers would on their own.
For many years, the benefits of professional investment advice,
however, have been persistently undermined by conflicts of interest
that occur when financial services firms compensate individual
investment advice providers in a manner that incentivizes them to steer
consumers toward investments and transactions that yield higher profits
for the firms. These practices can bias the investment advice that
providers render to consumers and detrimentally impact their retirement
savings by eroding plan and IRA investment results.
Title I of ERISA imposes duties and restrictions on fiduciaries
with respect to employee benefit plans. ERISA section 404 requires
Title I plan fiduciaries to 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.''
Further, fiduciaries must carry out their duties ``solely in the
interest of the participants and beneficiaries'' of the plan. Title I
of ERISA also includes prohibited transaction provisions that forbid
fiduciaries from, among other things, self-dealing.\151\ The aim of the
prohibited transaction provisions is to protect plans, their
participants, and beneficiaries from dangerous conflicts of interest
that threaten the safety and security of plan benefits.\152\
---------------------------------------------------------------------------

\151\ ERISA section 406, 29 U.S.C. 1106.
\152\ Lockheed Corp. v. Spink, 517 U.S. 882 (1996); Comm'r v.
Keystone Consol. Indus, Inc., 508 U.S. 152 (1993).
---------------------------------------------------------------------------

Title II of ERISA, codified in the Internal Revenue Code, governs
the conduct of fiduciaries to tax-qualified

[[Page 75913]]

plans and IRAs. Although Title II does not directly impose specific
duties of prudence and loyalty on fiduciaries as ERISA section 404(a)
does, it prohibits fiduciaries from engaging in conflicted transactions
on many of the same terms as Title I.\153\
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\153\ Cf. 26 U.S.C. 4975(c)(1), Code section 4975(f)(5) defining
``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.''
---------------------------------------------------------------------------

The proposal focuses on the provision of fiduciary investment
advice to ERISA retirement plans, participants, and IRA owners and
seeks to reduce or eliminate the impacts of conflicts of interest on
advice they receive. The proposal amends the definition of a fiduciary
such that an investment advice provider is a fiduciary if the person
provides advice or makes a recommendation on any securities transaction
or other investment transaction or any investment strategy involving
securities or other investment property to the plan, plan fiduciary,
plan participant or beneficiary, IRA, IRA owner or IRA fiduciary
(retirement investor), the advice or recommendation is provided ``for a
fee or other compensation, direct or indirect,'' as defined by the
proposed rule, and (i), (ii) or (iii) is satisfied:
(i) 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;
(ii) 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 its 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
(iii) The person making the recommendation represents or
acknowledges that they are acting as a fiduciary when making the
investment recommendation.
The proposed amendments to PTE 2020-02 expand the scope of the
exemption to cover certain transactions involving PEPs and transactions
involving ``pure'' robo-advice providers. The amendments would provide
greater specificity as to what information must be disclosed to
retirement investors under the exemption and clarify that fiduciary
acknowledgements must clearly indicate whether the entity is a
fiduciary with respect to investment recommendations and advice.
Additionally, the amendments would require financial institutions to
notify retirement investors of their right to obtain additional
information upon request, free of charge. The proposed amendments would
also provide more guidance for financial institutions and investment
professionals complying with PTE 2020-02's requirements related to
financial institutions' policies and procedures. The amendments would
also expand on which parties can request and receive records under the
exemption's recordkeeping provisions.
PTE 84-24 would be amended to limit relief for investment advice to
independent insurance producers (i.e., independent insurance agencies)
that recommend annuities from an unaffiliated financial institution to
retirement investors on a commission or fee basis. Additionally, PTEs
75-1 Parts III and IV, 77-4, 80-83, 83-1, and 86-128 would be amended
to eliminate relief for transactions resulting from fiduciary
investment advice, as defined under ERISA.
Rather than look to an assortment of different exemptions with
different conditions for different transactions, investment advice
fiduciaries--apart from independent insurance producers--would
generally be expected to rely solely on the amended PTE 2020-02 for
exemptive relief for covered investment advice transactions. These
amendments serve to give the same or similar requirement for the
provision of retirement investment advice regardless of the market and
investment product.
The most significant benefits of the proposal are expected to
result from (1) changing the definition of a fiduciary by amending the
five-part test, (2) requiring advice given to a broader range of advice
recipients, including plan fiduciaries and non-retail investors, to
meet fiduciary standards under ERISA, (3) extending the application of
the fiduciary best interest standard in the market for non-security
annuities, creating a uniform standard across different retirement
products, and (4) requiring that more rollover recommendations be in
the retirement investor's best interest.
These proposed amendments generally align with the Investment
Advisers Act of 1940 and the SEC's Regulation Best Interest. In
crafting this proposal, the Department has worked to align its proposed
definition with Regulation Best Interest and the Advisers Act where it
can. ERISA has a functional fiduciary test and imposes fiduciary status
only to the extent the functional test is satisfied. The Department
intends for the compliance obligations under this proposal to broadly
align with the standards set by the SEC where practicable and has tried
to accomplish such alignment in this proposal. The Department believes
that by harmonizing the application of fiduciary duty for retirement
investment advisers across regulatory regimes, retirement investors
will benefit from more uniform protections from conflicted advice.
While extending fiduciary duty to more entities will generate costs,
the Department believes any new compliance costs will not be unduly
burdensome as the proposal broadly aligns with those compliance
obligations imposed under the Investment Advisers Act and the SEC's
Regulation Best Interest on investment advisers and broker-dealers,
respectively, and simply expands them to larger portions of the
retirement market.
The Department of Labor has examined the effect of the proposal as
required by Executive Order 13563,\154\ Executive Order 12866,\155\ the
Regulatory Flexibility Act,\156\ section 202 of the Unfunded Mandates
Reform Act,\157\ and Executive Order 13132.\158\
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\154\ 76 FR 3821 (Jan. 21, 2011).
\155\ 58 FR 51735 (Oct. 4, 1993).
\156\ Public Law 96-354, 94 Stat. 1164 (Sept. 19, 1980).
\157\ Public Law 104-4, 109 Stat. 48 (Mar. 22, 1995).
\158\ 64 FR 43255 (Aug. 9, 1999).
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1. Executive Orders

Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives. If regulation
is necessary, agencies must choose a regulatory approach that maximizes
net benefits, including potential economic, environmental, public
health and safety effects; distributive impacts; and equity. Executive
Order 13563 emphasizes the importance of quantifying costs and
benefits, reducing costs, harmonizing rules, and promoting flexibility.
Under Executive Order 12866, ``significant'' regulatory actions are
subject to review by the Office of Management and Budget (OMB). As
amended by Executive Order 14094,\159\ entitled ``Modernizing
Regulatory Review'', section 3(f) of Executive Order 12866 defines a
``significant regulatory

[[Page 75914]]

action'' as any regulatory action that is likely to result in a rule
that may:
---------------------------------------------------------------------------

\159\ 88 FR 21879 (Apr. 6, 2023).
---------------------------------------------------------------------------

(1) have an annual effect on the economy of $200 million or more
(adjusted every three years by the Administrator of the Office of
Information and Regulatory Affairs (OIRA) for changes in gross domestic
product); or adversely affect in a material way the economy, a sector
of the economy, productivity, competition, jobs, the environment,
public health or safety, or State, local, territorial, or tribal
governments or communities;
(2) create a serious inconsistency or otherwise interfere with an
action taken or planned by another agency;
(3) materially alter the budgetary impacts of entitlement grants,
user fees, or loan programs or the rights and obligations of recipients
thereof; or
(4) raise legal or policy issues for which centralized review would
meaningfully further the President's priorities or the principles set
forth in the Executive order, as specifically authorized in a timely
manner by the Administrator of OIRA in each case.
It has been determined that this proposal is significant within the
meaning of section 3(f)(1) of the Executive Order. Therefore, the
Department has provided an assessment of the proposal's potential
costs, benefits, and transfers, and OMB has reviewed the proposal.

2. Need for Regulatory Action

In preparing this analysis, the Department has reviewed recent
regulatory and legislative actions concerning investment advice, market
developments in industries providing investment advice, and research
literature weighing in on investment advice. From this review, the
Department believes there is compelling evidence that retirement
investors remain vulnerable to harm from conflicts of interest in the
investment advice they receive. Given this evidence, and the
Department's mission to ensure the security of retirement benefits of
America's workers and their families, the Department is proposing to
amend the definition of fiduciary and certain exemption relief.
Why Being a Fiduciary Matters
As described above, fiduciaries under ERISA are subject to specific
requirements. ERISA section 404 requires Title I plan fiduciaries to
act with the ``care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man 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.'' Further,
fiduciaries must carry out their duties ``solely in the interest of the
participants and beneficiaries'' of the plan. Title II of ERISA,
codified in the Internal Revenue Code, governs the conduct of
fiduciaries to tax-qualified plans and IRAs. Under both Title I and
Title II, fiduciaries are subject to prohibited transactions that
forbid them from, among other things, self-dealing.\160\ The aim of the
prohibited transaction provisions is to protect plans, their
participants, and beneficiaries from dangerous conflicts of interest
that threaten the safety and security of plan benefits.\161\
---------------------------------------------------------------------------

\160\ ERISA section 406, 29 U.S.C. 1106.
\161\ Lockheed Corp. v. Spink, 517 U.S. 882 (1996); Commissioner
v. Keystone Consol. Industries, Inc., 508 U.S. 152 (1993).
---------------------------------------------------------------------------

This combination of a high standard of conduct and personal
liability for violations of the standard of conduct for Title I
fiduciaries, and restrictions on behavior for Title I and Title II
fiduciaries functions to protect plans, participants, and beneficiaries
from fiduciary misdeeds. Previously, the Department conducted an
economic analysis\162\ (2016 Regulatory Impact Analysis (RIA)) of then-
current market conditions and the likely effects of expanding the
definition of fiduciary to include more individuals. It reviewed
evidence that included:
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\162\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
---------------------------------------------------------------------------

statistical comparisons finding poorer risk-adjusted
investment performance in more conflicted settings;
experimental and audit studies revealing questionable
investment advice provider conduct, including recommendations to
withdraw from low-cost, well diversified portfolios and invest in
higher-cost alternatives likely to deliver inferior results;
studies detailing gaps in consumers' financial literacy,
errors in their financial decision-making, and the inadequacy of
disclosure as a consumer protection;
federal agency reports documenting abuse and investors'
vulnerability;
a study by the President's Council of Economic Advisers
that attributed $17 billion in annual IRA investor losses to advisory
conflicts;
economic theory, which predicts that when expert
investment advice providers have conflicts of interest, non-expert
investors will be harmed; and
international experience with harmful advisory conflicts
and responsive reforms.
The Department's analysis found that conflicted advice was
widespread, caused serious harm to retirement investors, and that
disclosing conflicts alone would fail to adequately mitigate the
conflicts or remedy the harm. The analysis concluded that extending
fiduciary protections to more advice would reduce advisory conflicts
and deliver substantial net gains for retirement investors.
Changes in Retirement Savings Since the 1975 Regulation
While the 1975 regulation that established the five-part test has
remained fixed, the private retirement savings landscape has changed
dramatically. In the late 1970s, private retirement savings were mainly
held in large employer-sponsored defined benefit plans. Under the terms
of these plans and the governing legal structure, the plans and plan
sponsors promised fixed payments to retirees, generally based on a
percentage of their compensation and years of employment with the
sponsoring employer. Plan sponsors hired professional asset managers,
who were subject to ERISA's fiduciary obligations, to invest the funds,
and the employers or other plan sponsors shouldered the risk that
investment returns were insufficient to pay promised benefits.
Individual plan participants did not take direct responsibility for
management of the assets held by the plan and did not depend on expert
advice for the sound management of funds, which were directly
controlled by investment professionals.
Since then, much of the responsibility for investment decisions in
employment-based plans has shifted from these large private pension
fund managers to individual retirement account participants, many with
low levels of financial literacy. Over time, the share of participants
covered by defined contribution plans, in which benefits are based on
contributions and earnings within an individual account, grew
substantially, from just 26 percent in 1975 to 78 percent in 2020.\163\
By 2020, 94 percent of active participants in defined contribution
plans had responsibility for directing the investment of some or all of
their

[[Page 75915]]

account balances.\164\ The Department could not have foreseen such a
dramatic shift when it issued the existing fiduciary investment advice
regulation in 1975. The passage of ERISA authorized IRAs in 1974, and
IRAs remained in their infancy when the 1975 rule was issued. The vast
majority of consumers were not managing their own retirement savings,
nor retaining investment advisers to do so, because 401(k) plans did
not even exist in 1975.
---------------------------------------------------------------------------

\163\ Employee Benefits Security Administration, Private Pension
Plan Bulletin Historical Tables and Graphs 1975-2020, (November
2022), Table E4, (November 2022), https://www.dol.gov/sites/dolgov/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf.
\164\ Employee Benefits Security Administration, Private Pension
Plan Bulletin: Abstract of 2020 Form 5500 Annual Reports, Table D5,
(November 2022), https://www.dol.gov/sites/dolgov/files/EBSA/researchers/statistics/retirement-bulletins/private-pension-plan-bulletins-abstract-2020.pdf.
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Though workers have assumed more of the responsibility for their
investment decisions, they at least still receive some fiduciary
oversight and protections provided by ERISA while participating in
employer-sponsored plans. However, often workers who change jobs or
retire roll over their retirement savings to an IRA, where they assume
full responsibility for investing the assets in the larger marketplace
without those protections. Not only is it very common for defined
contribution plan participants to roll over their retirement savings to
an IRA, but it is also increasingly common among defined benefit plan
participants. Defined benefit plan participants have the option to
perform a rollover if their plan allows them to take a lump-sum payment
when they separate from service. About 36 percent of private industry
workers in traditional defined benefit plans have a lump-sum payment
available at normal retirement, as do virtually all private industry
workers in non-traditional defined benefit plans, such as cash balance
plans.\165\
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\165\ U.S. Bureau of Labor Statistics, National Compensation
Survey: Retirement Plan Provisions For Private Industry Workers in
the United States, 2022, Table 6, (April 2023), https://www.bls.gov/ebs/publications/retirement-plan-provisions-for-private-industry-workers-2022.htm.
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In 1981, private defined benefit plans held more than twice the
assets in private defined contribution plans, and roughly 10 times more
than IRA assets. By the first quarter of 2022, the order had reversed:
IRAs held $13.2 trillion in assets, private defined contribution plans
held $9.2 trillion, and private defined benefit plans held $3.7
trillion in assets.\166\ This trend is expected to continue as
retirement investors are projected to move $4.5 trillion from defined
contribution plans to IRAs from 2022 through 2027.\167\
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\166\ Board of Governors of the Federal Reserve System,
Financial Accounts of the United States: Flow of Funds, Balance
Sheets, and Integrated Macroeconomic Accounts: Second Quarter 2022,
Tables L.117 & L.118, (Sept. 9, 2022), https://www.federalreserve.gov/releases/z1/20220909/z1.pdf; Historical
Series Z1/Z1/FL572000075.Q, Z1/Z1/FL574090055.Q & Z1/Z1/
LM893131573.Q. https://www.federalreserve.gov/datadownload/Build.aspx?rel=z1.
\167\ Cerulli Associates, U.S. Retirement Markets 2022: The Role
of Workplace Retirement Plans in the War for Talent, Exhibit 8.06,
(2023).
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Moreover, workers have become more reliant on their retirement
savings as Social Security benefits have eroded in recent decades. The
age to receive full retirement benefits is gradually increasing from 65
to 67 between 2003 and 2027. Those who claim Social Security before
reaching full retirement age--which in 2021 was approximately 60
percent of new retired-worker beneficiaries--receive reduced
benefits.\168\ For a hypothetical medium wage earner who first claims
benefits at age 65, their Social Security benefit, as a share of
average career earnings, was more than 40 percent in 2005 but is
projected to be only about 35 percent in 2025.\169\
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\168\ Congressional Research Services, The Social Security
Retirement Age, (July 6, 2022), https://sgp.fas.org/crs/misc/R44670.pdf.
\169\ Social Security Administration, Office of the Chief
Actuary, Replacement Rates for Hypothetical Retired Workers,
Actuarial Note, 2021.9, Tables B & D, (August 2021), https://www.ssa.gov/oact/NOTES/ran9/an2021-9.pdf.
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Investment Advice and the 1975 Regulation
As the nature of retirement savings has changed since 1975,
investment advice has also evolved. Commercial relationships between
corporate pension plan sponsors and fund managers and their consulting
advisers have been supplanted by retail relationships between consumers
and the trusted experts they turn to for help managing their 401(k)
plan and IRA savings.
Instead of ensuring that trusted advisers give prudent and unbiased
advice in accordance with fiduciary norms, the 1975 regulation erected
a multi-part series of technical impediments to fiduciary
responsibility. The five-part test of the 1975 rule diverges from the
express language of the statute and from its protective purposes by
stating that advice must be on a ``regular basis'' and be ``a primary
basis for investment decisions'' to confer fiduciary status. Without
fiduciary status, the advice provider is free to disregard ERISA's
duties of prudence and loyalty and to engage in self-dealing
transactions that would otherwise be flatly prohibited by ERISA and the
Code because of the dangers they pose to plans and plan participants.
While consumers often use financial advisers for investment advice
related to their retirement savings, if an investment recommendation
does not meet all five parts of the 1975 test, the adviser is not
treated as a fiduciary under ERISA, no matter how complete the
investor's reliance on recommendations purported to be based on their
best interest in light of their individual circumstances.
For example, under the 1975 rule, if the advice is not given on a
``regular basis,'' it makes no difference if the person making the
recommendation claims to make the recommendation based on the
investor's best interest and knows that the investor is relying on that
recommendation. Thus, if a plan participant seeks advice on whether to
roll over all their retirement savings, representing a lifetime of
work, out of an ERISA-covered plan overseen by professional ERISA
fiduciaries, to purchase an annuity, the person making the
recommendation with respect to the purchase of the annuity has no
obligation to adhere to a best interest standard unless they meet all
prongs of the 1975 rule, including regularly giving advice to the plan
participant. This is true even if the person giving the advice holds
themselves out as an investment expert whose recommendation is based
solely on a careful and individualized assessment of the investor's
needs, the plan participant has no investment expertise whatsoever, and
both parties understand that the participant is relying upon the advice
for the most important financial decision of their life. Because the
advice was not rendered on a ``regular basis,'' the adviser has no
obligation under ERISA to adhere to fiduciary standards, and thus would
not be subject to ERISA's prohibitions on disregarding the
participants' financial interests, recommending an annuity that is
imprudent and ill-suited to the participant's circumstances, and
favoring the adviser's own financial interests at the expense of the
participant.\170\ An adviser who regularly

[[Page 75916]]

had rendered trivial advice about small plan investments, and met the
other prongs of the multi-part test, would appropriately be treated as
a fiduciary if they met the other requirements of the 1975 rule, but
not the person who on one occasion purported to give individualized
advice to roll a lifetime of savings out of an ERISA-covered plan and
place it in a fixed indexed annuity. This is not a sensible way to e
draw distinctions in fiduciary status, and finds no support in the text
of ERISA, which makes no mention of a ``regular basis'' requirement.
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\170\ Investors have suffered significant losses when an
investment professional does not act in the investor's best
interest. For example, in 2021, the SEC settled with Teachers
Insurance and Annuity Association of America (TIAA) for $97 million,
citing disclosure violations and failure to implement policies and
procedures. See https://www.sec.gov/litigation/admin/2021/33-10954.pdf. While the SEC was able to settle, the Southern District
of New York recently dismissed a complaint by plaintiffs in this
same TIAA plan who argued that TIAA acted as an ERISA fiduciary when
advising plan participants to roll over assets from their employer-
sponsored plan to a TIAA managed account product. Although TIAA
represented in market materials that it ``[met] a fiduciary
standard'' when providing investment recommendations, the court
found that it did not provide this advice on a regular basis and
therefore did not satisfy the five-part test to be considered an
ERISA fiduciary. See Carfora v. TIAA, 631 F. Supp. 3d 125, 138 (S.
D. N. Y. 2022).
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When the Department issued PTE 2020-02, it sought to ameliorate
some of the effects of the regular basis requirement by suggesting that
rollover advice could be treated as falling within the 1975 rule, if it
was rendered at the beginning of an ongoing advisory relationship.
Accordingly, in an April 2021 FAQ, in the context of advice to roll
over assets from an employee benefit plan to an IRA, the Department
acknowledged that a single instance of advice would not satisfy the
regular basis prong of the 1975 test \171\ but explained that ``advice
to roll over plan assets can also occur as part of an ongoing
relationship or as the beginning of an intended future ongoing
relationship that an individual has with an investment advice
provider.'' \172\ In other words, ``when the investment advice provider
has not previously provided advice but expects to regularly make
investment recommendations regarding the IRA as part of an ongoing
relationship, the advice to roll assets out of an employee benefit plan
into an IRA would be the start of an advice relationship that satisfies
the regular basis requirement.'' \173\
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\171\ Employee Benefits Security Administration, New Fiduciary
Advice Exemption: PTE 2020-02 Improving Investment Advice for
Workers & Retirees Frequently Asked Questions, (April 2021), https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption; Notably, although the
Department does not think that a single instance of advice would
satisfy the regular basis prong of the 1975 regulation, a single
piece of advice can be sufficient to satisfy the language of the
statute. See Findings, Conclusions, and Recommendations of the
United States Magistrate Judge, Federation of Ams. for Consumer
Choice v. U.S. Dep't of Labor, 2023 WL 5682411, at *18, No. 3:22-CV-
00243-K-BT, at 43 (N.D. Tex. June 30, 2023) (``First-time advice may
be sufficient to confer fiduciary status and is consistent with
ERISA.'') (emphasis added).
\172\ Employee Benefits Security Administration, New Fiduciary
Advice Exemption: PTE 2020-02 Improving Investment Advice for
Workers & Retirees Frequently Asked Questions, (April 2021), https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.
\173\ Id.
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Ultimately, however, that policy interpretation was struck down as
inconsistent with the text of the 1975 rule.\174\ In American
Securities Association v. United States Department of Labor, the court
found that ``the scope of the regular basis inquiry is limited to the
provision of advice pertaining to a particular plan.'' \175\ Further,
the court held that, ``[b]efore a rollover occurs, a professional who
gives rollover advice does so with respect to an ERISA-governed plan.
However, after the rollover, any future advice will be with respect to
a new non-ERISA plan, such as an IRA that contains new assets from the
rollover. The professional's one-time rollover advice is thus the last
advice that he or she makes to the specific plan.'' \176\ Based on the
court's ruling, the only way for the Department to remedy the
shortcomings of the ``regular basis'' test is through new rulemaking.
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\174\ ASA v. U.S. Dep't of Labor, No. 8:22-CV-330VMC-CPT, 2023
WL 1967573, at *14-*19 (M.D. Fla. Feb. 13, 2023).
\175\ Id. at *16 (emphasis added).
\176\ Id. at *17; id. (``Because assets cease to be assets of an
ERISA plan after the rollover is complete, any future provision of
advice is, by nature, no longer to that ERISA plan.''); Findings,
Conclusions, and Recommendations of the United States Magistrate
Judge, Federation of Americans for Consumer Choice v. U.S. Dep't of
Labor, No. 3:22-CV-00243-K-BT, 2023 WL 5682411, at *18 (N.D. Tex.
June 30, 2023) (``ERISA's text defines Title I and Title II `plans'
distinctly. By utilizing these separate definitions, Congress
indicated how each Title's plans should be treated differently due
to the nature of the relationship between financial professionals
and retirement investors in Title I and Title II plans. As the New
Interpretation purports to consider recommendations as to Title II
plans when determining Title I fiduciary status, it conflicts with
ERISA.'') (internal citation omitted).
---------------------------------------------------------------------------

Inexpert Customers
Researchers have consistently found that many Americans demonstrate
low levels of financial knowledge and lack basic understanding of
investment strategies. In particular, households age 50 and older and
nearing retirement, ``fail to grasp essential aspects of risk
diversification, asset valuation, portfolio choice, and investment
fees.'' \177\ Such customers appear to be particularly vulnerable to
receiving harmful advice. Egan et al. (2019) found that misconduct
among investment advice professionals was higher in counties with
populations that were less financially sophisticated, including those
who are less educated and older.\178\ Retirement investors are in a
poor position to assess the quality of the advice they receive, and the
advisers' incentives are often misaligned with the investors'
interests.\179\ The dependence of inexpert clients on advisers with
significant conflicts of interest creates a large risk of investment
advice and investment decisions that are not in the best interest of
retirement investors.
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\177\ Annamaria Lusardi, Olivia Mitchell, & Vilsa Curto,
Financial Literacy and Financial Sophistication in the Older
Population, 13(4) Journal of Pension Economics and Finance 347-366,
(October 2014).
\178\ Mark Egan, Gregor Matvos, & Amit Seru, The Market for
Financial Adviser Misconduct, 127(1) Journal of Political Economy,
(2019).
\179\ Mark Egan, Brokers vs. Retail Investors: Conflicting
Interests and Dominated Products, 74(3) Journal of Finance 1217-
1260, (June 2019).
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The Department's 2016 RIA\180\ demonstrated that the balance of
research and evidence indicates that the aggregate harm from cases in
which consumers received bad advice due to investment advice providers'
conflicts of interest is significant. The complex nature of financial
markets alone, particularly for insurance products, creates information
asymmetry that makes it difficult for inexpert investors to navigate
savings for retirement. Multiple studies cited found that retirement
investors often lack a basic understanding of investment
fundamentals.\181\ A subsequent 2018 FINRA study of non-retired
individuals age 25-65 found that those investors that only had
retirement accounts through their employers routinely scored lower on
financial literacy questions than active investors and that these
workplace-only investors scored only two percentage points higher than
the general population (32 percent versus 30 percent) on a composite
question regarding interest, inflation and risk diversification.\182\
In addition to lacking rudimentary financial knowledge, many retirement
investors do not understand the roles of different players in the
investment industry and what those players are obligated to do.
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\180\ 2016 RIA in this document refers to Employee Benefits
Security Administration, Regulating Advice Markets Definition of the
Term ``Fiduciary'' Conflicts of Interest--Retirement Investment
Advice Regulatory Impact Analysis for Final Rule and Exemptions,
(April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\181\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 108-109 & 136-137, (April 2016),
https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\182\ Jill E. Fisch, Andrea Hasler, Annamaria Lusardi, & Gary
Mottolo, New Evidence on the Financial Knowledge and Characteristics
of Investors (October 2019), https://gflec.org/wp-content/uploads/2019/10/FINRA_GFLEC_Investor_FinancialIlliteracy_Report_FINAL.pdf?x20348.
---------------------------------------------------------------------------

The SEC has commissioned several studies on whether investors can
differentiate between different types of

[[Page 75917]]

investment service providers. A 2005 study considered four focus groups
in different geographic locations and found that investors were
generally unclear about distinctions between broker-dealers, financial
advisers, investment advisers, and financial planners and often used
the terms indistinguishably.\183\ A 2008 household survey found that
while most of the survey respondents had ``a general sense of the
difference in services offered by brokers and by investment advisers
but that they are not clear about their specific legal duties.'' \184\
A 2018 study also evaluated four focus groups and found that
participant understanding of the distinction between broker-dealers and
investment advisers was low, even among those who were provided
information describing the classifications of the two categories.\185\
If investors are unable to distinguish between types of advisers, they
cannot be expected to understand legal distinctions of the standard to
which that advice is held.
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\183\ Siegel & Gale, LLC, & Gelb Consulting Group, Inc, Results
of Investor Focus Group Interviews About Proposed Brokerage Account
Disclosures: Report to the Securities and Exchange Commission,
(March 2005).
\184\ Angela Hung, Noreen Clancy, Jeff Dominitz, Eric Talley,
Claude Berrebi, & Farrukh Suvankulov, Investor and Industry
Perspectives on Investment Advisers and Broker-Dealers, RAND
Institute for Civil Justice, (October 2008), https://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf.
\185\ Brian Scholl, & Angela A. Hung, The Retail Market for
Investment Advice, (October 2018), https://bit.ly/3hGGNj4.
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Confusion regarding the different types of advice providers and the
different standards of conduct to which they must adhere is often made
worse by industry marketing and other practices.\186\ To attempt to
address this, the SEC adopted as part of its 2019 Rulemaking a new
required disclosure of a ``Form CRS Relationship Summary,'' under which
registered investment advisers and broker-dealers must provide retail
investors with certain information about the nature of their
relationship with the firm and its financial professionals in plain
English.\187\ One of the purposes of the Form CRS is to help retail
investors better understand and compare the services and relationships
that investment advisers and broker-dealers offer in a way that is
distinct from other required disclosures under the securities laws.
---------------------------------------------------------------------------

\186\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 108, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\187\ Securities and Exchange Commission, Form CRS Relationship
Summary: Amendments to Form ADV, (September 19, 2019). https://www.sec.gov/info/smallbus/secg/form-crs-relationship-summary.
---------------------------------------------------------------------------

In order for disclosures to be effective, however, investors must
both review and understand them. Many disclosures, however, suffer from
complexity, so investors overlook or misunderstand them and gloss over
the information presented to them. A 2017 survey of private-sector
workers with retirement plans found only one-third had read any
investment fee disclosure in the past year and only 25 percent of all
respondents had both read and understood the information.\188\
---------------------------------------------------------------------------

\188\ Pew Charitable Trusts, Many Workers have Limited
Understanding of Retirement Plan Fees, (November 2017), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/11/many-workers-have-limited-understanding-of-retirement-plan-fees.
---------------------------------------------------------------------------

Many investors also cannot effectively assess the quality of
investment advice they receive. Research suggests that, in general,
consumers often fail to fully comprehend the quality of professional
services they receive, including services from doctors, lawyers, and
banks in addition to investment advice providers.\189\ The 2016 RIA
cited evidence that advice from providers often encouraged investors'
cognitive biases, such as return chasing, rather than correcting such
biases. It cited research showing that payments made to broker-dealers
influenced the advice provided to clients and that funds distributed
through more conflicted broker channels tend to perform worse.\190\
Research also suggests that investors' opinions of adviser quality can
be manipulated. For instance, Agnew et al. (2014) found that if an
adviser first provides good advice on a financial decision that is easy
to understand, the client will subsequently trust bad advice on a more
difficult or complicated topic.\191\ Investors who are unable to
discern when they are receiving bad advice are at risk of being
persuaded to make investment decisions that are not in their best
interest.
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\189\ William Rogerson, Reputation and Product Quality, 14(2)
The Bell Journal of Economics 508-516 (1983).
\190\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 145-158, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\191\ Julie Agnew, Hazel Bateman, Christine Eckert, Fedor
Iskhakov, Jordan Louviere, & Susan Thorp, Individual Judgment and
Trust Formation: An Experimental Investigation of Online Financial
Advice, Australian School of Business Research Paper No. 2013
ACTL21, (2014).
---------------------------------------------------------------------------

Overall, evidence demonstrates that the combination of inexpert
customers and conflicted advisers results in investment
underperformance and negative outcomes for investors. According to a
2015 report by the Council of Economic Advisers, approximately $1.7
trillion of IRA assets were invested in products with a payment
structure that generates conflicts of interests.\192\ A substantial
body of research has shown that IRA holders receiving conflicted
investment advice can expect their investments to underperform by
approximately 50 to 100 basis points per year.\193\
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\192\ Council of Economic Advisors, The Effects of Conflicted
Investment Advice on Retirement Savings, (2015), https://obamawhitehouse.archives.gov/sites/default/files/docs/cea_coi_report_final.pdf.
\193\ Ibid.
---------------------------------------------------------------------------

As discussed in the 2016 RIA, the Department estimated that a 50 to
100 basis point performance gap of broker-sold funds would result in
retirees losing $9 to $17 billion each year (or between 0.5 and 1
percentage point of return each year for $1.7 trillion in assets), $95
to $189 billion over 10 years, and $202 and $404 billion over 20 years.
That means a retiree spending their savings down over 30 years would
have 6 to 12 percent less to spend.\194\ If a retiree encounters
conflicts of interest and experiences a 100-basis point reduction in
performance, but still spends as though they were not encountering
conflicts of interest, they would run out of retirement savings more
than five years early.\195\
---------------------------------------------------------------------------

\194\ For example, an ERISA plan investor who rolls $200,000
into an IRA, earns a 6 percent nominal rate of return with 2.3
percent inflation, and aims to spend down her savings in 30 years,
would be able to consume $11,034 per year for the 30-year period. A
similar investor whose assets underperform by 0.5, 1, or 2
percentage points per year would only be able to consume $10,359,
$9,705, or $8,466, respectively, in each of the 30 years. The 0.5
and 1 percentage point figures represent estimates of the
underperformance of retail mutual funds sold by potentially
conflicted brokers. These figures are based on a large body of
literature cited in the 2015 NPRM RIA, comments on the 2015 NPRM
RIA, and testimony at the Department's hearing on conflicts of
interest in investment advice in August 2015. The 2 percentage point
figure illustrates a scenario for an individual where the impact of
conflicts of interest is more severe than average. See Employee
Benefits Security Administration, Regulating Advice Markets
Definition of the Term ``Fiduciary'' Conflicts of Interest--
Retirement Investment Advice Regulatory Impact Analysis for Final
Rule and Exemptions, p. 4, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\195\ Council of Economic Advisors, The Effects of Conflicted
Investment Advice on Retirement Savings, (2015), https://obamawhitehouse.archives.gov/sites/default/files/docs/cea_coi_report_final.pdf.

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[[Page 75918]]

Pervasiveness of Conflicts of Interest in Investment Advice
In recent years, consolidation of the financial industry and
innovations in products and compensation practices have multiplied
opportunities for self-dealing and made fee arrangements less
transparent to clients and regulators. The existence of safeguards in
only certain markets, such as the recent adoption of Regulation Best
Interest by the SEC regarding recommendations of securities
transactions or investment strategies involving securities, creates
incentives for agents to recommend conflicted products in less
regulated markets. While the relative newness of Regulation Best
Interest makes it challenging to quantify instances of these effects,
there is research demonstrating similar impacts from other policies
addressing financial conflicts of interest or misconduct that varied
across markets. Bhattacharya et al. (2020) found that higher fiduciary
standards are associated with the sale of higher quality annuity
products.\196\ Honigsberg et al. (2022) showed that variation in
regulatory oversight regimes leads to a situation where the worst
financial advisers are operating in the most lightly regulated
regimes.\197\ Charoenwong et al. (2019) found that under lighter
regulation, advisers were more likely to receive complaints,
particularly advisers with past complaints or with conflicts of
interest.\198\ This proposal would extend protections associated with
fiduciary status under ERISA, regardless of advice model, and reduce
the gap in protections with respect to ERISA-covered investments.
---------------------------------------------------------------------------

\196\ Vivek Bhattacharya, Gaston Illanes, & Manisha Padi,
Fiduciary Duty and the Market for Financial Advice, Working Paper
25861 National Bureau of Economic Research (2020), https://www.nber.org/papers/w25861.
\197\ Colleen Honigsberg, Edwin Hu, & Robert J. Jackson, Jr., 74
Regulatory Arbitrage and the Persistence of Financial Misconduct,
Stanford Law Review 797, (2022).
\198\ Ben Charoenwong, Alan Kwan, & Tarik Umar, Does Regulatory
Jurisdiction Affect the Quality of Investment-Adviser Regulation,
109(10) American Economic Review (October 2019), https://www.aeaweb.org/articles?id=10.1257/aer.20180412.
---------------------------------------------------------------------------

Conflicts of Interest After the SEC's Regulation Best Interest
Regulation Best Interest under the Securities Exchange Act of 1934
created a ``best interest'' standard of conduct for broker-dealers and
associated persons when they make a recommendation to a retail customer
of any securities transaction or investment strategy involving
securities, including recommendation of types of accounts. While
Regulation Best Interest does overlap with ERISA's fiduciary standard,
and reduces conflicts, the two standards do not align perfectly:
Regulation Best Interest does not apply fiduciary accountability to all
parties that provide investment advice to Retirement Investors and does
not cover advice to non-retail investors. Moreover, Regulation Best
Interest generally does not apply to recommendations of investment
products that are not regulated as securities, such as many annuity
products. Similarly. while there is a large overlap in the substance of
the different regulatory regimes, in enacting ERISA, Congress provided
special protections for tax-advantaged retirement savings that don't
apply more broadly. For example, Congress prohibited transactions
(absent an exemption) that were determined to raise significant risk to
retirement plan participants and beneficiaries.
The SEC began conducting limited scope broker-dealer examinations
and risk-based inspections in June 2020 to assess whether firms
established written policies and procedures to comply with Regulation
Best Interest and had made reasonable progress in implementing those
policies and procedures. In their reviews, staff identified instances
of deficient disclosure obligations, care obligations, periodic review
and testing, and conflict of interest obligations.\199\ FINRA has
identified similar deficiencies in its Report on Examination and Risk
Monitoring Program.\200\ The SEC's Division of Examination notes that
in response to deficiency letters identifying these issues, many
broker-dealers modified their practices, policies and procedures.\201\
In addition, the SEC released additional guidance in April 2023 focused
on the Care Obligation to continue to improve compliance with
Regulation Best Interest.\202\
---------------------------------------------------------------------------

\199\ Securities and Exchange Commission, Risk Alert:
Observations from Broker-Dealer Examinations Related to Regulation
Best Interest, (Jan. 30, 2023), https://www.sec.gov/file/exams-reg-bi-alert-13023.pdf.
\200\ FINRA, 2023 Report on FINRA's Examination and Risk
Monitoring Program, (Jan. 2023), https://www.finra.org/sites/default/files/2023-01/2023-report-finras-examination-risk-monitoring-program.pdf.
\201\ Securities and Exchange Commission, Risk Alert:
Observations from Broker-Dealer Examinations Related to Regulation
Best Interest, (Jan. 30, 2023), https://www.sec.gov/file/exams-reg-bi-alert-13023.pdf.
\202\ Securities and Exchange Commission, Staff Bulletin:
Standards of Conduct for Broker Dealers and Investment Advisers Care
Obligation, (Apr. 20, 2023), https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers.
---------------------------------------------------------------------------

In the first year after the SEC's compliance deadline for
Regulation Best Interest, the North American Securities Administrators
Association (NASAA) conducted a survey of 443 FINRA firms.\203\ The
survey found that many broker-dealer firms were still utilizing the
compliance programs they had in place prior to Regulation Best
Interest, when the standard for retail advice was to recommend
investments that were ``suitable'' for the client.\204\ In addition,
the percentage of broker-dealer firms surveyed that were offering
complex, costly, and risky products increased by 11 percent after
Regulation Best Interest took effect. About 65 percent of broker-dealer
firms did not discuss lower-cost or lower-risk products with their
customers when they recommended complex, costly, and risky products.
The survey also found that 24 to 30 percent of broker-dealer firms were
still using conflicted forms of compensation, including sales contests,
differential or variable compensation, and other extra forms of
compensation.\205\ In the first year after Regulation Best Interest
took effect, only 35 percent of those broker-dealer firms recommending
complex, costly, and risky products had ``reduced the financial reward
associated with these products by capping agent sales credits.'' \206\
In other words, the majority of broker-dealer firms that offered
complex, costly and risky products had not restructured their financial
reward structure in response to conflict mitigation requirements in
SEC's Regulation Best Interest.
---------------------------------------------------------------------------

\203\ North American Securities Administrators' Association,
Report and Findings of NASAA's Regulation Best Interest
Implementation Committee: National Examination Initiative Phase II
(A), (Nov. 2021).
\204\ Kenneth Corbin, Reg BI Isn't Working So Far. Exams Are
Coming, Says NASAA, Barron's (Nov. 5, 2021).
\205\ James Langton, New Conduct Rules, Same Old Conflicts:
NASAA, Advisor's Edge (Nov. 4, 2021).
\206\ Melanie Waddell, Reg BI Report Zooms in BDs' Lack of
Compliance, Think Advisor, (Nov. 5, 2021).
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NASAA's Broker-Dealer Section Committee concluded a subsequent
review of over 200 examinations evaluating broker-dealers' compliance
of Regulation Best Interest by state examiners in 25 states, under its
second and third year of implementation.\207\ This review revealed
steady implementation progress, including that firms had been updating
investor profile forms and policies and procedures; that firms
recommending complex, costly or risky products were imposing
restrictions based on ages, income/net worth and risk profiles; and
that firms were utilizing cost-comparison tools to better consider
reasonable investment

[[Page 75919]]

alternatives. The report noted, however, that firms still struggle with
considering reasonably available alternatives and conflict mitigation;
ignoring lower cost and risk products when recommending complex, costly
risk products and relying on financial incentives to sell them; and
that firms have not enhanced point of sale disclosures.
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\207\ North American Securities Administrators' Association,
Report and Findings of NASAA's Broker-Dealer Section Committee:
National Examination Initiative Phase II (B), (Sept. 2023).
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The SEC and FINRA have subsequently released additional guidance
designed to clarify and strengthen compliance with Regulation Best
Interest's Consumer Protective conditions.\208\ The SEC announced in
January 2023 that it intends to incorporate compliance with Regulation
Best Interest into retail-focused examinations of broker-dealers \209\
and both the SEC and FINRA have begun enforcement actions related to
Regulation Best Interest.\210\ In June 2022, the SEC charged a firm and
five brokers for violating Regulation Best Interest and selling high-
risk bonds to retirees and other retail investors.\21\ Meanwhile, FINRA
levied its first Regulation Best Interest-related fine in October 2022
and suspended two New York-based brokers in February 2023.\212\
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\208\ See Securities and Exchange Commission, Regulation Best
Interest: A Small Entity Compliance Guide, (September 23, 2019),
https://www.sec.gov/info/smallbus/secg/regulation-best-interest#Disclosure_Obligation; Securities and Exchange Commission,
Staff Bulletin: Standards of Conduct for Broker-Dealers and
Investment Advisers Account Recommendations for Retail Investors,
(Mar. 20, 2022), https://www.sec.gov/tm/iabd-staff-bulletin;
Securities and Exchange Commission, Staff Bulletin: Standards of
Conduct for Broker-Dealers and Investment Advisers Conflict of
Interest, (Aug. 2, 2022), https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest; Securities and Exchange Commission,
Staff Bulletin: Standards of Conduct for Broker-Dealers and
Investment Advisers Care Obligation, (Apr. 20, 2023), https://www.sec.gov/tm/standards-conduct-broker-dealers-and-investment-advisers.
\209\ Securities and Exchange Commission, Risk Alert:
Observations from Broker-Dealer Examinations Related to Regulation
Best Interest, p. 1, (Jan. 30, 2023), https://www.sec.gov/file/exams-reg-bi-alert-13023.pdf.
\210\ See Securities and Exchange Commission, Press Release: SEC
Charges Broker-Dealer with Violations of Regulation Best Interest
and Fraud for Excessive Trading in Customer Accounts, (Sept. 28,
2023), https://www.sec.gov/enforce/34-98619-s; SEC Charges Broker-
Dealers with Violations of Regulation Best Interest and Form CRS
Rules for Failing to Effect Delivery of Required Disclosures, (Sept.
28, 2023), https://www.sec.gov/enforce/34-98609-s; and SEC Charges
Wisconsin Broker-Dealer with Violations of Regulation Best Interest,
(Sept. 22, 2023), https://www.sec.gov/enforce/34-98478-s.
\211\ Securities and Exchange Commission, Press Release: SEC
Charges Firm and Five Brokers with Violations of Reg BI, (June 16,
2022), https://www.sec.gov/news/press-release/2022-110.
\212\ Melanie Waddell, FINRA Fines Long Island BD Over Reg BI,
Think Advisor, (Feb. 13, 2023), https://www.thinkadvisor.com/2023/02/13/finra-fines-long-island-bd-over-reg-bi/.
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Conflicts of Interest in Advice Given to Plan Fiduciaries
Concerns regarding investment advice extend to that received by
ERISA plan fiduciaries. Pool et al. (2016) found that while mutual fund
companies involved in plan management for 401(k) plans included both
funds from their own family as well as unaffiliated funds in the menu
of investment options, poor performing funds were less likely to be
removed and more likely to be added to the menu if they were affiliated
with the plan trustee.\213\ In 2005, the SEC found evidence that some
pension consultants do not adequately disclose their conflicts and may
steer plan fiduciaries to hire money managers based partly on the
consultants' own financial interests.\214\ The U.S. Government
Accountability Office (GAO) found these inadequately disclosed
conflicts were associated with substantial financial losses. GAO's
study found that between 2000 and 2004, plans associated with pension
consultants without adequate disclosure of their conflicts of interest
saw annual rates of return 1.2 to 1.3 percentage points lower than
plans associated with pension consultants with adequate disclosure of
conflicts of interest.\215\ In another study, GAO found that ERISA plan
sponsors often are confused as to whether the advice they receive is
fiduciary advice, and small plans in particular may suffer as a
result.\216\ This confusion leaves plan participants vulnerable to
lower returns due to conflicted advice.
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\213\ Veronika K. Pool, Clemens Sialm, & Irina Stefanescu, It
Pays to Set the Menu: Mutual Fund Investment Options in 401(k)
Plans, 71(4) Journal of Finance 1779-1812, (2016).
\214\ The report's findings were based on a 2002 to 2003
examination of 24 pension consultants. See SEC, SEC Staff Report
Concerning Examination of Select Pension Consultants, (May 16,
2005), https://www.sec.gov/news/studies/pensionexamstudy.pdf.
\215\ GAO Publication No. GAO-09-503T, Private Pensions:
Conflicts of Interest Can Affect Defined Benefit and Defined
Contribution Plans, (2009), https://www.gao.gov/assets/gao-09-503t.pdf.
\216\ GAO Publication No. GAO-11-119, 401(K) Plans: Improved
Regulation Could Better Protect Participants from Conflicts of
Interest, (2011), https://www.gao.gov/products/GAO-11-119.
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Conflicts of Interest in Rollover Recommendations or Advice
The treatment of rollover recommendations or advice under the 1975
rule has been a central concern in the Department's regulation of
fiduciary investment advice. The decision to roll over assets from a
plan to an IRA is often the single most important financial decision a
plan participant makes, involving a lifetime of retirement savings.
Most IRA assets are attributable to rollover contributions, and the
amount of assets rolled over to IRAs is large and expected to increase
substantially. In 2021, IRA rollovers from defined contribution plans
increased by 4.9 percent. Cerulli Associates estimates that aggregate
rollover contributions to IRAs from 2022 to 2027 will surpass $4.5
trillion.\217\
---------------------------------------------------------------------------

\217\ Cerulli Associates, U.S. Retirement Markets 2022: The Role
of Workplace Retirement Plans in the War for Talent, Exhibit 8.06,
(2023). Note that these numbers include public sector plans.
---------------------------------------------------------------------------

The decision to roll over one's retirement savings from an ERISA-
covered employer-based plan into an IRA or other plan has significant
consequences, and for many investors is the single most consequential
advice they will receive and affects a lifetime of savings. About 57
percent of traditional IRA-owning households indicated that their IRAs
contained rollovers from employer-sponsored retirement plans and of
those households, 85 percent indicated they had rolled over their
entire account balance in their most recent rollover.\218\ In 2020 more
than 95 percent of the dollars flowing into IRAs came from rollovers,
while the rest came from regular contributions.\219\
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\218\ Investment Company Institute, The Role of IRAs in US
Households' Savings for Retirement, 2021, 28(1) ICI Research
Perspective, (Jan. 2022), https://www.ici.org/system/files/2022-01/per28-01.pdf.
\219\ Internal Revenue Service, SOI Tax Stats--Accumulation and
Distribution of Individual Retirement Arrangement (IRA), Table 1:
Taxpayers with Individual Retirement Arrangement (IRA) Plans, By
Type of Plan, Tax Year 2020, (2023).
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Retiring workers must decide how best to invest a career's worth of
401(k) savings, and many look to an investment advice provider for
guidance. Financial institutions face an innate conflict of interest,
in that a financial institution that provides a recommendation or
advice concerning a rollover to a retirement investor may expect to
earn transaction-based compensation such as commissions and/or receive
an ongoing advisory fee that it likely would not receive if the assets
were to remain in an ERISA-covered plan. Further, under the 1975 rule,
if an investment advice provider makes a one-time recommendation that
the worker move the entire balance of their retirement plan into an IRA
and invest it in a particular annuity, then the advice provider has no
fiduciary obligation under ERISA to honor the worker's best interest
unless this recommendation is part of an ``ongoing'' advice
relationship. The resulting compensation represents a significant
revenue source for investment advice providers.

[[Page 75920]]

In the preamble to PTE 2020-02, the Department provided an
interpretation of when advice or a recommendation to roll over assets
from an employee benefit plan to an IRA would constitute fiduciary
investment advice under the 1975 regulation's five-part test. The
preamble interpretation confirmed the Department's view that advice or
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 five-part test,
constitutes fiduciary investment advice. The preamble interpretation
also discussed when a recommendation to roll over employee benefit
plans to an IRA would satisfy the ``regular basis'' requirement and the
Department's interpretation of the requirement of ``a mutual agreement,
arrangement, or understanding'' that the investment advice will serve
as ``a primary basis for investment decisions.''
Regarding the regular basis prong, the Department explained that
``advice to roll assets out of a Title I Plan into an IRA where the
investment advice provider has not previously provided advice but will
be regularly giving advice regarding the IRA in the course of a
lengthier financial relationship would be the start of an advice
relationship that satisfies the regular basis prong.'' \220\ As
discussed above, however, this interpretation of the 1975 rule was
rejected by the court in American Securities Association v. United
States Department of Labor,\221\ and in the case of Federation of
Americans for Consumer Choice v. United States Department of
Labor,\222\ the magistrate judge has recommended that the district
court also reject this interpretation. In their view, the 1975 rule
does not permit the Department to treat one-time rollover
recommendations as ``regular basis'' advice based on the expectation of
future advice on the management of the assets rolled out of the ERISA
plan and into the IRA. Any change to the ``regular basis'' requirement
requires a new rule.\223\
---------------------------------------------------------------------------

\220\ 85 FR 82798, 82805, (Dec. 18, 2020).
\221\ American Securities Association v. U.S. Dep't of Labor,
No. 8:22-CV-330-VMC-CPT, 2023 WL 1967573, at *14-*19, (M.D. Fla.
Feb. 13, 2023) [hereinafter ASA].
\222\ Conclusions, and Recommendations of the United States
Magistrate Judge, FACC v. U.S. Dep't of Labor, No. 3:22-CV-00243-K-
BT, 2023 WL 5682411, at *18-*19 (N.D. Tex. June 30, 2023)
\223\ See id. at *22-23.
---------------------------------------------------------------------------

While PTE 2020-02 mitigates some of these concerns by requiring
investment advice fiduciaries to render advice in their customer's best
interest in order to receive certain types of compensation from
otherwise prohibited transactions resulting from rollover advice, the
limitations of the existing five-part test for fiduciary status still
result in significant portions of the retirement investment market
operating outside of the PTE's protections.
Uniformity Across Markets and Product Types
The current regulatory approach to investment advice results in
standards that vary by advice market and investment product.\224\ As a
result, retirement investors cannot rely on a single protective
standard, and their exposure to risk is not only based on the types of
products they invest in but also by who gives that advice or makes that
recommendation and in what capacity they are acting. This creates
investor confusion and makes room for regulatory arbitrage, where
investment advice providers can use more favorable rules in one market
to circumvent less favorable regulations elsewhere. The Department
identifies the following nuances of the regulatory landscape as sources
of investor confusion:
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\224\ For more information on the different regulatory regimes,
Refer to the Regulatory Baseline section in this analysis.
---------------------------------------------------------------------------

Regulation Best Interest only applies to recommendations
made by broker-dealers to retail customers. As a result of this
limitation, broker-dealers' recommendations of securities transactions,
investment strategies, plan design, and plan investment options to plan
fiduciaries, fall outside its scope. This may be particularly confusing
for small plan fiduciaries.
Securities laws (i.e., the Investment Advisers Act and
Regulation Best Interest) may not apply to advice on investments such
as real estate, fixed indexed annuities, commodities, certificates of
deposit, and other bank products.
Variable annuities and some indexed annuities are
considered securities and are subject to securities laws, while fixed
annuities, including fixed indexed annuities, are subject to state law.
As discussed in the Regulatory Baseline section, these laws vary
significantly from state to state.
This list is not exhaustive but provides a sense of how many
seemingly similar investments are subject to widely different
regulators and protective standards.
Honigsberg et al. (2022) identified associated persons of broker-
dealers who had been registered with FINRA between 2010 and 2020 but
were no longer registered with the regulatory authority. Of those that
exited, roughly a third continued providing financial advice under a
different regulatory regime, of which eight percent had a history of
serious misconduct while registered with FINRA. This share increased to
12 percent when you looked at those that were still providing financial
advice as an insurance producer registered with the NAIC and 13 percent
when you looked at the National Futures Association members. The
authors argued that the existing framework for regulating adviser
misconduct creates incentives for the worst advisers to migrate to more
poorly regulated state regimes.\225\
---------------------------------------------------------------------------

\225\ Colleen Honigsberg, Edwin Hu, & Robert J. Jackson, Jr., 74
Regulatory Arbitrage and the Persistence of Financial Misconduct,
Stanford Law Review 797, (2022).
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The risk posed by non-uniform regulatory environments is
exemplified by the annuity market. A recent survey of insurers reported
that 58 percent of insurers thought the SEC's Regulation Best Interest
had improved protections for consumers.\226\ However, as discussed
above, generally only annuities considered securities are under the
jurisdiction of the SEC. The remaining annuities are covered by state
regulations that potentially hold those selling such insurance products
to a lower standard. In crafting this proposal, the Department strove
to craft a definition that hews to both the text and purpose of ERISA.
---------------------------------------------------------------------------

\226\ Cerulli Associates, U.S. Annuity Markets 2021: Acclimating
to Industry Trends and Changing Demand, Exhibit 1.06, The Cerulli
Report, (2022).
---------------------------------------------------------------------------

An investor's retirement account may hold a wide range of
investment products, those products may touch multiple regulatory
regimes, and the retirement investor may not be aware of the different
standards. Once the investment products are held in a tax-advantaged
retirement account, however, ERISA requires a uniform standard,
applicable regardless of the type of investment product. This range of
investment products held in retirement plans means that the regulatory
definition of an investment advice fiduciary for purposes of Title I of
ERISA and the Code takes on special importance in creating uniform
standards for investment advice, particularly when a retirement
investor may not realize the investment product is not covered by
another regulatory regime such as federal securities laws.
Need for Uniformity Concerning Rollovers
The difference between types of products, such as securities
subject to regulation by the SEC and non-

[[Page 75921]]

securities annuities subject to regulation by state insurance
departments, creates problematic incentives for financial professionals
to recommend certain products.
Under the Investment Advisers Act and Regulation Best Interest,
investment advisers and broker-dealers must have a reasonable basis to
believe both the rollover itself and the account being recommended are
in the retail investor's best interest.\227\ SEC staff guidance
recognizes that it would be difficult to have such a reasonable basis
if, ``you do not consider the alternative of leaving the retail
investor's investments in their employer's plan, where that is an
option.'' \228\ Moreover, broker-dealers and investment advisers are
instructed to generally consider certain factors when making rollover
recommendations to retail investors, specifically and without
limitation, ``costs; level of services available; features of the
existing account, including costs; available investment options;
ability to take penalty-free withdrawals; application of required
minimum distributions; protection from creditors and legal judgments;
and holdings of employer stock.'' \229\ As such, the SEC's regulatory
framework is likely to mitigate some of the aforementioned harms to
retirement investors, but only in markets where it applies.
---------------------------------------------------------------------------

\227\ In addition to staff guidance, the Commission recognized
in Regulation Best Interest that, ``as part of determining whether a
broker-dealer has a reasonable basis to believe that a
recommendation is in the best interest of the retail customer, a
broker-dealer generally should consider reasonably available
alternatives offered by the broker-dealer'' which the Commission
viewed as ``an inherent aspect of making a `best interest'
recommendation.'' See Reg BI Adopting Release at 33381.
\228\ SEC, Staff Bulletin: Standards of Conduct for Broker-
Dealers and Investment Advisers Account Recommendations for Retail
Investors, (March 30, 2022), https://www.sec.gov/tm/iabd-staff-bulletin.
\229\ Ibid.
---------------------------------------------------------------------------

In contrast, the NAIC Model Regulation #275, which is the basis for
much of the state regulation on insurers,\230\ makes no direct
reference to rollovers, and imposes a less stringent obligation on
annuity recommendations than the best interest standard imposed on
securities recommendations and investment advice by the SEC. Given the
average rollover contribution to a traditional IRA in 2019 was
$112,000,\231\ the variation in regulatory standards regarding rollover
advice can result in widely disparate outcomes among similarly situated
retirement investors based solely on who they sought for advice and
whether that adviser was required to put the investor's interests above
their own.
---------------------------------------------------------------------------

\230\ For more information, refer to the discussion in the
Regulatory Baseline section on state legislation and regulation.
\231\ Matched file of Forms 1040, 1099-R, and 5498 for Tax Year
2019. IRS, Statistics of Income Division, Individual Retirement
Arrangements Study, February 2022.
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An update to the regulatory definition of an investment advice
fiduciary, for purposes of Title I of ERISA and the Code, is necessary
to enhance protections of retirement investors. This approach both
reflects ERISA's and the Code's statutory text, which adopts a uniform
approach, as well as sound public policy. Investment recommendations
should be consistently governed solely by the best interest of
retirement investors, rather than adviser perceptions that advice on
one category of investment product is subject to different regulatory
standards than another.
How the Proposed Rule Addresses the Need for Regulatory Action
The proposed amendments to the 1975 rule would better reflect the
text and purposes of the statute and would address inadequacies that
the Department has observed during its decades of experience in
implementing the 1975 rule. This proposal would honor the broad
statutory definition of fiduciary by amending the five-part test to
create a uniformly protective fiduciary standard for retirement
investors, subject to firm-level oversight, designed to mitigate and
eliminate the harmful effects of biased advice. The amendments to the
1975 rule and related exemptions would also eliminate the risk of
regulatory arbitrage, in which an investment advice provider may
operate in a particular market to evade more stringent regulation. For
instance, under the current regulation, an independent producer selling
an indexed annuity, a financial professional giving a retirement
investor one-time advice to roll investments into an IRA, or a
financial professional giving advice on one transaction, could portray
themselves as serving the best interest of the investor while being
held to lower care standard than financial professionals subject to the
Investment Advisers Act of 1940 or the SEC's Regulation Best Interest
or the Department's fiduciary standard. In contrast, the amended rule
would broadly align the standard of care required of all financial
professionals giving retirement investment advice with retirement
investors' reasonable expectations that those recommendations are
trustworthy. This would in turn create a retirement market where all
advisers compete under a uniform fiduciary standard, reducing investor
exposure to harms from conflicted advice.
The fiduciary standard, as buttressed by the protective conditions
of PTE 2020-02 and PTE 84-24, protects investors from getting
investment recommendations that are improperly biased because of the
advisers' competing financial interests. It requires firms and advisers
to put the interests of Retirement Investors first and to take
appropriate action to mitigate and control conflicts of interest. These
conditions should go a long way to redressing the dangers posed by
biased advice.
In addition, the proposed exemptions also give inexpert investors
important information on the scope, severity, and magnitude of
conflicts of interest. Moreover, by imposing a uniform fiduciary
standard on conflicted advisers in the retirement marketplace, the
proposed rule and exemptions reduce investor confusion about the
standards governing advice. Retail investors who rely on expert advice
are unlikely to have a sound understanding of differences in standards
across various categories of investments and investment
professionals.\232\ The SEC Investor Advisory Committee, when
considering a uniform adoption of a standard of duty for investment
advisers and broker-dealers in 2013, found that ``investors do not
distinguish between broker-dealers and investment advisers, do not know
that broker-dealers and investment advisers are subject to different
legal standards, do not understand the difference between a suitability
standard and a fiduciary duty, and expect broker-dealers and investment
advisers alike to act in their best interest when giving advice and
making recommendation.'' \233\
---------------------------------------------------------------------------

\232\ Angela A. Hung, Noreen Clancy, Jeff Emmett Dominitz, Eric
Talley, Claude Berrebi, & Farrukh Suvankulov, Investor and Industry
Perspectives on Investment Advisers and Broker-Dealers, RAND
Corporation, (2008), https://www.rand.org/pubs/technical_reports/TR556.html.
\233\ Securities and Exchange Commission. ``Recommendation of
the Investor as Purchaser Subcommittee Broker-Dealer Fiduciary
Duty,'' November 1, 2013. https://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation.pdf.
---------------------------------------------------------------------------

While these issues have been mitigated to a considerable degree by
the imposition of a common ``best interest'' standard for broker-
dealers governed by Regulation Best Interest and investment advisers
subject to the Investment Advisers Act or state law, significant
differences remain with respect to the standards governing investments
that are not securities, such as fixed indexed annuities. Investor
confusion is exacerbated by different

[[Page 75922]]

regulatory regimes referencing a ``best interest standard'' while
defining what that means and the protections that entails differently.
Although the proposal will enhance disclosures of conflicts of
interest, the Department stresses that disclosure alone is limited in
its effectiveness at protecting investors from the dangers posed by
conflicts of interest, as detailed in the RIA for the fiduciary rule
the Department promulgated in 2016.\234\ As that document explained,
there are myriad reasons to doubt that disclosure alone could
effectively mitigate conflicts of interest, and available data support
a finding that disclosure is not a reliable corrective for conflicts of
interest:
---------------------------------------------------------------------------

\234\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 268-271, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
---------------------------------------------------------------------------

Even with relatively clear disclosures, investors
routinely ignore them and are hard pressed to understand them.
Investors often lack the requisite financial expertise, disregard the
materials they receive, and have trouble following the disclosures or
parsing their significance. These problems can be compounded for older
and more vulnerable retirement-age investors.
Merely disclosing a conflict of interest does not give the
investor a working model on how to determine the impact of the conflict
of interest on the advice they are receiving or of how to use the
disclosure to make a better investment decision. While now on notice of
the conflict, the inexpert customer remains dependent on the expert's
advice.
Disclosure can even exacerbate the harmful impacts of
conflicts of interest, as when an adviser feels morally licensed to
indulge the conflict of interest because they can now treat the
customer as duly warned or as when they press harder to make the sale
to offset possible concerns about disclosed conflicts.
Without a working model on how to take account of
conflicts of interest, investors may overweight the advice based on the
adviser's perceived honesty for having disclosed the conflict, or
unduly discount the advice and take a contrarian approach because of
discomfort about the advice's reliability. Investors may also feel
pressure not to question the adviser's integrity or deprive them of
their livelihood.
While disclosure of conflicts could, in some cases, change the
adviser's behavior for the better,\235\ mitigating or removing
conflicts and requiring the adviser to adhere to a strong conduct
standard with a mechanism for overseeing and enforcing compliance, when
necessary, provides stronger incentives for advisers to provide
investment advice that is in the best interest of the investor. These
are the key components of the Department's proposals, and the primary
ways the Department expects the rule to address the problems posed by
conflicted advice.
---------------------------------------------------------------------------

\235\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 268-271, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
---------------------------------------------------------------------------

While the SEC has addressed many of the Department's concerns about
conflicted advice, the impact is limited to advice in the SEC's
regulatory jurisdiction. This situation would be alleviated by the
introduction of a uniform fiduciary standard for the broad range of
retirement investment transactions in all regulatory spheres.
Additional regulatory action is warranted due to the pervasiveness of
conflicts of interest in this marketplace and the complexity of
investing assets for retirement. The growing body of evidence
underscores that best interest fiduciary standards play an important
role in protecting retirement investors.\236\ One of the Department's
objectives in issuing this proposal is to abate these and similar harms
in areas outside of SEC jurisdiction, to ensure that retirement
investors' assets outside the securities space are also protected from
conflicted advice. This proposal would extend the fiduciary best
interest standard to additional markets and investment product,
including annuities and other non-securities. This proposal would apply
to advice given to plan fiduciaries as well as plan participants.
---------------------------------------------------------------------------

\236\ For more information on the relationship of best interest
fiduciary standards and the protection of retirement investors,
refer to the Benefits section of the RIA.
---------------------------------------------------------------------------

In addition, for retirement investors who already receive the
protections in the Investment Advisers Act of 1940, Regulation Best
Interest, and PTE 2020-02 under the regulatory baseline, this proposal
would provide even stronger protections. Standards for mitigating
conflicts under this proposal would be more rigorous and well-defined.

3. Baseline

Since the Department first took on the issues of fiduciary advice
and conflicts of interest, there have been numerous developments in the
regulatory environment and the financial markets in which they operate.
Regulatory Baseline
The problems of conflicted advice and supervisory structures for
advice have received increased regulatory attention, resulting in
action from the Department, the SEC, individual states, and the
National Association of Insurance Commissioners (NAIC). The major
actions are summarized below.
Regulatory Baseline, the Department of Labor
Many financial institutions undertook efforts to adapt to the
Department's 2016 Final Rule. As such, the intended improvements in
retirement investor outcomes appear to have been on track prior to the
Fifth Circuit's vacatur of the 2016 Final Rule.\237\ Research suggests
that the Department's prior efforts produced positive changes in advice
markets, even without fully taking effect, which were reinforced by the
SEC's actions. For instance, several studies found that the
Department's 2016 Final Rule had a positive effect on conflicts of
interest and that some categories of conflicts, such as bundled share
classes of mutual funds and high-expense variable annuities, were
reduced even after the DOL rule was struck down.\238\ The nature of the
conflicts associated with bundled share classes and high-expense
variable annuities are discussed later in this document.
---------------------------------------------------------------------------

\237\ See Chamber, 885 F.3d 360 (5th Cir. 2018).
\238\ Aron Szapiro & Paul Ellenbogen, Early Evidence on the
Department of Labor Conflict of Interest Rule: New Share Classes
Should Reduce Conflicted Advice, Likely Improving Outcomes for
Investors, Morningstar, (April 2017); Jasmin Sethi, Jake Spiegel, &
Aron Szapiro, Conflicts of Interest in Mutual Fund Sales: What Do
the Data Tell Us?, 6(3) The Journal of Retirement 46-59, (2019); Lia
Mitchell, Jasmin Sethi, & Aron Szapiro, Regulation Best Interest
Meets Opaque Practices: It's Time to Dive Past Superficial Conflicts
of Interest, Morningstar, (November 2019), https://ccl.yale.edu/sites/default/files/files/wp_Conflicts_Of_Interest_111319%20FINAL.pdf; Mark Egan, Shan Ge, &
Johnny Tang, Conflicting Interests and the Effect of Fiduciary
Duty--Evidence from Variable Annuities, 35(12) Review of Financial
Studies 5334-5386 (December 2022).
---------------------------------------------------------------------------

In 2020, the Department issued a technical amendment to the CFR to
reinsert the 1975 rule and published PTE 2020-02. The exemption is
available to registered investment advisers, broker dealers, banks, and
insurance companies and their individual employees, agents, and

[[Page 75923]]

representatives that provide fiduciary investment advice to retirement
investors. However, the exemption explicitly excluded investment advice
solely generated by an interactive website, referred to as ``pure robo-
advice.'' \239\ Under the exemption, financial institutions and
investment professionals can receive a wide variety of payments that
would otherwise violate the prohibited transaction rules. The
exemption's relief extends to prohibited transactions arising as a
result of investment advice to roll over assets from a plan to an IRA,
under certain conditions.
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\239\ ``Hybrid robo-advice,'' or advice that combines combine
features of robo-advice and traditional investment advice, is
included under the existing PTE 2020-02. 85 FR 82798, 82830 (Dec.
18, 2020).
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This exemption conditions relief on the investment professional and
financial institution investment advice fiduciaries providing advice in
accordance with the Impartial Conduct Standards. The Impartial Conduct
Standards include a best interest standard, a reasonable compensation
standard, and a requirement to make no misleading statements about
investment transactions and other relevant matters. The best interest
standard in the exemption is broadly aligned with the federal
securities laws. In addition, the exemption requires financial
institutions to acknowledge in writing the institution's and their
investment professionals' fiduciary status under Title I and the Code,
as applicable, when providing investment advice to the retirement
investor, and to describe in writing the services to be provided and
the financial institutions' and investment professionals' material
conflicts of interest. Financial institutions must document the reasons
that a rollover recommendation is in the best interest of the
retirement investor and provide that documentation to the retirement
investor.\240\ Financial institutions are required to adopt policies
and procedures prudently designed to ensure compliance with the
Impartial Conduct Standards and conduct a retrospective review of
compliance.
---------------------------------------------------------------------------

\240\ The PTE 2020-02 preamble says: This requirement extends to
recommended rollovers from a Plan to another Plan or IRA as defined
in Code section 4975(e)(1)(B) or (C), from an IRA as defined in Code
section 4975(e)(1)(B) or (C) to a Plan, from an IRA to another IRA,
or from one type of account to another (e.g., from a commission-
based account to a fee-based account). The requirement to document
the specific reasons for these recommendations is part of the
required policies and procedures, in Section II(c)(3).''
---------------------------------------------------------------------------

In order to ensure that financial institutions provide reasonable
oversight of investment professionals and adopt a culture of
compliance, the exemption provides that financial institutions and
investment professionals will be ineligible to rely on the exemption
if, within the previous 10 years, they were convicted of certain crimes
arising out of their provision of investment advice to retirement
investors. They can also become ineligible if they engage in systematic
or intentional violation of the exemption's conditions or provided
materially misleading information to the Department in relation to
their conduct under the exemption.
At the time PTE 2020-02 was finalized, the Department left in place
other administrative exemptions that could be used to provide
investment advice in place of PTE 2020-02, including the other PTEs
being amended in this proposal. Leaving the other PTEs in place allowed
for a varied landscape of conditions that could be used by different
types of financial institutions to provide investment advice for
different types of assets and financial products. The varied landscape
of conditions allows for regulatory arbitrage where investment advice
providers can use more favorable rules in one market to circumvent less
favorable regulations elsewhere.
Regulatory Baseline, the Securities and Exchange Commission
The Investment Advisers Act of 1940, ``establishes a fiduciary duty
for [investment advisers] roughly analogous to the fiduciary duties of
care and loyalty established by ERISA for investment advisers to plans
and plan participants.'' \241\ In an interpretation of the conduct
standards applicable to investment advisers, the SEC wrote:
---------------------------------------------------------------------------

\241\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 30, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.

An investment adviser's fiduciary duty under the Advisers Act
comprises a duty of care and a duty of loyalty. This fiduciary duty
requires an adviser ``to adopt the principal's goals, objectives, or
ends.'' 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.\242\
---------------------------------------------------------------------------

\242\ Commission Interpretation Regarding Standard of Conduct
for Investment Advisers, 84 FR 33669 (July 12, 2019).

In June 2019, the SEC adopted a package of rulemakings and
interpretations designed to enhance the quality and transparency of
retail investors' relationships with investment advisers and broker-
dealers.\243\ The package included Regulation Best Interest, the Form
CRS, and publication of two separate interpretations under the
Investment Advisers Act.
---------------------------------------------------------------------------

\243\ SEC Regulation Best Interest defines retail customer to
include ERISA plan participants and beneficiaries, including IRA
owners, but not ERISA fiduciaries. See 84 FR 33343-44 (July 12,
2019). This subject is further addressed in the affected entities
section below.
---------------------------------------------------------------------------

Regulation Best Interest establishes a standard of conduct for
broker-dealers and associated persons (unless otherwise indicated,
together referred to as ``broker-dealers'') when they make a
recommendation to a retail customer of any securities transaction or
investment strategy involving securities.\244\ In adopting Regulation
Best Interest, the SEC made findings consistent with the underlying
premise of DOL's recent rulemakings: that financial services firms'
conflicts of interest are harmful to investors. Specifically, in the
Regulation Best Interest preamble, the SEC stated that:
---------------------------------------------------------------------------

\244\ The SEC's Regulation Best Interest was adopted pursuant to
the express and broad grant of rulemaking in Section 913(f) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC
also required disclosure of a Customer Relationship Summary, adopted
an interpretation of the fiduciary duty that investment advisers owe
to their clients under the Investment Advisers Act, and published an
interpretation of the ``solely incidental'' prong of the broker-
dealer exclusion under the Investment Advisers Act. Under Regulation
Best Interest, broker-dealers are required to act in the best
interest of a retail customer when making a recommendation of any
securities transaction or investment strategy involving securities
to a retail customer and cannot place its own interests ahead of the
customer's interests.

[l]ike 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.\245\ These and other conflicts of interest may provide
an incentive to a broker-dealer to seek to increase its own
compensation or other financial interests at the expense of the
customer to whom it is making investment recommendations.\246\
---------------------------------------------------------------------------

\245\ The SEC also stated that ``[t]he investment adviser-client
relationship also has inherent conflicts of interest, including
those resulting from an asset-based compensation structure that may
provide an incentive for an investment adviser to encourage its
client to invest more money through an adviser in order increase its
AUM at the expense of the client.''
\246\ 84 FR 33319 (July 12, 2019).
---------------------------------------------------------------------------

* * * * *
Notwithstanding these inherent conflicts of interest in the
broker-dealer-customer relationship, 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

[[Page 75924]]

seeking investment recommendations . . . Nevertheless, concerns
exist regarding (1) the potential harm to retail customers resulting
from broker-dealer recommendations provided where conflicts of
interest exist and (2) the insufficiency of existing broker-dealer
regulatory requirements to address these conflicts when broker-
dealers make recommendations to retail customers. More specifically,
there are concerns that existing requirements do not require a
broker-dealer's recommendations to be in the retail customer's best
interest.\247\
---------------------------------------------------------------------------

\247\ Id. at 33319 (internal citation omitted).

Accordingly, the SEC stated that Regulation Best Interest enhances
the broker-dealer standard of conduct beyond existing ``suitability''
obligations \248\ and aligns the standard of conduct with customers'
reasonable expectations by requiring broker-dealers 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 retail customer's interest; and, among other things,
address conflicts of interest by disclosing and mitigating, or even
eliminating, conflicts of interest.\249\
---------------------------------------------------------------------------

\248\ FINRA Rule 2111(a).
\249\ 84 FR 33318 (July 12, 2019).
---------------------------------------------------------------------------

In particular, the best interest obligation for Regulation Best
Interest is only satisfied if the broker-dealer complies with four
component obligations: a Disclosure Obligation, which requires a
broker-dealer to provide all material facts related to the scope and
terms of the relationship with the retail customer and the conflicts of
interests associated with the recommendation prior to or at the time of
the recommendation; a Care Obligation, which requires a broker-dealer
to exercise reasonable diligence, care, and skill when making
recommendations to a retail customer; a Conflict of Interest
Obligation, which requires the broker-dealer to establish, maintain and
enforce written policies and procedures reasonably designed to address
conflicts of interest associated with its recommendations to retail
customers; and a Compliance Obligation, which requires broker-dealers
to establish, maintain and enforce written policies and procedures
reasonably designed to achieve compliance with Regulation Best Interest
as a whole.\250\
---------------------------------------------------------------------------

\250\ SEC's Office of Compliance Inspections and Examinations,
Examinations that Focus on Compliance with Regulation Best Interest,
(April 7, 2020), https://www.sec.gov/files/Risk%20Alert-%20Regulation%20Best%20Interest%20Exams.pdf.
---------------------------------------------------------------------------

Significantly, Regulation Best Interest applies to recommendations
by broker-dealers to roll over or transfer assets in a workplace
retirement plan accounts to an IRA and recommendations to take a plan
distribution. The SEC has also issued staff guidance that under
Regulation Best Interest and the Advisers Act's fiduciary duty, when
making a rollover recommendation, broker-dealers and investment
advisers must consider costs, the level of services available, and
features of existing accounts. The guidance notes that, ``it would be
difficult to form a reasonable basis to believe that a rollover
recommendation is in the retail investor's best interest and does not
place your or your firm's interests ahead of the retail investor's
interest, if you do not consider the alternative of leaving the retail
investor's investments in their employer's plan, where that is an
option.'' \251\
---------------------------------------------------------------------------

\251\ SEC, Staff Bulletin: Standards of Conduct for Broker-
Dealers and Investment Advisers Account Recommendations for Retail
Investors, (March 30, 2022), https://www.sec.gov/tm/iabd-staff-bulletin.
---------------------------------------------------------------------------

The standard of conduct in SEC's Regulation Best Interest draws
from key principles of fiduciary obligations, including those that
apply to investment advisers under the Investment Advisers Act. As
reiterated in Staff Bulletins \252\ and speeches,^{253 254}
Regulation Best Interest, as adopted, incorporates Care and Conflict of
Interest Obligations substantially similar to the fiduciary duties
under the Advisers Act of loyalty (to not subordinate their client's
interest to their own) and care (to ensure that advice is suitable and
in the best interest of the client), to recommendations made by broker-
dealers to their retail clients. Importantly, 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 does not place the interests
of the firm or the financial professional ahead of the interests of the
retail investor.
---------------------------------------------------------------------------

\252\ Ibid.
\253\ Chairman Jay Clayton, Statement at the Open Meeting on
Commission Actions to Enhance and Clarify the Obligations Financial
Professionals Owe to our Main Street Investors, (June 5, 2019),
https://www.sec.gov/news/public-statement/statement-clayton-060519-iabd.
\254\ Chairman Jay Clayton, Regulation Best Interest and the
Investment Advisory Fiduciary Duty: Two Strong Standards that
Protect and Provide Choice for Main Street Investors, SEC (July 8,
2019), https://www.sec.gov/news/speech/clayton-regulation-best-interest-investment-adviser-fiduciary-duty.
---------------------------------------------------------------------------

The SEC's Regulation Best Interest covers advice that SEC-
registered broker-dealers render to retail investors. Therefore, the
affected firms and professionals include those making recommendations
to the individual IRA and ERISA plan investors covered by this
proposal. With respect to this area of overlap, the potential costs of
this proposal are relatively limited, because the SEC actions and this
proposal share many similarities and many firms have already built
compliance structures based on SEC actions, the Department's 2016 Final
Rule, and PTE 2020-02.
The SEC also covers robo-advice, subjecting robo-advisers that meet
the definition of ``investment adviser'' to regulation under the
Investment Advisers Act of 1940. It states that robo-advisers have a
fiduciary duty to provide advice in the best interest of their clients.
In addition, if robo-advisers also hold customer assets, they must
register with the SEC and FINRA as broker-dealers. In 2017, the SEC's
Division of Investment Management released regulatory compliance
guidance for robo-advisers that included the need for adequate
disclosure about the robo-adviser and the services it provides, the
need to ensure that the robo-adviser is providing appropriate advice to
its customers, and the need to adopt and implement appropriate
compliance programs tailored to the automated nature of the robo-
adviser's services.\255\ This SEC guidance confirms that robo-advisers
registered as investment advisers with the SEC are subject to the
Investment Adviser Act's legal requirements and fiduciary obligations.
---------------------------------------------------------------------------

\255\ Jill E. Fisch, Marion Labour[eacute], & John A. Turner,
The Disruptive Impact of FinTech on Retirement Systems: Chapter 2:
The Emergence of the Robo-Advisor, Oxford University Press 13
(2019).
---------------------------------------------------------------------------

For brokers-dealers subject to Regulation Best Interest and
investment advisers subject to the Investment Advisers Act, there is
substantial overlap between SEC requirements and the obligations
imposed by ERISA, the Code, and this regulatory project. Outside this
area of overlap, however, current standards generally are lower, so the
potential costs--and benefits--of this proposal may be more
significant. For example, this proposal would apply to state-licensed
insurance agents and state-registered brokers, who are not uniformly
regulated by the SEC, when they provide investment advice to IRA or
ERISA plan investors. It would also apply to broker-dealers who give
fiduciary advice to ERISA plan fiduciaries, who are not included within
Regulation Best Interest's definition of a retail customer.
Recommendations regarding plan and IRA investments in real estate,
certificates of deposit, other bank products and fixed indexed
annuities that are not considered

[[Page 75925]]

securities under the federal securities laws are also not generally
regulated by the SEC.
The Department is especially concerned about the proper regulation
of fixed index annuities, as they comprised 67 percent of the retail
annuity market in 2022, an increase of 42 percent from 2021, as
investors hedged against rising interest rates.\256\ This growth in
fixed annuity investments has increased the share of retirement savings
residing in a less secure environment with fewer protections against
conflicted advice compared to direct investors in mutual funds and
securities. The Department anticipates the benefits to investors of
extending fiduciary law principles to entities providing investment
advice in currently less stringent regulatory regimes to be
substantial.
---------------------------------------------------------------------------

\256\ LIMRA, Record Annuity Sales in 2022 Expected Continue into
First Quarter 2023, (March 8, 2023), https://www.limra.com/en/newsroom/news-releases/2023/limra-record-annuity-sales-in-2022-expected-to-continue-into-first-quarter-2023/.
---------------------------------------------------------------------------

Regulatory Baseline, State Legislative and Regulatory Developments
The appropriate baseline for this analysis is also informed by
certain recent legislative and regulatory developments involving
conduct standards at the state level.
Summary of State Legislative and Regulatory Developments
In a list compiled in July 2023, the Department identified 43
states that have enacted legislation, finalized regulation, or both
that impose conduct standards and disclosure requirements on various
financial institutions.\257\ The table below summarizes the enacted
legislation and finalized regulation in each state, as well as the type
of financial institution each regulation pertains to. This list
includes states that have adopted the NAIC Model Regulation #275,\258\
in addition to states that have adopted conduct standards and
disclosure requirements outside of NAIC Model Regulation #275.
---------------------------------------------------------------------------

\257\ States that have enacted legislation include Arizona,
Connecticut, Florida, Hawaii, Idaho, Louisiana, Maryland, Michigan,
Minnesota, Montana, Nebraska, Nevada, North Dakota, Oregon,
Pennsylvania, South Dakota, Texas, Washington, and Wisconsin. States
that have finalized regulation include Alabama, Alaska, Arizona,
Arkansas, Colorado, Connecticut, Delaware, Georgia, Illinois, Iowa,
Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota,
Mississippi, Montana, New Mexico, New York, North Carolina, Ohio,
Oklahoma, Rhode Island, South Carolina, Tennessee, Virginia, West
Virginia, and Wyoming.
\258\ For more information on the NAIC's Suitability in Annuity
Transactions Model Regulation, or Model Regulation #275, refer to
the section entitled ``NAIC Annuity Transactions Model Regulation
#275'' in this RIA.
\259\ The Massachusetts Supreme Judicial Court recently upheld
the validity of the state's fiduciary duty rule, holding that the
Secretary of the Commonwealth had authority to promulgate it, that
the Secretary's authority was not an impermissible delegation of
legislative power, that the rule did not override the common-law
protections available to investors, and that the rule was not
preempted by the SEC's imposition of the Regulation Best Interest.
Robinhood Fin. LLC v. Sec'y of Commonwealth, No. SJC-13381, 2023 WL
5490571, at *1, *6-15 (Mass. Aug. 25, 2023).

Table 1--States That Have Enacted Legislation or Finalized Regulation
----------------------------------------------------------------------------------------------------------------
Legislation or Title of legislation or
State regulation regulation Affected entities
----------------------------------------------------------------------------------------------------------------
Alabama........................... Regulation........... Suitability in Annuity Insurers, Broker-Dealers,
Transactions. and Independent
Producers.
Alaska............................ Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Arizona........................... Legislation.......... An Act Relating to Annuity Insurers and Independent
Transactions. Producers.
Regulation........... Article 2--Transaction of Insurers and Independent
Insurance. Producers.
Arkansas.......................... Regulation........... Stability in Annuity Insurers and Independent
Transactions. Producers.
Colorado.......................... Regulation........... Colorado Securities Act: Investment Advisers,
Dishonest and Unethical Investment Adviser
Conduct. Representatives, and
Federal Covered
Advisers.
Regulation........... Concerning Best Interest Insurers and Independent
Obligations and Producers.
Supervision in Annuity
Transactions.
Connecticut....................... Legislation.......... Consumers Doing Business Financial Planners.
with Financial Planners.
Legislation.......... An Act Requiring Administrators to
Administrators of Certain Municipal 403(b) Plans.
Retirement Plans to
Disclose Conflicts of
Interest.
Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Delaware.......................... Regulation........... Stability in Annuity Insurers and Independent
Transactions. Producers.
Florida........................... Legislation.......... Consumer Protection....... Insurers and Insurance
Agents.
Georgia........................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Hawaii............................ Legislation.......... An Act Relating to Insurers and Independent
Insurance. Producers.
Idaho............................. Legislation.......... Annuity Consumer Insurers and Independent
Protections Act. Producers.
Illinois.......................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Iowa.............................. Regulation........... Rulemaking Related to Best Insurers and Independent
Interest Standard for Producers.
Insurance Professionals.
Kansas............................ Regulation........... Policy and Procedure on Insurers and Independent
Suitability in Annuity Producers.
Transactions.
Kentucky.......................... Regulation........... Stability in Annuity Insurers and Independent
Transactions. Producers.
Louisiana......................... Legislation.......... Provides Relative to Venue Insurance Commissioner.
for Direct Actions by
Third Parties Against
Insurers.
Maine............................. Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Maryland.......................... Legislation.......... Financial Consumer N/A.
Protection Act of 2018.
Regulation........... Suitability in Annuity Insurers and Independent
Transaction. Producers.
Massachusetts \259\............... Regulation........... Suitability in Annuity Investment Advisers,
Transactions. Financial Planners,
Broker-Dealers,
Insurers, and
Independent Producers.
Regulation........... Amendments to Fiduciary Broker-Dealers and
Conduct Standards. Agents.
Regulation........... Amendments to Investment Investment Advisers.
Adviser Disclosure
Regulations.

[[Page 75926]]

Michigan.......................... Legislation.......... Amendments to An Act to Insurers and Independent
Revise, Consolidate, and Producers.
Classify the Law Relating
to the Insurance and
Surety Business.
Minnesota......................... Legislation.......... Annuity Suitability Insurers and Independent
Regulation Modification. Producers.
Regulation........... Insurance Industry Trade Insurers and Independent
Practices. Producers.
Mississippi....................... Regulation........... Annuity Transactions Model Insurers and Independent
Producers.
Montana........................... Legislation.......... An Act to Revise Insurance Insurers and Independent
Laws Related to Annuities. Producers.
Regulation........... Securities Regulation..... Investment Advisers,
Investment Adviser
Representatives, and
Federal Covered
Advisers.
Nebraska.......................... Legislation.......... An Act relating to the Insurers and Independent
Nebraska Protections in Producers.
Annuity Transactions Act.
Nevada............................ Legislation.......... An Act Relating to Broker-Dealers, Sales
Financial Planners; Representatives,
Imposing a Fiduciary Duty Investment Advisers, and
on Broker-Dealers, Sales Investment Adviser
Representatives and Representatives.
Investment Advisers Who
for Compensation Advise
Other Persons Concerning
the Investment of Money.
New Mexico........................ Regulation........... Suitability and Annuity Insurers and Independent
Transactions. Producers.
New York.......................... Regulation........... Suitability and Best Insurers and Independent
Interests in Life Producers.
Insurance and Annuity
Transactions.
North Carolina.................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
North Dakota...................... Legislation.......... An Act Relating to Annuity Insurers and Independent
Transaction Practices. Producers.
Ohio.............................. Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Oklahoma.......................... Regulation........... Standards of Ethical Investment Advisers and
Practices. Investment Adviser
Representatives.
Regulation........... Standards of Ethical Broker-Dealers and
Practices for Broker- Agents.
Dealers and Their Agents.
Oregon............................ Legislation.......... An Act Relating to Insurers and Independent
Annuities. Producers.
Pennsylvania...................... Legislation.......... An Act amending the Insurers and Independent
Insurance company Law of Producers.
1921.
Rhode Island...................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
South Carolina.................... Regulation........... Suitability in Annuity Independent Producers,
Transactions. Broker-Dealers, Agents,
and Plan Fiduciaries.
South Dakota...................... Legislation.......... An Act to Revise Annuity Broker-Dealers,
Sales Standards. Investment Advisers,
Insurers, and
Independent Producers.
Tennessee......................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Texas............................. Legislation.......... Relating to Disclosures Insurers and Agents.
and Standards Required
for Certain Annuity
Transactions and Benefits
Under Certain Annuity
Contracts.
Virginia.......................... Regulation........... Rules Governing Insurers and Independent
Suitability in Annuity Producers.
Transactions.
Washington........................ Legislation.......... Concerning the Best Insurers and Independent
Interest Standard for Producers.
Annuity Transactions.
West Virginia..................... Regulation........... Suitability in Annuity Insurers and Independent
Transactions. Producers.
Wisconsin......................... Legislation.......... An Act Relating to Best Insurers, Independent
Interest in Annuity Producers, Investment
Transactions. Advisers, and Broker-
Dealers.
Wyoming........................... Regulation........... Regulation Governing Insurers and Independent
Suitability in Annuity Producers.
Transactions.
----------------------------------------------------------------------------------------------------------------

In addition, three states, that have not yet enacted legislation or
finalized regulations have introduced legislation or proposed
regulations that would impose conduct standards and disclosure
requirements on various financial institutions.\260\
---------------------------------------------------------------------------

\260\ California, New Hampshire, and New Jersey have introduced
legislation and/or regulation.
---------------------------------------------------------------------------

NAIC Annuity Transactions Model Regulation #275
As shown in the table above, much of the legislative and regulatory
action among states focuses on insurers and independent producers. In
February 2020, the NAIC membership approved revisions to its
Suitability in Annuity Transactions Model Regulation to include a
``best interest'' standard of conduct. When the Department conducted
its analysis of states in July of 2023, 39 states had adopted the NAIC
Model Regulation #275.\261\ Since then, additional states may have
adopted the Model Regulation. In August 2023, the NAIC reported that 43
states had adopted it.\262\
---------------------------------------------------------------------------

\261\ Based on internal Department analysis, the modified Model
Regulation #275, including a best interest standard, was adopted by
Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware,
Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky,
Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi,
Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio,
Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin,
and Wyoming.
\262\ NAIC, Annuity Suitability & Best Interest Standard,
(August 2023), https://content.naic.org/cipr-topics/annuity-suitability-best-interest-standard.
---------------------------------------------------------------------------

The revisions were in response to both the SEC and the Department's
work

[[Page 75927]]

in the regulatory space and reflected some movement in the direction of
greater uniformity, although significant differences remain, as
partially discussed below.\263\ 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.\264\ If these
obligations are met, the producer is treated as satisfying the best
interest standard. The care obligation states that the producer, in
making a recommendation, must exercise reasonable diligence, care and
skill to:
---------------------------------------------------------------------------

\263\ NAIC, Suitability in Annuity Transactions Model Regulation
(#275) Best Interest Standard of Conduct Revisions Frequently Asked
Questions, (May 10, 2021), https://content.naic.org/sites/default/files/inline-files/Final%20FAQ%20July%202021.pdf.
\264\ A producer is defined in section 5.L. of the 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.
---------------------------------------------------------------------------

Know the consumer's financial situation, insurance needs
and financial objectives;
Understand the available recommendation options after
making a reasonable inquiry into options available to the producer;
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
Communicate the basis or bases of the recommendation.
The 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.'' ``Material conflict of interest'' is
defined as ``a financial interest of the producer in the sale of an
annuity that a reasonable person would expect to influence the
impartiality of a recommendation,'' but the definition expressly carves
out ``cash compensation or non-cash compensation'' from treatment as
sources of conflicts of interest. 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.
The NAIC expressly disclaimed that its standard creates fiduciary
obligations and the obligations in the Model Regulation differ in
significant respects from those in Regulation Best Interest. For
example, in addition to disregarding compensation as a source of
conflicts of interest, the specific care, disclosure, conflict of
interest, and documentation requirements, do not expressly incorporate
the obligation not to put the producer's interests before the
customer's interests, even though compliance with their terms is
treated as meeting the ``best interest'' standard. The care obligation
in the Model Regulation only requires that the adviser ``[h]ave a
reasonable basis to believe the recommended option effectively
addresses the consumer's financial situation.'' \265\ In contrast,
Regulation Best Interest requires that, when making a recommendation,
the broker-dealer ``exercises reasonable diligence, care, and skill to
. . . [h]ave a reasonable basis to believe that the recommendation is
in the best interest of a particular retail customer,'' \266\ and the
exemptions proposed here, consistent with ERISA's text, require that
advice 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.
---------------------------------------------------------------------------

\265\ Id. at Sec. 6(A)(1)(a)(iii). Members of the insurance
industry have noted that ``[t]here is a world of difference''
between the NAIC model rule and ERISA's fiduciary regime. See Brief
of Plaintiffs at 39-40, FACC, No. 3:22-cv-00243-K-BN (Nov. 7, 2022),
ECF No. 48 (comparing ERISA's best interest requirement to NAIC
Model Regulation 275, Sections 2.B and 6.A.(1)(d)).
\266\ 84 FR 33318, 33458, 33491 (July 12, 2019).
---------------------------------------------------------------------------

In recent insurance industry litigation against the Department, the
plaintiffs described the differences between ``the requirements of an
ERISA fiduciary and an insurance agent operating under the NAIC model
regulation [as] extensive.'' \267\ Among the numerous differences they
identified is the fact that, ``the NAIC model regulation does not
define conflicts of interest or the requirements pertaining to such
conflicts as broadly as ERISA.'' \268\ Additionally, they asserted that
``the NAIC model regulation does not contain a `prudence' standard''
\269\ and characterized ``these best interest requirements . . . [as] a
far cry from the obligations imposed on an ERISA fiduciary.'' \270\
---------------------------------------------------------------------------

\267\ Brief of Plaintiffs at 40, FACC, No. 3:22-CV-00243-K-BT
(Nov. 7, 2022), ECF No. 48.
\268\ Id. at 40-41 n.15.
\269\ Id.
\270\ Id. at 40.
---------------------------------------------------------------------------

The Department of Labor, uniquely among the regulators, can impose
uniform standards for the provision of investment advice to retirement
investors. It is neither limited to the regulation of securities, nor
to insurance products, but rather can set a uniform fiduciary standard
for the regulation of conflicts of interest with respect to any advice
on any investment products recommended to retirement investors. The
Department believes that retirement investors and the regulated
community are best served by a consistent, protective, and
understandable fiduciary standard.
Market Conditions and Impacts of Conflicts of Interest
Financial products, commission structures, and investment services
are constantly evolving. The major market developments that the
Department considered with respect to the proposed amendments are
discussed below.
Market Developments, Mutual Fund Share Classes
The 2016 Final Rule and recent SEC actions highlighted inherent
conflicts of interest in how broker-dealers or investment advisers are
compensated for recommending certain share classes of mutual funds.
Since then, share classes without traditional conflicts of interest
have increased in popularity. For instance, data published by the
Investment Company Institute (ICI) in 2021 show that no-load mutual
funds, or mutual funds without commissions, accounted for 46 percent of
long-term mutual fund gross sales in 2000, 79 percent in 2015, and 89
percent in 2021. The ICI attributed the increase in no-load funds to
two growing trends: investors paying intermediaries for advice through
direct fees rather than indirectly through funds and the popularity of
retirement accounts that invest in institutional, no-load share
classes.\271\
---------------------------------------------------------------------------

\271\ Investment Company Institute, Trends in the Expenses and
Fees of Funds, 2021, 28(2) ICI Research Perspective (March 2022).
---------------------------------------------------------------------------

Sethi, Spiegel, and Szapiro (2019) found that the Department's 2016
Final Rule reduced flows into funds with excess loads or loads that
were higher than would otherwise be expected based on the fund's
characteristics.\272\

[[Page 75928]]

Mitchell, Sethi, and Szapiro (2019) found while mutual funds with
excess loads have historically received greater inflows, since 2010 the
correlation between excess loads and inflows has been lower. The
authors attribute this change to an ``increased focus on broker
practices'' and ``a culture of accountability.'' \273\
---------------------------------------------------------------------------

\272\ This study updated the analysis performed by
Christoffersen, Evans, and Musto (2013) and examined the period from
1993 to 2017 in order to look at the impact of the Department's
Final Rule, taking into consideration preexisting marketplace
trends, anticipatory effects, the April 2015 Proposal, and the April
2016 Final Rule. The study calculates the excess load as ``the
difference between loads predicted by a regression and actual load,
given a number of other control variables.'' See Jasmin Sethi, Jake
Spiegel, & Aron Szapiro, Conflicts of Interest in Mutual Fund Sales:
What Do the Data Tell Us?, 6(3) The Journal of Retirement 46-59
(Winter 2019).
\273\ Lia Mitchell, Jasmin Sethi, & Aron Szapiro, Regulation
Best Interest Meets Opaque Practices: It's Time to Dive Past
Superficial Conflicts of Interest, Morningstar (November 2019).
---------------------------------------------------------------------------

Meanwhile, other types of share classes have emerged and grown more
prevalent, including unbundled and semi-bundled share classes. In a
traditional, bundled share class, the investor pays the mutual fund a
load or 12b-1 fee, and the mutual fund pays a portion back to an
intermediary, such as the intermediary that sold the fund to the
investor. Alternatively, in an unbundled or ``clean'' share class, the
investor pays any intermediaries directly, while in a semi-bundled
share class, the fund pays sub-accounting fees for recordkeeping
services and uses revenue sharing for other services, such as
distribution.\274\ The different compensation arrangement for each of
the types of share classes create different types and magnitudes of
conflicts for financial professionals.
---------------------------------------------------------------------------

\274\ Ibid.
---------------------------------------------------------------------------

Adoption of these new share classes has spread quickly. Mitchell,
Sethi, and Szapiro (2019) found that between July 2018 to August 2019,
relatively few bundled share classes were launched into the market and
that more bundled share classes closed in that time frame than semi-
bundled and unbundled combined. Additionally, they found that unbundled
share classes received almost five times as much new money as semi-
bundled share classes. While flows to semi-bundled share classes
fluctuated, they received net positive flows overall during this
period.\275\
---------------------------------------------------------------------------

\275\ Ibid.
---------------------------------------------------------------------------

Market Developments, the Insurance Market
Before it was vacated, the 2016 Final Rule had begun exerting
substantial influence on financial advice and products in the insurance
market, particularly with regard to annuities. There are three common
types of annuities offered by insurance companies.
In a variable annuity, an insurance company invests in an
investment option chosen by the investor, which is often a mutual
fund.\276\ The return of the variable annuity reflects the return on
the underlying investments. Variable annuities have often been referred
to as ``mutual funds in an insurance wrapper.'' \277\
---------------------------------------------------------------------------

\276\ SEC, Annuities, (2021), https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities.
\277\ Frank Fabozzi, The Handbook of Financial Instruments, 596-
599 (2002).
---------------------------------------------------------------------------

In a fixed annuity, an insurance company agrees to pay the
investor no less than a specified rate of interest during the asset
accumulation phase and to pay a specified amount per dollar in the
decumulation phase.^{278 279}
---------------------------------------------------------------------------

\278\ SEC, Annuities, (2021), https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities.
\279\ The initial contract of a fixed annuity establishes an
initial credited rate, a minimum guaranteed rate, and a bailout
rate. The invested premiums grow at the specified credited rate and
are added to the cash value of the annuity. The credited rate may be
changed by the insurance company at a specified frequency. However,
the interest rate is guaranteed to be no lower than the specified
minimum guaranteed rate. If the credited rate falls below the
bailout rate, the investor is able to withdraw all the funds without
paying a surrender charge. See Frank Fabozzi, The Handbook of
Financial Instruments, 599-601 (2002).
---------------------------------------------------------------------------

In an indexed annuity, an insurance company agrees to pay
the investor returns linked to the performance of a market index.
However, unlike a variable annuity, the terms in the contract and the
method used to calculate gains and losses may result in actualized
gains or losses that differ from the gains and losses experienced by
the index.\280\
---------------------------------------------------------------------------

\280\ SEC, Updated Investor Bulletin: Indexed Annuities, (July
2020), https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-13. See also FINRA Rule 2330.
---------------------------------------------------------------------------

Annuity regulators also vary by type. While all annuity products
are subject to state regulation, variable annuities and some indexed
annuities are considered securities, and therefore are also subject to
SEC and FINRA regulations.\281\ As the financial structure of each type
of annuity varies, so does the risk of conflicted advice. Variable and
fixed-indexed annuity commissions tend to be similar, while fixed rate
income and immediate annuity commissions are generally lower.\282\
---------------------------------------------------------------------------

\281\ SEC, Annuities, (2021), https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities.
\282\ Constantijn Panis & Kathik Padmanabhan, Literature Review
of Conflicted Advice in Annuities Markets, Internal Report for
Department of Labor (February 2023).
---------------------------------------------------------------------------

Similar to mutual funds, insurance agents and brokers are often
compensated through load fees for selling variable annuities.\283\ The
commission paid varies significantly, from as little as 0 percent to as
much as 10 percent of the investment with the most common amount being
7 percent.\284\ The 2016 Final Rule discouraged sales of the typical
load funds. Between 2016 and 2018, the sale of fee-based variable
annuities, or I-share class variable annuities, increased by 43
percent.\285\ Following the vacatur of the 2016 Final Rule in 2018,
fee-based variable annuity sales decreased, falling by 28 percent
between 2018 and 2020. More recently, sales have rebounded, increasing
76 percent between 2020 and 2021.\286\ The significant increases in I-
share class variable annuities have been driven by demand for fee-based
products among fee-based advisers. They have been the second most
popular variable annuity contract type since 2016, though they still
only comprised 9.5 percent of retail variable annuity sales in
2021.\287\ The Department does not have similar trend data on sales of
fee-based fixed annuities.
---------------------------------------------------------------------------

\283\ Frank Fabozzi, The Handbook of Financial Instruments 596-
599 (2002).
\284\ Mark Egan, Shan Ge, & Johnny Tang, Conflicting Interests
and the Effect of Fiduciary Duty--Evidence from Variable Annuities,
35(12) The Review of Financial Studies 5334-5486 (December 2022).
\285\ Cerulli Associates, U.S. Annuity Markets 2022: Acclimating
to Industry Trends and Changing Demand, Exhibit 4.09. The Cerulli
Report.
\286\ Ibid.
\287\ Cerulli Associates, U.S. Annuity Markets 2022: Acclimating
to Industry Trends and Changing Demand, Exhibit 2.07. The Cerulli
Report.
---------------------------------------------------------------------------

Summary
The recent regulatory and market developments, combined with the
judicial vacatur of the 2016 Final Rule, provide for a different
baseline than the pre-2016 Final Rule baseline. While some reforms and
improvements in the delivery of advice have endured despite the
vacatur, without new regulatory action, gains made to some products and
markets that are not covered by recent regulatory actions by the
Department, SEC, or states, could be derailed. Other regulatory
agencies have worked to reduce conflicts of interest, but this has
resulted in a ``patchwork'' approach to regulating advice arrangements
of retirement investments,\288\ which has already resulted in the most
conflicted advisers moving to markets with the least oversight.\289\
---------------------------------------------------------------------------

\288\ Eversheds Sutherland. ``Getting the Full Picture: The
Emerging Best Interest and Fiduciary Duty Patchwork.'' (August
2020), https://www.jdsupra.com/legalnews/the-emerging-patchwork-of-fiduciary-54761/.
\289\ Colleen Honigsberg, Edwin Hu, & Robert J. Jackson, Jr.,
Regulatory Arbitrage and the Persistence of Financial Misconduct, 74
Stanford Law Review 797 (2022).

---------------------------------------------------------------------------

[[Page 75929]]

This proposal would extend important and effective protections
broadly to retirement investors. Specifically, the proposal would
replace the 1975 regulation's five-part test with a new fiduciary
status test, which would capture more financial investment transactions
in which the investor is reasonably relying on the advice
individualized to the investor's financial needs and best interest.
This proposal would also increase the number of rollover
recommendations being considered as fiduciary advice, which would
enhance protections to retirement investors, particularly in regard to
recommendations regarding annuities.
In accordance with OMB Circular A-4, Table 2 depicts an accounting
statement summarizing the Departments' assessment of the benefits,
costs, and transfers associated with this regulatory action. The
Department is unable to quantify all benefits, costs, and transfers of
the proposal but has sought, where possible, to describe these non-
quantified impacts. The effects in Table 2 reflect non-quantified
impacts and estimated direct monetary costs resulting from the
provisions of the proposal.
The quantified costs are significantly lower than costs in the 2016
RIA due to the smaller scope of the proposal relative to the 2016 Final
Rule as well as compliance structures adopted by the industry to reduce
conflicted advice in response to state regulations, Regulation Best
Interest, PTE 2020-02, and the Department's 2016 Rulemaking. The
methodology for estimating the costs of the proposed amendments to the
rule and PTEs is consistent with the methodology and assumptions used
in the 2020 analysis for the current PTE 2020-02.

Table 2--Accounting Statement
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Benefits:
Non-Quantified (please also see the Transfers section of this table):
----------------------------------------------------------------------------------------------------------------
Increase uniformity in
the regulation of financial
advice for retirement investors,
across different market segments
and market participants.
Protect consumers from
losses that can result from
advisory conflicts of interest
(without unduly limiting consumer
choice or adviser flexibility).
Facilitate retirement
investors' trust in advisers.
Facilitate more efficient
capital allocation
----------------------------------------------------------------------------------------------------------------
Costs Estimate Year dollar Discount rate Period covered
----------------------------------------------------------------------------------------------------------------
Annualized............................ $221.1 2023 7 percent............... 2024-2033
Monetized ($million/Year)............. 220.4 2023 3 percent............... 2024-2033
----------------------------------------------------------------------------------------------------------------
Quantified Costs:
----------------------------------------------------------------------------------------------------------------
The Department expects that entities
would not incur additional costs from
the proposed amendments to PTE 77-4,
PTE 80-83, and PTE 83-1. However, the
Department expects that entities
would incur costs directly from the
proposed amendments to the following
PTEs:.
The annualized cost
estimates in PTE 2020-02 reflect
estimated costs associated with
reviewing the proposal, preparing
written disclosures for
investors, preparing written
disclosures for PEPs, reviewing
and updating policies and
procedures, reviewing and
updating the retrospective
review, and preparing rollover
documentation.
The annualized cost
estimates in PTE 84-24 reflect
estimated costs associated with
reviewing the rule, providing
disclosures to retirement
investors, establishing written
policies and procedures,
conducting a retrospective
review, and maintaining
recordkeeping.
The annualized cost
estimates in PTE 75-1 reflect
estimated costs associated with
maintaining recordkeeping.
The annualized cost
estimates in PTE 86-128 reflect
estimated costs associated with
maintaining recordkeeping. In
addition, the annualized cost
estimates in PTE 86-128 reflect
estimated costs associated with
extending the exemption
requirements on IRAs. These costs
include preparing and
distributing the written
authorization from the
authorizing fiduciary to the
broker-dealer, preparing and
mailing the required information
to the authorizing fiduciary,
preparing and distributing the
annual termination form,
preparing and distributing the
quarterly report, collecting and
generating the information
required for the annual report,
and collecting and generating the
information required for the
report of commissions paid.
----------------------------------------------------------------------------------------------------------------

[[Page 75930]]

Transfers:
Non-Quantified:
----------------------------------------------------------------------------------------------------------------
The Benefits section provides a
qualitative description of the
expected gains to investors; however,
the available data do not allow the
Department to break down those gains
into component social welfare
``benefits'' and ``transfers.''
Transfers identified in this analysis
include:
Lower fees and expenses
for participants paid to
financial institutions.
Reallocation of
investment capital to different
asset classes, share classes, or
investment products.
Shifts in the assets in
plans and IRAs.
----------------------------------------------------------------------------------------------------------------

4. Affected Entities

The table below summarizes the estimated number of entities that
would be affected by the proposed amendments to the Rule and each of
the PTEs. These estimates are discussed in greater detail below.

Table 3--Affected Financial Entities
----------------------------------------------------------------------------------------------------------------
Prohibited transaction exemptions
-----------------------------------------------------------------------------
2020-02 75-1 77-4 80-83 86-128 84-24
----------------------------------------------------------------------------------------------------------------
Retirement Plans.................. 765,124 765,124 277,390 6,886 1,000 1,722
Individual Retirement Accounts.... 3,119,832 ........... ........... ........... 210 52,449
Pooled Employer Plans............. 382 ........... ........... ........... ........... ...........
Pooled Plan Providers............. 134 ........... ........... ........... ........... ...........
Broker-Dealers.................... 1,894 1,894 ........... ........... ........... ...........
Discretionary Fiduciaries......... ........... ........... ........... ........... 1,894 ...........
Registered Investment Advisers.... 15,982 ........... ........... ........... ........... ...........
Pure Robo-Advisers................ 200 ........... ........... ........... ........... ...........
Insurance Companies............... 183 ........... ........... ........... ........... 215
Captive Insurance Agents and 1,577 ........... ........... ........... ........... 1,577
Brokers..........................
Insurance Producers............... ........... ........... ........... ........... ........... 4,000
Banks............................. ........... 2,048 ........... 25 ........... ...........
Mutual Fund Companies............. ........... ........... 812 ........... ........... ...........
Investment Company Principal 20 ........... ........... ........... ........... 20
Underwriters.....................
Pension Consultants............... 1,011 ........... ........... ........... ........... 1,011
----------------------------------------------------------------------------------------------------------------

Plans and Participants
The proposed amendments to the rule and related PTEs would affect
plans that receive investment advice from a financial institution.
Participants may be affected by advice they receive directly and by
advice that is received by their plan's administrators and fiduciaries.
As of 2021, there were approximately 765,000 private sector retirement
plans with 146 million participants and $13.2 trillion in assets that
would be affected by these proposals. Approximately 46,000 of these
plans were defined benefit plans, with 31 million participants and $3.7
trillion in assets, and approximately 719,000 are defined contribution
plans with 115 million participants and $9.5 trillion in assets.\290\
The Department recognizes that some plans, such as simplified employee
pension (SEP) plans and Savings Incentive Match Plan for Employees IRA
(SIMPLE IRA) plans, are exempt from filing and are not included in
these estimates but would typically be affected by the proposal. The
Department expects that participants in general would benefit from the
stronger, uniform standards imposed by the proposed amendments to the
rule and PTEs.
---------------------------------------------------------------------------

\290\ Private Pension Plan Bulletin: Abstract of 2021 Form 5500
Annual Reports, Employee Benefits Security Administration (2023;
forthcoming), Table A1. Table A1 reports that there were 765,124
pension plans, consisting of 46,388 defined benefit plans and
718,736 defined contribution plans. Due to a rounding discrepancy,
the sum of defined benefit and defined contribution plans does not
equal the aggregate of the plans. Additionally, some individuals
participate in two or more plans, so the number of individuals
covered is lower than the number of gross participants.
---------------------------------------------------------------------------

Participants who receive investment advice would be directly
affected by the proposed amendments, particularly participants
receiving one-time advice as to whether they should roll over their
retirement savings. These participants are discussed in the section on
IRA owners, below.
Similarly, plans receiving fiduciary investment advice would also
be directly affected by the proposed amendments. The Department
believes that most of these plan fiduciaries are compliant with the
existing PTE 2020-02. Accordingly, the Department expects that plans
would be only minimally affected by the proposed amendments to the
rule. The Department requests comment on how plans currently compliant
with PTE 2020-02 would be affected. As amended, PTE 86-128, PTE 84-24,
and PTE 77-4 would directly affect subsets of plans, described below.
The proposed amendments to PTE 86-128 would limit the scope of the
amendment to transactions in which a fiduciary uses its fiduciary
authority to cause the plan or IRA to pay a fee to such trustee for
effectuating or executing securities transactions as an agent for the
plan. Using 2021 Form 5500 data, the Department estimates that 1,257
unique plans hired service providers that denoted on the Schedule C
that they were a discretionary trustee. Further, among these plans, 801
plans

[[Page 75931]]

also reported that the discretionary trustee provided investment
management services or received investment management fees paid
directly or indirectly by the plan.\291\ Based on the range of values
(801 and 1,257), the Department estimates on average, 1,000 plans have
discretionary fiduciaries with full discretionary control. As small
plans do not file the Schedule C, this estimate may be an
underestimate. The Department requests comment on how many plans have
discretionary fiduciaries with full discretionary control and how many
would continue to rely on PTE 86-128 under the proposed amendments.
---------------------------------------------------------------------------

\291\ Estimates based on 2021 Form 5500 data.
---------------------------------------------------------------------------

The Department estimates that of the estimated 1,000 plans
discussed above, 7.5 percent are new accounts or new financial advice
relationships.\292\ Based on these assumptions, the Department
estimates that 75 plans would be affected by the proposed amendments to
PTE 86-128.\293\
---------------------------------------------------------------------------

\292\ EBSA identified 57,575 new plans in its 2021 Form 5500
filings, or 7.5 percent of all Form 5500 pension plan filings.
\293\ The number of new plans is estimated as: 1,000 plans x 7.5
percent of plans are new = 75 new plans. The number of new IRAs is
estimated as: 10,000 IRAs x 2.1 percent of IRAs are new = 210 new
IRAs.
---------------------------------------------------------------------------

For PTE 84-24, the Department estimates that 7.5 percent of plans
are new accounts or new financial advice relationships \294\ and that 3
percent of plans will use the exemption for covered transactions.\295\
Based on these assumptions, the Department estimates that 1,722 plans
would be affected by the proposed amendments to PTE 84-24.\296\
---------------------------------------------------------------------------

\294\ EBSA identified 57,575 new plans in its 2021 Form 5500
filings, or 7.5 percent of all Form 5500 pension plan filings.
\295\ In 2020, 7 percent of traditional IRAs were held by
insurance companies. See Investment Company Institute, The Role of
IRAs in US Households' Saving for Retirement, 2020, 27(1) ICI
Research Perspective (2021), https://www.ici.org/system/files/attachments/pdf/per27-01.pdf. This number has been adjusted downward
to 3 percent to account for the fact that some transactions are not
covered by this exemption.
\296\ 765,124 plans x 7.5 percent of plans are new x 3 percent
of plans with relationships with insurance agents or pension
consultants = 1,722 plans.
---------------------------------------------------------------------------

To estimate the number of plans affected by the proposed amendments
to PTE 77-4, the Department estimated the number of plans relying on a
mutual fund company. The Department does not have data on what
percentage of plans receive fiduciary advice through mutual fund
companies. A 2013 Deloitte/ICI survey found that 37 percent of 401(k)
plans have a mutual fund company as their service provider.\297\ Based
upon ICI analyses and Form 5500 data that examines the percentage of
plans that are invested in registered investment companies, the
Department estimates that 24.7 percent of defined benefit plans have
mutual fund companies as money managers.\298\ Applying these
percentages to the universe of pension plans that filed a Form 5500 in
2021 yields a total of approximately 277,390 plans with service
provider relationships with mutual fund companies.\299\ Thus, the
Department estimates that 277,390 plans would be affected by the
proposed amendments to PTE 77-4. The Department acknowledges that this
estimate likely overestimates the number of plans affected by the
proposed amendments.
---------------------------------------------------------------------------

\297\ The Department uses this estimate as a proxy for the
percent of defined contribution plans that have service provider
relationships with mutual fund companies. See Deloitte & Investment
Company Institute, Defined Contribution/401(k) Fee Study, (August
2014).
\298\ Based on Form 5500 Data 2000-2010, defined benefit plans
are approximately 33 percent less likely than defined contribution
plans to be invested in a registered investment company. See Sarah
Holden, The Economics of Providing 401(k) Plans: Services, Fees, and
Expenses, Investment Company Institute (September 2010).
\299\ Private Pension Plan Bulletin: Abstract of 2021 Form 5500
Annual Reports, Employee Benefits Security Administration (2023;
forthcoming), Table A1. There are 765,124 pension plans, of which
718,736 are defined contribution plans and 46,388 are defined
benefit plans. The number of plans with service provider
relationships with mutual fund companies is estimated as: 718,736
defined contribution plans x 37% = 265,932; 46,388 defined benefit
plans x 24.7% = 11,458.
---------------------------------------------------------------------------

Individual Retirement Account (IRA) Owners
The proposed amendments to the rule and PTEs 2020-02, 84-24, 75-1,
and 86-128 would also impact IRA owners receiving investment advice.
According to Cerulli Associates, there were 67.8 million IRA owners
holding $11.5 trillion in assets in 2022.\300\ Approximately 85 percent
of the assets are held in traditional IRAs, 10 percent in Roth IRAs,
and 5 percent in SEP, Salary Reduction Simplified Employee Pension
(SARSEP), and SIMPLE IRAs.\301\ Some owners hold multiple IRAs. The
Department estimates that the number of IRA accounts is 83.3 million by
applying the ratio of IRA accounts to IRA owners observed in EBRI's
administrative database.\302\
---------------------------------------------------------------------------

\300\ Cerulli Associates, U.S. Retirement End-Investor 2023:
Personalizing the 401(k) Investor Experience, Exhibits 5.03 and
5.12. The Cerulli Report.
\301\ Ibid. Exhibits 5.03 and 5.04.
\302\ The EBRI database has data on 11.3 million IRA accounts
owned by 9.2 million individuals. See Craig Copeland, EBRI IRA
Database: IRA Balances, Contributions, Rollovers, Withdrawals, and
Asset Allocation, 2017 Update, EBRI Issue Brief, no. 513 (2020). The
Department uses this ratio as a proxy for the ratio for total IRA
accounts to IRA owners in the following estimate: (11.3 million IRA
accounts/9.2 million IRA owners) x 67,781,000 IRA owners =
83,252,750 IRA accounts.
---------------------------------------------------------------------------

The proposed amendments to the rule and PTE 2020-02 would affect
retirement investors who roll over money from a plan or IRA into
another plan or IRA. A 2020 survey found that 46 percent of recent
retirees who had at least $30,000 in retirement savings had rolled at
least some of their savings into an IRA.\303\ According to Cerulli
Associates, in 2022, almost 4.5 million DC plan accounts with $779
billion in assets were rolled over into an IRA. Additionally, 0.7
million DC plan accounts with $66 billion in assets were rolled over to
other employer-sponsored plans.\304\ It is challenging to obtain
detailed data on other types of rollovers such as IRA-to-IRA and DB
plan-to-IRA. The Department used IRS data from 2020 to estimate overall
rollovers into IRAs, which is 5.7 million taxpayers and $618
billion.\305\ Adding in the figures for plan-to-plan rollovers, the
Department estimates the total number of rollovers at 6.4 million
accounts with $684 billion in assets.\306\ The Department requests
comment on these estimates.
---------------------------------------------------------------------------

\303\ Pew Charitable Trusts. ``Pew Survey Explores Consumer
Trend to Roll Over workplace Savings Into IRA Plans.'' Issue Brief.
(October 2021), https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2021/09/pew-survey-explores-consumer-trend-to-roll-over-workplace-savings-into-ira-plans.
\304\ According to Cerulli, in 2022, there were 4,485,059 DC
plan-to-IRA rollovers and 707,104 DC plan-to-DC plan rollovers. See
Cerulli Associates, U.S. Retirement End-Investor 2023: Personalizing
the 401(k) Investor Experience, Exhibit 6.05. The Cerulli Report.
\305\ Internal Revenue Service, SOI Tax Stats--Accumulation and
Distribution of Individual Retirement Arrangement (IRA), Table 1:
Taxpayers with Individual Retirement Arrangement (IRA) Plans, By
Type of Plan, Tax Year 2020, (2023).
\306\ Estimates for the number of IRAs may include some non-
retirement accounts such as Health Savings Accounts, Archer medical
savings accounts, and Coverdell education savings accounts. See the
discussion on Code section 4975 in the Background section of the
preamble for more details.
---------------------------------------------------------------------------

Only rollovers overseen by an ERISA fiduciary would be affected by
the proposed amendments to PTE 2020-02. The Department does not have
compelling data on the percentage of rollovers that will be overseen by
an ERISA fiduciary under the amended rule. In 2022, 49 percent of DC
plan-to-IRA rollovers with 63 percent of DC plan rollover assets were
intermediated by a financial adviser.\307\ Because the

[[Page 75932]]

Department assumes that advisers intermediating rollovers are ERISA
fiduciaries, this estimate is an upper bound. The Department then
applies the estimate of DC plan-to-IRA rollovers to all types of
rollovers. Accordingly, the Department estimates that 3.1 million
rollovers and $431 billion in rollover assets would be affected by the
proposed amendments to PTE 2020-02.\308\ The Department requests
comments on these estimates.
---------------------------------------------------------------------------

\307\ According to Cerulli, 49 percent of rollovers were
mediated by an adviser, while 37 percent were self-directed. The
remaining 14 percent were plan-to-plan rollovers. See Cerulli
Associates, U.S. Retirement-End Investor 2023: Personalizing the
401(k) Investor Experience Fostering Comprehensive Relationships,
Exhibit 6.04. The Cerulli Report.
\308\ The number of affected rollovers is estimated as:
(6,367,005 x 49%) = 3,119,832.
---------------------------------------------------------------------------

As amended, PTE 86-128 and PTE 84-24 would each affect subsets of
the number of IRAs discussed above. The Department's estimates of the
IRAs that would be affected by the proposed amendments to PTE 86-128
and PTE 84-24 are discussed below.
The proposed amendments to PTE 84-24 would affect new IRA accounts.
The Department does not have data on the number of new IRA accounts
that are opened each year. However, in 2022, of the 67.8 million IRA
owners, 1.4 million, or approximately 2.1 percent, opened an IRA for
the first time.\309\ The Department used this statistic to estimate
that 2.1 percent of IRA accounts are new each year. The Department
acknowledges that some IRA owners may have multiple IRAs, and as such,
this statistic may underestimate the percentage of new IRAs
opened.\310\ Additionally, the Department estimates that about 3
percent of these new IRAs, or approximately 52,000 IRAs, would use PTE
84-24 for covered transactions.\311\ The Department requests comments
on these assumptions, particularly with regard to the percent of IRAs
that are new accounts each year.
---------------------------------------------------------------------------

\309\ Cerulli Associates, U.S. Retirement End-Investor 2023:
Fostering Comprehensive Relationships, The Cerulli Report.
\310\ The Department lacks data on the number of IRA owners that
own multiple IRAs. To provide scope of magnitude, one source
reported that in 2019, 19 percent of IRA owners contributed to both
a traditional IRA and Roth IRA. See Investment Company Institute,
The Role of IRAs in U.S. Households' Saving for Retirement, 2020,
27(1) ICI Research Perspective (2021), https://www.ici.org/system/files/attachments/pdf/per27-01.pdf. This statistic does not account
for individuals who own multiple of each type of IRA or those who
did not contribute in 2019, but it provides a lower bound.
\311\ In 2020, 7 percent of traditional IRAs were held by
insurance companies. See Investment Company Institute, The Role of
IRAs in U.S. Households' Saving for Retirement, 2020, 27(1) ICI
Research Perspective (2021), https://www.ici.org/system/files/attachments/pdf/per27-01.pdf. This number has been adjusted downward
to 3 percent to reflect the removal of transactions not covered by
this exemption.). The number of IRAs affected is estimated as:
(83,252,750 IRAs x 2.1% IRAs assumed to be new IRAs x 3% of IRAs
held by insurance companies) = 52,449 IRAs.
---------------------------------------------------------------------------

The proposed amendments to PTE 86-128 would limit the scope of the
amendment to transactions in which a fiduciary uses its fiduciary
authority to cause the plan or IRA to pay a fee to such trustee for
effectuating or executing securities transactions as an agent for the
plan, without providing investment advice. The Department lacks
reliable data on the number of managed IRAs that would experience such
a transaction in a given year. For the purpose of this analysis, the
Department assumes that there are 10,000 managed IRAs. To err on the
side of caution, the Department assumes that all managed IRAs would
have a relationship with a discretionary fiduciary. As discussed above
for PTE 84-24, the Department assumes 2.1 percent of IRA accounts are
new each year. This results in an estimate of 210 managed IRAs that are
new accounts or new financial advice relationships.\312\ The Department
requests comment on these estimates, particularly on the number of IRAs
that are managed accounts.
---------------------------------------------------------------------------

\312\ (10,000 managed IRAs x 2.1 percent of IRAs are new) = 210
IRAs.
---------------------------------------------------------------------------

These estimates likely overestimate of the number of IRA owners
that would be affected by the proposed amendments, since IRA owners
would only be affected by the proposed rule and amendments to PTEs when
they have a relationship with certain financial entities or are
conducting financial certain transactions, as defined by the revised
fiduciary definition and the conditions for exemptive relief of each
PTE. In addition to the specific requests for comment, the Department
welcomes general comments on how IRAs and rollovers are likely to be
affected by the proposed amendments.
Pooled Plan Providers and Pooled Employer Plans
The proposed amendments to PTE 2020-02 would affect PPPs and PEPs.
As of August 22, 2023, 134 PPPs had filed an initial Form PR Pooled
Plan Provider Registration (Form PR) and 382 PEPs were registered with
the Department, though this number does not include all PEPs operating
on fiscal years whose filing deadline may be delayed.\313\ Due to these
data limitations, the Department assumes a universe of 134 PPPs and 382
PEPs for its cost estimate.\314\
---------------------------------------------------------------------------

\313\ Department of Labor, Form PR, https://www.dol.gov/agencies/ebsa/employers-and-advisers/plan-administration-and-compliance/reporting-and-filing/form-pr.
\314\ The inaugural filing deadline for Form 5500 filings for
PEPs with plan years beginning after January 1, 2021, was July 31,
2022. The Department based its estimates on those filings it had
received by August 22, 2023. The Department anticipates that this
understates the true number of PEPs.
---------------------------------------------------------------------------

The Department does not have data on what percent of PPPs or PEPs
would be affected by PTE 2020-02. For the purposes of this analysis,
the Department assumes that all PPPS and PEPs would be affected. The
Department requests comment on this assumption.
Summary of Affected Financial Entities
In its economic analysis for its 2020 rulemaking, the Department
included all financial institutions eligible for relief on a variety of
transactions and compensation that may not have been covered by prior
exemptions in its cost estimate. In 2020, the Department acknowledged
that not all these entities will serve as investment advice fiduciaries
to plans and IRAs within the meaning of Title I and the Code.
Additionally, the Department acknowledged that because other exemptions
are also currently available to these entities, it is unclear how
widely financial institutions will rely upon the new exemptions and
which firms are most likely to choose to rely on them.
This analysis, like the analysis from 2020, includes all financial
institutions eligible for relief in its cost estimate. These estimates
are subject to caveats similar to those in 2020. The Department
requests comments on which, and how many, financial institutions may
rely on each of the exemptions, as amended.
Additionally, the proposed rule would expand the definition of a
fiduciary such that an advice provider would be a fiduciary if they
make an investment recommendation to a retirement investor for a fee or
compensation and any of the following circumstances apply: (1) the
advice provider (directly or indirectly) has investment discretion over
the retirement investor's assets, (2) the advice provider (directly or
indirectly) provides investment recommendations on a regular basis as
part of their business and the recommendation is provided under
circumstances indicating that it 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 (3)

[[Page 75933]]

the advice provider represents or acknowledges they are a fiduciary
when making investment recommendations.
Registered Investment Advisers
Registered investment advisers providing investment advice to
retirement plans or retirement investors and registered investment
advisers acting as pension consultants would be directly affected by
the proposed amendments to PTE 2020-02. Generally, investment advisers
must register with either the SEC or with state securities authorities,
as appropriate.\315\
---------------------------------------------------------------------------

\315\ Generally, a person that meets the definition of
``investment adviser'' under the Investment Advisers Act (and is not
eligible to rely on an enumerated exclusion) must register with the
SEC, unless they are prohibited from registering under Section 203A
of the Investment Advisers Act or qualify for an exemption from the
Act's registration requirement. An adviser precluded from
registering with the SEC may be required to register with one or
more state securities authorities.
---------------------------------------------------------------------------

Investment advisers registered with the SEC are generally larger
than state-registered investment advisers, both in staff and in
regulatory assets under management.\316\ For example, according to one
report, 64 percent of state-registered investment advisers manage
assets under $30 million while investment advisers must register with
the SEC if they manage assets of $110 million or more.\317\ In
addition, according to one survey of SEC-registered investment
advisers, about 47 percent of SEC-registered investment advisers
reported 11 to 50 employees.\318\ In contrast, an examination of state-
registered investment advisers reveals about 80 percent reported less
than two employees.\319\
---------------------------------------------------------------------------

\316\ After the Dodd-Frank Wall Street Reform and Consumer
Protection Act, an investment adviser with $110 million or more in
regulatory assets under management generally registers with the SEC,
while an investment adviser with less than $110 million registers
with the state in which it has its principal office, subject to
certain exceptions. For more details about the registration of
investment advisers. See Securities and Exchange Commission, General
Information on the Regulation of Investment Advisers, (March 11,
2011), https://www.sec.gov/investment/divisionsinvestmentiaregulationmemoiahtm; North American Securities
Administrators Association, A Brief Overview: The Investment Adviser
Industry, (2019), www.nasaa.org/industry-resources/investment-advisers/investment-adviser-guide/.
\317\ North American Securities Administrators Association, 2018
Investment Adviser Section Annual Report, (May 2018), www.nasaa.org/wp-content/uploads/2018/05/2018-NASAA-IA-Report-Online.pdf.
\318\ Investment Adviser Association, 2019 Investment Management
Compliance Testing Survey, (June 18, 2019), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/about/190618_IMCTS_slides_after_webcast_edits.pdf.
\319\ North American Securities Administrators Association,
NASAA 2019 Investment Adviser Section Annual Report, (May 2019),
www.nasaa.org/wp-content/uploads/2019/06/2019-IA-Section-Report.pdf.
---------------------------------------------------------------------------

As of December 2021, there were 14,714 SEC-registered investment
advisers, of which 9,254 provided advice to retail investors while
5,460 provided advice to non-retail investors. Of the 14,714 SEC-
registered investment advisers, 325 were dual-registered as broker-
dealers.\320\ To avoid double counting when estimating compliance
costs, the Department counted dually registered firms as broker-dealers
and excluded them from the count of registered investment
advisers.\321\ Therefore, the Department estimates there to be 14,389
SEC-registered investment advisers.
---------------------------------------------------------------------------

\320\ Estimates are based on the SEC's FOCUS filings and Form
ADV filings.
\321\ The Department applied this exclusion rule across all
types of investment advisers, regardless of registration (SEC-
registered versus state only) and retail status (retail versus
nonretail).
---------------------------------------------------------------------------

Additionally, as of December 2021, there were 15,987 state-
registered investment advisers, of which 283 are dually registered as a
broker-dealer.\322\ In 2018, 125 state-registered investment advisers
were also registered with the SEC.\323\ To avoid double counting, the
Department counted dually registered firms as broker-dealers and
excluded them from the count of state-registered investment advisers.
Similarly, the Department counted investment advisers registered with
the SEC and a state as SEC-registered investment advisers. Accordingly,
for the purposes of this analysis, the Department considers 15,579
state-registered investment advisers.
---------------------------------------------------------------------------

\322\ Estimates are based on the SEC's FOCUS filings and Form
ADV filings.
\323\ In December 2018, 125 of the state-registered investment
advisers were also registered with the SEC and 204 were dually
registered as broker-dealers. See Form CRS Relationship Summary;
Amendments to Form ADV, 84 FR 33492 (Jul. 12, 2019).
---------------------------------------------------------------------------

In 2021, 54 percent of registered investment advisers provided
employer-sponsored retirement benefits consulting.\324\ Based on this
statistic, the Department estimates that 16,182 registered investment
advisers, including 7,770 SEC-registered investment advisers and 8,412
state-registered investment advisers state, would be affected by the
proposed amendments.\325\
---------------------------------------------------------------------------

\324\ Cerulli Associates, U.S. RIA Marketplace 2022: Expanding
Opportunities to Support Independence, Exhibit 5.10. The Cerulli
Report.
\325\ The number of registered investment advisers is estimated
as: [(14,389 SEC-registered investment advisers + 15,579 state-
registered investment advisers) x 54%] = 16,182 registered
investment advisers.
---------------------------------------------------------------------------

As discussed in the Baseline section, PTE 2020-02 excludes
investment advisers providing pure robo-advice. The proposed amendments
would include these entities; however, pure robo-advisers would have a
different baseline from registered investment advisers currently under
PTE 2020-02. As discussed below, the Department estimates that there
are 200 pure robo-advisers.\326\ Accordingly, the Department estimates
that 15,982 registered investment advisers who do not provide pure
robo-advice are currently eligible for relief under PTE 2020-02.\327\
---------------------------------------------------------------------------

\326\ For more information on this estimate, refer to the Robo-
Advisers discussion in the Affected Entities section.
\327\ As discussed below, the Department estimates that there
are 200 pure robo-advisers. Accordingly, the Department estimates
that 15,982 registered investment advisers would be affected by the
proposed amendments and are not pure robo-advisers. The number of
registered investment advisers is estimated as: [(14,389 SEC-
registered investment advisers + 15,579 state-registered investment
advisers) x 54%]-200 robo-advisers = 15,982 registered investment
advisers.
---------------------------------------------------------------------------

The Department does not have data on how many of these firms
provide advice only to retirement investors that are plan participants,
plan beneficiaries, or IRA owners, rather than the workplace retirement
plans themselves. These firms are fiduciaries under the Investment
Advisers Act and already operate under standards broadly similar to
those required by PTE 2020-02.\328\
---------------------------------------------------------------------------

\328\ Investment Adviser Association, SEC Standards of Conduct
Rulemaking: What It Means for RIAs, IAA Legal Staff Analysis (July
2019), https://higherlogicdownload.s3.amazonaws.com/INVESTMENTADVISER/aa03843e-7981-46b2-aa49-c572f2ddb7e8/UploadedImages/resources/IAA-Staff-Analysis-Standards-of-Conduct-Rulemaking2.pdf.
---------------------------------------------------------------------------

Robo Advisers
The proposed changes to PTE 2020-02 would make investment advice
providers providing pure robo-advice eligible for relief under the
exemption. While there has been a significant increase in robo-advice
in recent years,\329\ the market for robo-advice has shifted away from
pure robo-advice to a hybrid approach which combines features of robo-
advisers and traditional human advisers.\330\ This is partly driven by
investor preference. For instance, one survey found that only 45
percent of investors were comfortable using online only advice
services.\331\ Another driver is larger financial institutions entering
the market with hybrid robo-advice.

[[Page 75934]]

While the first robo-advisers were stand-alone firms, many existing
financial firms, including banks, broker-dealers, technology firms, and
asset managers, have entered the market,\332\ many by acquiring
existing pure robo-advice platforms.\333\
---------------------------------------------------------------------------

\329\ Deloitte. ``The Expansion of Robo[hyphen]Advisory in
Wealth Management.'' (2016).
\330\ Jill E. Fisch, Marion Laboure, & John A. Turner, The
Emergence of the Robo-advisor, Wharton Pension Research Council
Working Papers (2018).
\331\ Cerulli Associates, U.S. Retail Investor Advice
Relationships 2022: Rethinking the Advice Continuum, Exhibit 3.02.
The Cerulli Report.
\332\ Jill E. Fisch, Marion Laboure, & John A. Turner, The
Emergence of the Robo-Advisor, Wharton Pension Research Council
Working Papers (2018).
\333\ Andrew Welsch, Robo-Advisors Changed Investing. But Can
They Survive Independently, Barron's (February 2022), https://www.barrons.com/articles/robo-advisors-changed-investing-but-can-they-survive-independently-51645172100.
---------------------------------------------------------------------------

Robo-advisers offer varying services and different degrees of
hands-on assistance.\334\ The most basic models use computer algorithms
to offer investments deemed appropriate in terms of asset allocation
and diversification based on the information supplied by the client on
opening an account. These investments typically include low-cost mutual
funds and exchange traded funds (ETFs), and automatically invest and
rebalance funds based on a specified objective or risk tolerance. Most
robo-advisers offer advice concerning taxable accounts and IRA
accounts. The nature of robo-advice appeals to different investors than
traditional investment advice does. While traditional advisers often
target older investors with high net worth, robo-advice providers or
other low-cost investment firms tend to attract young, technology-savvy
investors with low balances.\335\
---------------------------------------------------------------------------

\334\ SEC, Investor Bulletin: Robo-Advisers, (February 23,
2017), https://www.sec.gov/oiea/investor-alerts-bulletins/ib_robo-advisers.
\335\ Jonathan W. Lam, Robo-Advisors: A Portfolio Management
Perspective, (April 2016). https://economics.yale.edu/sites/default/files/2023-01/Jonathan_Lam_Senior%20Essay%20Revised.pdf.
---------------------------------------------------------------------------

According to one source, there were 200 robo-advisers in the United
States in 2017.\336\ Robo-advisers are typically required to register
with the SEC or state authorities. For the purposes of this analysis,
the Department estimates that there are 200 pure robo-advisers that
would be subject to the amended PTE 2020-02 that are not subject to the
current PTE 2020-02. The Department requests comment on how the number
of robo-advisers in the market has evolved since 2017, what proportion
of robo-advisers provide pure versus hybrid robo-advice, and what
proportion of pure robo-advisers are likely to rely on the amended PTE
2020-02. The Department also requests comment on whether robo-advisers
operate as registered investment advisers, or if they can also operate
as broker-dealers.
---------------------------------------------------------------------------

\336\ Facundo Abraham, Sergio L. Schmukler, & Jose Tessada,
Robo-advisors: Investing Through Machines, World Bank Research and
Policy Briefs 134881 (2019).
---------------------------------------------------------------------------

Broker-Dealers
The proposed amendments would modify PTE 75-1 such that broker-
dealers would no longer be able to rely on the exemption for investment
advice. The Department does not have information about how many of
these firms provide investment advice to plan fiduciaries, plan
participants and beneficiaries, and IRA owners.
Under PTE 75-1, broker-dealers would still be able to receive
reasonable compensation for extending credit to a plan or IRA to avoid
a failed purchase or sale of securities involving the plan or IRA if
(1) the potential failure of the purchase or sale of the securities is
not caused by such fiduciary or an affiliate, and (2) the terms of the
extension of credit are at least as favorable to the plan or IRA as the
terms available in an arm's length transaction between unaffiliated
parties. Any broker-dealers seeking relief for investment advice,
however, would be required to rely on the amended PTE 2020-02.
According to data provided by the SEC, there were 3,508 registered
broker-dealers as of December 2021. Of those, approximately 70 percent,
or 2,447 broker-dealers, reported retail customer activities, while
approximately 30 percent, or 1,061 broker-dealers, were estimated to
have no retail customers.\337\
---------------------------------------------------------------------------

\337\ Estimates are based on the SEC's FOCUS filings and Form
ADV filings.
---------------------------------------------------------------------------

Not all broker-dealers perform services for employee benefit plans.
In 2021, 54 percent of registered investment advisers provided
employer-sponsored retirement benefits consulting.\338\ Assuming the
percentage of broker-dealers provide advice to retirement plans is the
same as the percent of investment advisers providing services to plans,
the Department assumes 54 percent, or 1,894 broker-dealers, would be
affected by the proposed amendments.\339\ The Department requests
comment on this estimate.
---------------------------------------------------------------------------

\338\ Cerulli Associates, U.S. RIA Marketplace 2022: Expanding
Opportunities to Support Independence, Exhibit 5.10. The Cerulli
Report.
\339\ The estimated of retail broker-dealers affected by this
exemption is estimated as: (2,447 retail broker-dealers x 54%) =
1,321 retail broker dealers. The estimated number of non-retail
broker-dealers affected by this exemption is estimated as: (1,061
non-retail broker-dealers x 54%) = 573 non-retail broker dealers.
The estimated number of total broker-dealers is 1,894 (1,321 + 573).
---------------------------------------------------------------------------

Discretionary Fiduciaries
The proposed amendments to PTE 86-128 would affect investment
advice fiduciaries. The proposed amendments would remove provisions
that had provided relief for certain plans not covering employees, such
as IRAs. Investment advice fiduciaries to IRAs would, instead, have to
rely on another exemption, such as PTE 2020-02. While fiduciaries that
exercise full discretionary authority or control with respect to IRAs
may continue to rely on the exemption, the proposed amendments to PTE
86-128 would impose additional requirements on fiduciaries of employee
benefits plans that affect or execute securities transactions and the
independent plan fiduciaries authorizing the plan or IRA to engage in
the transactions with an authorizing fiduciary.
The Department lacks reliable data on the number of investment
advice providers who are discretionary fiduciaries that would rely on
the amended exemption. For the purposes of this analysis, the
Department assumes that the number of discretionary fiduciaries relying
on the exemption is no larger than the estimated number of broker-
dealers estimated to be affected by the amendments to PTE 2020-02, or
1,894 investment advice providers while acknowledging the number is
likely significantly smaller.\340\
---------------------------------------------------------------------------

\340\ SEC Commission Interpretation Regarding the Solely
Incidental Prong of the Broker-Dealer Exclusion From the Definition
of Investment Adviser, 84 FR 33681, 33685-86 (July 12, 2019).
---------------------------------------------------------------------------

[[Page 75935]]

regulator records a nationwide count of insurance companies. Although
state regulators track insurance companies, the total number of
insurance companies cannot be calculated by aggregating individual
state totals, because individual insurance companies often operate in
multiple states. In the Department's 2016 RIA, it estimated that 398
insurance companies wrote annuities.\341\ The Department continues to
use this estimate although the number may have changed during the
intervening years. Furthermore, this may be an overestimate because
some of these insurance companies may not sell annuity contracts in the
IRA or Title I retirement plan markets. The Department requests
information on the number of insurance companies underwriting annuities
that would be affected by this proposal.
---------------------------------------------------------------------------

\341\ This estimate is based on 2014 data from SNL Financial on
life insurance companies reported receiving either individual or
group annuity considerations. See Employee Benefits Security
Administration, Regulating Advice Markets Definition of the Term
``Fiduciary'' Conflicts of Interest--Retirement Investment Advice
Regulatory Impact Analysis for Final Rule and Exemptions, (April
2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
---------------------------------------------------------------------------

Annuity sales reached record highs in 2022. Total annuity sales in
2022 amounted to $312.8 billion, while indexed annuity sales amounted
to $79.8 billion, or approximately 26% of total annuity sales. During
the first two quarters of 2023, indexed annuity sales accounted for 27%
of total annuity sales.\342\
---------------------------------------------------------------------------

\342\ LIMRA, Preliminary U.S. Annuity Second Quarter 2023 Sales
Estimates, (2023), https://www.limra.com/siteassets/newsroom/fact-tank/sales-data/2023/q2/2q-2023-prelim-annuity-sales-estimates-_final.pdf.
---------------------------------------------------------------------------

Recent legislative developments may lead to an expansion in this
market. A 2021 survey asked insurers what impacts they expected to see
from the Setting Every Community Up for Retirement Enhancement Act of
2019 (the SECURE Act). It found that 58 percent of insurers thought the
SECURE Act would result in a significant increase in the number of plan
sponsors offering in-plan annuities, and 63 percent of insurers thought
the SECURE Act would lead to a significant increase in the number of
plan participants allocating a portion of their plan balances to an
annuity option.\343\ With increasing usage of annuities in plans, the
future impact on plans, participants, assets, and insurance companies
will be greater. It also increases the need for plan fiduciaries to
receive advice that is subject to a best interest standard.
---------------------------------------------------------------------------

\343\ Cerulli Associates, U.S. Annuity Markets 2021: Acclimating
to Industry Trends and Changing Demand, Exhibit 1.06. The Cerulli
Report.
---------------------------------------------------------------------------

Insurance companies sell insurance products through (1) their
employees or ``captive insurance agents'' that work directly for an
insurance company or as independent contractors and exclusively sell
the insurance company's products, and/or (2) independent agents that
sell multiple insurance companies' products. In recent years, the
market has seen a shift away from captive distribution towards
independent distribution.\344\
---------------------------------------------------------------------------

\344\ See Ramnath Balasubramanian, Rajiv Dattani, Asheet Mehta,
& Andrew Reich, Unbundling Value: How Leading Insurers Identify
Competitive Advantage, McKinsey & Company (June 2022), https://www.mckinsey.com/industries/financial-services/our-insights/unbundling-value-how-leading-insurers-identify-competitive-advantage; Sheryl Moore, The Annuity Model Is Broken, Wink Intel
(June 2022), https://www.winkintel.com/2022/06/the-annuity-model-is-broken-reprint/.
---------------------------------------------------------------------------

The Department does not have strong data on the number of insurance
companies using captive agents or independent producers. Based on data
on the sales of individual annuities by distribution channel, the
Department estimates that, of annuities distributed through either a
captive or independent distribution channel, approximately 46 percent
of sales are done through captive distribution channels and 54 percent
of sales are done through independent distribution channels.\345\ For
the purpose of this analysis, the Department assumes that the number of
companies selling annuities through captive distribution channels and
independent distribution channels is proportionate to the sales
completed by each distribution channel. The Department recognizes that
the distribution of sales by distribution channel is likely different
from the distribution of insurance companies by distribution channel.
The Department requests comment on how many insurance companies sell
annuities through captive and independent distribution channels. The
Department also requests comment on whether how many insurance
companies may rely on both methods of distribution.
---------------------------------------------------------------------------

\345\ According to the Insurance Information Institute, in 2022,
independent broker dealers accounted for 20 percent of individual
annuities sales, independent agents accounted for 18 percent of
sales, career agents accounted for 15 percent of sales, banks
accounted for 24 of sales, full-service national broker-dealers
accounted for 17 percent of sales, direct response accounted for 3
percent of sales, and other methods accounted for 2 percent of
sales. For the purposes of this analysis, the Department considers
those sales made by career agents and full-service national broker-
dealers to be ``captive,'' and those made by independent broker-
dealers and independent agents to be ``independent.'' To estimate
the proportion of sales completed through ``captive'' and
``independent'' channels, the Department excludes the 6% of sales
associated with direct response and ``other methods'' from the
calculation. The Department assumes that 46 percent of sales by
banks are captive, while 54% of sales by banks are independent. See
Insurance Information Institute, Facts + Statistics: Distribution
Channels, (2023), https://www.iii.org/fact-statistic/facts-statistics-distribution-channels.
---------------------------------------------------------------------------

Following from this assumption, the Department estimates that 183
insurance companies distribute annuities through captive channels and
would rely on PTE 2020-02 for transactions involving investment advice.
Further, the Department estimates that 215 insurance companies
distribute annuities through independent channels and would rely on PTE
84-24 for transactions involving investment advice.\346\
---------------------------------------------------------------------------

\346\ The number of insurance companies using captive
distribution channels is estimated as 398 x 46% = 183 insurance
companies. The number of insurance companies using independent
distribution channels is estimated as 398-183 = 215 insurance
companies.
---------------------------------------------------------------------------

The Department estimates that 70 of the 398 insurance companies are
large entities.\347\ In the absence of data relating to the
distribution channel differences by firm size, the Department uses the
aggregate rate in its estimates. That is, the Department assumes that
46 percent of large insurance companies (32 insurance companies) sell
annuities through captive distribution channels, while the remaining
151 insurance companies distributing annuities through captive channels
are assumed to be small.\348\ Additionally, 54 percent of large
insurance companies (38 insurance companies) sell annuities through
independent distribution channels, while the remaining 177 insurance
companies selling annuities through independent distribution channels
are assumed to be small.\349\ The Department requests comment on this
assumption.
---------------------------------------------------------------------------

\347\ LIMRA estimates that, in 2016, 70 insurers had more than
$38.5 million in sales. See LIMRA Secure Retirement Institute, U.S.
Individual Annuity Yearbook: 2016 Data, (2017).
\348\ The number of large insurance companies using a captive
distribution channel is estimate as: 70 large insurance companies x
46% = 32 insurance companies. The number of small insurance
companies using a captive distribution channel is estimated as: 183
insurance companies-32 large insurance companies = 151 small
insurance companies.
\349\ The number of large insurance companies using an
independent distribution channel is estimate as: 70 large insurance
companies x 54% = 38 insurance companies. The number of small
insurance companies using a captive distribution channel is
estimated as: 215 insurance companies-38 large insurance companies =
177 small insurance companies.
---------------------------------------------------------------------------

Independent Producers
The proposal would also affect independent insurance producers that
recommend annuities from unaffiliated

[[Page 75936]]

financial institutions to retirement investors, as well as the
financial institutions whose products are recommended. While captive
insurance agents are employees of an insurance company, other insurance
agents are ``independent'' and work with multiple insurance companies.
Though these independent insurance producers may rely on PTE 2020-02,
the Department believes they are more likely to rely on PTE 84-24,
which is tailored to the industry under the proposal. For this reason,
the Department only considers captive insurance agents in the analysis
for PTE 2020-02. The Department requests comment on how captive
insurance agents and independent insurance producers would be affected
by the proposed amendments to PTE 2020-02 and PTE 84-24.
The Department estimates that the independent agent distribution
channel has sales of about $56 billion since this channel is 18 percent
of individual annuity sales and total U.S. annuity sales reached $312.8
billion in 2022.\350\
---------------------------------------------------------------------------

\350\ Insurance Information Institute, Facts + Statistics:
Distribution Channels--Sales of Individual Annuities By Distribution
Channels, 2018 and 2022, https://www.iii.org/fact-statistic/facts-statistics-distribution-channels. LIMRA: Record Annuity Sales in
2022 Expected to Continue Into First Quarter 2023, (March 8, 2023).
https://www.limra.com/en/newsroom/news-releases/2023/limra-record-
annuity-sales-in-2022-expected-to-continue-into-first-quarter-2023/
#:~:text=LIMRA%20data%20show%20there%20was,117%25)%20to%20%2421.8%20b
illion.
---------------------------------------------------------------------------

It is challenging to estimate the number of independent producers
selling annuities to the retirement market. A new release referencing a
study reported that there were approximately 40,000 independent
property-casualty agents and brokers in the United States.\351\ The
Department assumes that the number of independent producers selling
annuities to the retirement market who would use the exemption under
its proposed provisions would be about 10 percent of this figure, or
4,000 independent producers. This assumption is based on anecdotal
evidence. The Department requests comment on these assumptions, as well
as information as to how much of an independent producer's business
focuses on the retirement market (i.e., the shares of independent
producers serving the retirement market that receive less than one
percent of their sales from the retirement market, between one and
twenty-five percent, between twenty-five and seventy-five percent, or
more than seventy-five percent).
---------------------------------------------------------------------------

\351\ Annemarie McPherson Spears, 7 Findings From the 2022
Agency Universe Study, (October 13, 2022), https://www.iamagazine.com/news/7-findings-from-the-2022-agency-universe-study?__hstc=79369803.5fd6a87d75ca95f942e9dc33fed281b9.1691447156981.1691447156981.1691447156981.1&__hssc=79369803.3.1691447156981&__hsfp=2180945085.
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The proposed amendments would not impose any conditions on
insurance intermediaries, such as independent marketing organizations,
field marketing organizations, or brokerage general agencies. These
entities do not have supervisory obligations over independent insurance
producers under state or federal law that are comparable to those of
the other entities, such as insurance companies, banks, and broker-
dealers, nor do they have a history of exercising such supervision in
practice. They are generally described as wholesaling and marketing and
support organizations that are not tasked with ensuring compliance with
regulatory standards. In addition, they are not subject to the sort of
capital and solvency requirements imposed on state-regulated insurance
companies and banks.
Pension Consultants
The Department expects that pension consultants would continue to
rely on the existing PTE 84-24. Based on 2021 Form 5500 data, the
Department estimates that 1,011 pension consultants serve the
retirement market.\352\
---------------------------------------------------------------------------

\352\ Internal Department of Labor calculations based on the
number of unique service providers listed as pension consultants on
the 2021 Form 5500 Schedule C. This could be an underestimate as
only plans with one hundred or more participants need to file a
Schedule C and then only for service providers paid more than $5,000
during the plan year. To the extent small plans use different
pension consultants the number would be underestimated.
---------------------------------------------------------------------------

The proposed amendment would exclude pension consultants for plans
and IRAs currently relying on the existing PTE 84-24 for investment
advice. As such, any pension consultants relying on the existing
exemption for investment advice would be required to comply with PTE
2020-02 for relief. In this analysis, the Department includes pension
consultants in the affected entities for continued relief for the
existing provisions of PTE 84-24 as well as the amended PTE 2020-02.
The Department acknowledges that this approach likely overestimates the
entities and related costs to complying with the exemptions. The
Department requests comment on whether pension consultants would
continue to rely on the existing provisions of 84-24 or would rely on
the amended 2020-02.
Principal Company Underwriter
The Department expects that some investment company principal
underwriters for plans and IRAs rely on the existing PTE 84-24 for
advice. The Department does not have data allowing it to estimate how
many investment company principal underwriters would choose to rely on
the exemption, but based on its experience, the Department expects
investment company principal underwriters relying on PTE 84-24 to be
rare. For the purposes of this analysis, the Department assumes that 10
investment company principal underwriters for plans and 10 investment
company principal underwriters for IRAs would use this exemption once
with one client plan.
The proposed amendment would exclude investment company principal
underwriters for plans and IRAs currently relying on the existing PTE
84-24 for investment advice. As such, any principal company underwriter
relying on the existing exemption for investment advice would be
required to comply with PTE 2020-02 for relief. In this analysis, the
Department includes principal company underwriters in the affected
entities for continued relief for the existing provisions of PTE 84-24
as well as the amended PTE 2020-02.
The Department acknowledges that this approach likely overestimates
the entities and related costs to complying with the exemptions. The
Department requests comment on whether principal company underwriters
would continue to rely on the existing provisions of 84-24 or would
rely on the amended 2020-02.
Banks and Credit Unions
The proposed amendments to PTE 75-1, PTE 80-83, and PTE 2020-02
would affect banks and credit unions. There are 4,672 federally insured
depository institutions in the United States, consisting of 4,096
commercial banks and 576 savings institutions.\353\ Additionally, there
are 4,686 federally insured credit unions.\354\ In 2017, the GAO
estimated that approximately two percent of credit unions have private
deposit insurance.\355\ Based on this estimate, the Department
estimates that there are approximately 96 credit unions with private
deposit insurance

[[Page 75937]]

and 4,782 credit unions in total.\356\ The Department requests comment
on what proportion of credit unions offer IRAs and what proportion sell
share certificate products. The Department also requests comment on how
many banks and credit unions currently rely on PTE 2020-02, PTE 75-1,
and PTE 80-83 for investment advice.
---------------------------------------------------------------------------

\353\ Federal Insurance Deposit Corporation, Statistics at a
Glance- as of March 31, 2023, https://www.fdic.gov/analysis/quarterly-banking-profile/statistics-at-a-glance/2023mar/industry.pdf.
\354\ National Credit Union Administration, Quarterly Credit
Union Data Summary 2023 Q2, https://ncua.gov/files/publications/analysis/quarterly-data-summary-2023-Q2.pdf.
\355\ GAO, Private Deposit Insurance: Credit Unions Largely
Complied with Disclosure Rules, But Rules Should be Clarified,
(March 29, 2017), https://www.gao.gov/products/gao-17-259.
\356\ The total number of credit unions is calculated as: 4,686
federally insured credit unions/(100%-2% of credit unions that are
privately insured) = 4,782 total credit unions. The number of
private credit unions is estimated as: 4,782 total credit unions -
4,686 federally insured credit unions = 96 credit unions with
private deposit insurance.
---------------------------------------------------------------------------

The proposed amendments would exclude entities currently relying on
the existing PTE 75-1 and PTE 80-83 for investment advice. The
Department does not have a reliable data source on how many banks
currently rely on these exemptions. PTE 75-1 allows banks to engage in
certain classes of transactions with employee benefit plans and IRAs.
The Department assumes that half of these banks, or 2,048 banks would
use PTE 75-1. As amended. PTE 80-83 allows banks to purchase, on behalf
of employee benefit plans, securities issued by a corporation indebted
to the bank that is a party in interest to the plan. The Department
estimates that 25 fiduciary-banks with public offering services would
rely annually on the amended PTE 80-83. The Department requests comment
on how many banks currently rely on PTE 75-1 and PTE 80-83 and how many
of these entities rely on the exemptions for relief concerning
investment advice.
Banks relying on the existing exemptions for investment advice
would be required to comply with PTE 2020-02 for relief for advice.
Banks would be permitted to act as financial institutions under PTE
2020-02 if they or their employees are investment advice fiduciaries
with respect to retirement investors.
The Department understands that banks most commonly use
``networking arrangements'' to sell retail non-deposit investment
products, including equities, fixed-income securities, exchange-traded
funds, and variable annuities.\357\ Under such arrangements, bank
employees are limited to performing only clerical or ministerial
functions in connection with brokerage transactions. However, bank
employees may forward customer funds or securities and may describe, in
general terms, the types of investment vehicles available from the bank
and broker-dealer under the arrangement. Similar restrictions on bank
employees' referrals of insurance products and state-registered
investment advisers exist. The Department believes that, in most cases,
such referrals would not constitute fiduciary investment advice within
the meaning of the proposal. The Department, however, also requests
comment on what other types of activities banks or credit unions may
engage in that would require reliance on PTE 2020-02.
---------------------------------------------------------------------------

\357\ For more details about ``networking arrangements,'' see
Employee Benefits Security Administration, Regulating Advice Markets
Definition of the Term ``Fiduciary'' Conflicts of Interest--
Retirement Investment Advice Regulatory Impact Analysis for Final
Rule and Exemptions, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf. Financial institutions that are
broker-dealers, investment advisers, or insurance companies that
participate in networking arrangements and provide fiduciary
investment advice would be included in the counts in their
respective sections.
---------------------------------------------------------------------------

The Department currently estimates that no banks or credit unions
would be impacted by the proposed amendments to PTE 2020-02 but
requests comments on this assumption. The Department does not have
sufficient data to estimate the costs to banks or credit unions of
complying with PTE 2020-02 for investment advice services because it
does not know how frequently these entities use their own employees to
perform activities that would otherwise be covered by the prohibited
transaction provisions of ERISA and the Code. The Department seeks
comment on the frequency with which employees recommend their products
to retirement investors and how they currently ensure such
recommendations are prudent to the extent required by ERISA. The
Department invites comments on the magnitude of any such costs and
solicits data that would facilitate their quantification in the
proposal.
Mutual Fund Companies
The proposed amendments would modify PTE 77-4 such that mutual fund
companies providing services to plans can no longer rely on the
exemption when giving investment advice. Under the proposal, these
mutual funds would need to rely on PTE 2020-02 for relief concerning
investment advice.
According to the ICI, in 2022, there were 812 mutual fund
companies.\358\ The Department assumes that all of these companies are
service providers to pension plans, providing investment management
services.
---------------------------------------------------------------------------

\358\ Investment Company Institute, 2023 Investment Company Fact
Book: A Review of Trends and Activities in the Investment Company
Industry, (2023), https://www.ici.org/system/files/2023-05/2023-factbook.pdf.
---------------------------------------------------------------------------

Mortgage Pool Sponsors
PTE 83-1 provides relief for the sale of certificates in an initial
issuance of certificates by the sponsor of a mortgage pool to a plan or
IRA when the sponsor, trustee, or insurer of the mortgage pool is a
fiduciary with respect to the plan or IRA assets invested in such
certificates. The proposed amendments would modify PTE 83-1 to exclude
exemptive relief for investment advice. Under the proposal, these
entities would need to rely on PTE 2020-02 for relief concerning
investment advice. The Department requests comment on how many of these
entities currently rely on PTE 83-1 and how many of these entities rely
on PTE 83-1 for investment advice.

5. Benefits and Transfers

The Department believes that, as a result of this proposal,
retirement investors would achieve higher net returns on average in the
long run by selecting better investments or paying lower fees. More
specifically, this proposal would generate economic gains for
retirement investors by:
increasing uniformity in the regulation of financial
advice for retirement investors, across different market segments and
market participants,
protecting consumers from losses that can result from
advisory conflicts of interest (without unduly limiting consumer choice
or adviser flexibility),
giving retirement investors increased trust and confidence
in their advisers and in the reliability of their advice, and
facilitating more efficient capital allocation.
These represent gains to investors, which may manifest as pure
social welfare ``benefits,'' as some resources that were previously
inefficiently used to acquire financial products and services are now
available for more valuable uses. Other improvements may take the form
of ``transfers'' of social welfare to retirement investors from other
entities in society. The available data do not allow the Department to
quantify the gains to investors or the components social welfare
``benefits'' and ``transfers.'' These transfers represent a beneficial
gain to retirement investors and are a primary objective of the
proposed rule and PTE.
If some transactions have increased net returns for certain parties
and decreased returns of equal magnitude for other parties, that would
represent a transfer. If the increase in net returns for the first
group is larger than the corresponding decrease for the second group,
then only the equivalent portion would be transfers and the amount of
the additional net returns would represent benefits. For example, non-

[[Page 75938]]

retirement investors may have previously experienced lower prices and
higher returns resulting from timing errors of retirement investors due
to conflicted advice. As those conflicts are removed, those
transactions may not occur, leading to a transfer from non-retirement
investors to retirement investors. Moreover, it is possible that the
financial industry would forego profits (e.g., as a result of
conflicted advisers charging retirement investors lower fees),
resulting in a transfer from investment advisers and associated service
providers to retirement investors.
As detailed later in this RIA, the magnitude of the gains to
retirement investors, through benefits or transfers, is uncertain. As
noted earlier, advisory conflicts--which this proposal, in harmony with
federal securities laws, would mitigate--are very costly for retirement
investors. The cost is high both on aggregate and for individual
retirement investors, such as when a new retiree adheres to conflicted
advice to transfer a career's-worth of 401(k) savings into an over-
priced annuity or a high-risk investment.
Both the Department's 2016 RIA and the SEC's Regulation Best
Interest analyses show that investors stand to gain much from the
mitigation of advisory conflicts. This RIA provides a mainly
qualitative discussion of the benefits of this proposal. The Department
invites comments and data related to how it might quantify these
benefits as part of the RIA of any final rule.
Regulatory Uniformity
This proposal would make the rules that govern fiduciary advice to
plan and IRA investors more consistent with federal securities laws,
and thereby promote clarity and efficiency. Under the current
regulatory regime, bad actors are drawn to those markets with the least
regulated products, where they are not required to prioritize
retirement investors interest over their own when they make investment
recommendations. By harmonizing advice regulations across all markets
that are used by retirement investors, the Department can ensure that
advisers all face the same regulatory standard. It would also remove
incentives for investment advisers to steer recommendations in ways
that customers cannot monitor and that run counter to the customers'
best interest.
When contemplating a potential ``Financial Adviser Reform Act''
that would ``be uniform in its application of the fiduciary duties of
loyalty and care across all financial advisers,'' Smith (2017) noted
that, ``this uniformity would eliminate the `false distinction' between
investment service providers by recognizing the overlapping services
they offer.'' \359\ Smith argued that creating a uniform standard
``would both reduce consumer confusion as to what constitutes advice or
recommendations and ensure that the uniform fiduciary duty is
consistently applied in the investor's favor by taking a broad approach
to what constitutes investment advice and recommendations.'' \360\
Simply put, requiring that only some investment advisers advising
retirement investors adhere to an ERISA fiduciary standard promotes
recommendations that are driven by differences in the regulatory regime
rather than by the products or investors' interests.
---------------------------------------------------------------------------

\359\ Alec Smith, Advisers, Brokers, and Online Platforms: How a
Uniform Fiduciary Duty Will Better Serve Investors, 2017(3) Colum.
Bus. L. Rev. 1200-1243 (2017), https://doi.org/10.7916/cblr.v2017i3.1730.
\360\ Ibid.
---------------------------------------------------------------------------

Research suggests that the problems resulting from differing
regulatory regimes are not unique to the United States. For instance,
Anagol et al. (2017) found that when agents selling life insurance in
India were required to disclose commissions for one particular product,
they were much less likely to recommend it to clients. Instead, the
agents recommended products that did not have this requirement, but
which had higher and opaque commissions.\361\ The authors conclude,
``These results suggest that the disclosure requirements for financial
products need to be consistent across the menu of substitutable
products.'' This underscores that regulatory regimes that are not
uniform allow advisers to engage in regulatory arbitrage, leaving their
clients vulnerable to conflicts of interest.
---------------------------------------------------------------------------

\361\ Santosh Anagol, Shawn Cole & Shayak Sarkar, Understanding
the Advice of Commissions-Motivated Agents: Evidence from the Indian
Life Insurance Market, 99(1) The Review of Economics and Statistics
1-15, (2015), https://doi.org/10.1162/REST_a_00625.
---------------------------------------------------------------------------

This proposed rule would help create a uniform standard, as it
would apply to all retirement investment advice. This would address
concerns the Department has about lower standards for advice related to
insurance products and other investments that are not securities,
advice that broker-dealers render to ERISA plan fiduciaries, and robo-
advice.\362\ The proposed rule's broad application to all retirement
investment advice would help different market participants and
different financial products compete on similar terms for IRA and plan
business. This would reduce the risk to retirement investors. Uniform,
well-designed rules can make markets fairer for competitors and
friendlier for customers, leading to more efficient market outcomes.
They can also promote efficiency by allowing firms that offer multiple
products or make recommendations in both the retail and non-retail
market to utilize a common compliance structure.
---------------------------------------------------------------------------

\362\ The Department identifies these areas as areas of concern
because non-security investments and investment advice from broker-
dealers to ERISA plan fiduciaries are not covered by recent SEC
actions and pure robo-advice, while included in the SEC's actions
was excluded from the current PTE 2020-02. For more information,
refer to the Baseline discussion.
---------------------------------------------------------------------------

Financial services firms are already moving toward new approaches
in how they offer advice, including more fee-based advice models,
flatter compensation models, and integrating technology. The proposed
amendments to the rule and exemptions would help ensure that these new
approaches evolve toward less conflicted and more innately impartial
business models. These types of technology-enhanced models--whether
pure robo-adviser or hybrid models--will contain the overall costs
associated with providing investment advice and strategies and will
help low-balance account holders obtain investment advice at an
affordable cost.
This proposal would generate additional economic benefits and
transfers by extending important and effective protections broadly to
cover all advice given to retirement investors. In this analysis, the
Department identifies three specific areas in which retirement
investors would benefit from an extension of protections: one-time
advice regarding the rollover of assets, advice on non-security annuity
products, and advice given to ERISA plan fiduciaries. These types of
advice are discussed in the following sections.
Protections Concerning Rollover Investment Advice
The proposal would generate benefits for, and transfers to, savers
by reducing conflicts related to one-time advice concerning rollovers.
Frequently, participants are better off leaving their 401(k) account in
the retirement plan rather than rolling it over to an IRA, particularly
if the 401(k) plan has low fees and high-quality investment options.
Large 401(k) plans often have lower fees than IRAs, though smaller
401(k) plans sometimes find it difficult to keep fees low.\363\ IRAs
often utilize

[[Page 75939]]

retail shares in mutual funds with substantially higher fees than the
institutional share classes that employer-sponsored plans typically
utilize. A 2022 Pew Charitable Trusts study analyzed the difference
between median institutional and retail share class expense ratios
across all mutual funds that offered at least one institutional share
and one retail share in 2019. They found that the median retail shares
of equity funds had annual expenses that were 37 percent higher than
institutional shares. Over the course of saving for retirement, the
impact of even small differences in fees was significant.\364\
---------------------------------------------------------------------------

\363\ BrightScope and Washington, DC: Investment Company
Institute. The BrightScope/ICI Defined Contribution Plan Profile: A
Close Look at 401(k) Plans, 2019 (San Diego, CA: 2022). Available at
www.ici.org/files/2022/22-ppr-dcplan-profile-401k.pdf.
\364\ Pew Charitable Trusts, Small Differences in Mutual Fund
Fees Can Cut Billions from Americans' Retirement Savings, Pew
Charitable Trusts Issue Brief, (June 2022), https://www.pewtrusts.org/-/media/assets/2022/05/smalldifferenceinmutualfunds_brief_v1.pdf.
---------------------------------------------------------------------------

The investment fiduciaries of 401(k) plans also have
responsibilities under ERISA to act in the best interests of, and
solely for the benefit of, the plan participants, whereas IRA providers
do not have such responsibilities.\365\ Turner and Klein (2014)
suggested that the services and investment performance associated with
higher fees paid in an IRA are not necessarily justified,\366\ meaning
a plan participant would be able to obtain similar investment
performance and services in a lower cost 401(k) plan. For instance,
Turner, Klein, and Stein (2015) found that most financial advisers told
federal workers about the benefits of rolling over into an IRA, such as
having a larger number of investment options and more lenient
withdrawal options, without mentioning the higher costs that would be
incurred relative to keeping their savings in the Thrift Savings Plan,
which has extremely low fees.\367\
---------------------------------------------------------------------------

\365\ Ibid.
\366\ John Turner & Bruce W. Klein, Retirement Savings Flows and
Financial Advice: Should You Roll Over Your 401(k) Plan?, 30(4)
Benefits Quarterly 42-54 (2014), https://www.iscebs.org/Documents/PDF/bqpublic/bq414f.pdf.
\367\ John A. Turner, Bruce W. Klein & Norman P. Stein,
Financial Illiteracy Meets Conflicted Advice: The Case of Thrift
Savings Plan Rollovers, 3(4) The Journal of Retirement 47-65 (2015),
https://doi.org/10.3905/jor.2016.3.4.047.
---------------------------------------------------------------------------

If fewer participants roll over their 401(k) plan account balances
into IRAs, and instead keep their account balances in plans sponsored
by former or new employers, this would result in transfers between
different segments of the market. To consider one example, there may be
a transfer from service providers who specialize in serving IRAs to
service providers who specialize in serving defined contribution plans.
As a second example, retirement investors often pay lower fees in plans
where they can access institutional share classes than they do in IRAs
where they use retail share classes. This represents a transfer from
actors in the financial industry to retirement investors.
Protections Concerning Annuity Investment Advice
The proposal would generate additional benefits by extending
protections to investment advice from insurance agents or independent
producers to IRA investors. The annuity products offered by insurance
companies are notoriously complex, leaving retirement investors reliant
on advice from the insurance agent, broker, or independent producer
selling the annuity. The fees and adviser incentives are similarly
complex, often in a way that can conceal the full magnitude of the
fees. Other regulators have highlighted the complexity of many annuity
products. For example, FINRA stated:

Annuities are often products investors consider when they plan
for retirement--so it pays to understand them. They also are often
marketed as tax-deferred savings products. Annuities come with a
variety of fees and expenses, such as surrender charges, mortality
and expense risk charges and administrative fees. Annuities also can
have high commissions, reaching seven percent or more.\368\
---------------------------------------------------------------------------

\368\ Financial Industry Regulatory Authority, Annuities,
Financial Industry Regulatory Authority, https://www.finra.org/investors/investing/investment-products/annuities.

As described in the baseline discussion above, fixed annuities,
variable annuities, and indexed annuities differ significantly in risk.
For instance, while the insurer carries the investment risk for fixed
annuities, the investor carries the investment risk for variable
annuities and indexed annuities.\369\ Additionally, they differ in
regulatory standards and the required protections owed to customers.
While variable annuities and some indexed annuities are considered
securities subject to SEC and FINRA regulation,\370\ the standard of
care owed to a customer for other types of annuities depends on the
state regulation.
---------------------------------------------------------------------------

\369\ Frank Fabozzi, The Handbook of Financial Instruments 579,
(2002), https://seekingworldlywisdom.files.wordpress.com/2011/08/the-handbook-of-financial-instruments-fabozzi.pdf.
\370\ Securities and Exchange Commission, Annuities, Securities
and Exchange Commission, https://www.investor.gov/introduction-investing/investing-basics/glossary/annuities.
---------------------------------------------------------------------------

One area of concern for the Department is how financial entities
selling annuities are compensated, which may result in a conflict of
interest. According to the 2015 Warren Report, which examined 15 of the
largest annuity companies in the United States, 87 percent of the
annuity companies offered ``kickbacks'' to their agents in exchange for
sales to retirees.\371\ Further, insurance agents, brokers, and
independent producers are often compensated through load fees for
selling variable and fixed annuities fees.\372\ As discussed in the
Baseline section discussion on market developments in the insurance
market, research has found load fees create a conflict of interest in
investment advice, leading to decreased returns.\373\
---------------------------------------------------------------------------

\371\ Office of Senator Elizabeth Warren, Villas, Castles, and
Vacations: Americans' New Protections from Financial Adviser
Kickbacks, High Fees, & Commissions are at Risk (2017), https://www.warren.senate.gov/files/documents/2017-2-3_Warren_DOL_Rule_Report.pdf.
\372\ Frank Fabozzi, The Handbook of Financial Instruments 576-
599, (2002), https://seekingworldlywisdom.files.wordpress.com/2011/08/the-handbook-of-financial-instruments-fabozzi.pdf.
\373\ Susan Christoffersen, Richard Evans & David Musto, What Do
Consumers' Fund Flows Maximize? Evidence from Their Broker's
Incentives, 68(1) Journal of Finance 201-235 (February 2013),
https://doi.org/10.1111/j.1540-6261.2012.01798.x.
---------------------------------------------------------------------------

The Department is also particularly concerned about vulnerable
retirement investors who lack a basic understanding of investment
fundamentals and the complexities associated with indexed annuities.
FINRA cautions that, ``indexed annuities are complex financial
instruments, and retirement experts warn that such annuities include a
number of features that may result in lower returns than an investor
may expect.'' \374\ While indexed annuities have a minimum guaranteed
rate of return tied to an underlying index, the guarantee rate does not
cover all of a premium.\375\ Moreover, while the rate of return of the
indexed annuity is linked to performance of the index, indexed annuity
returns are subject to contractual limitations which effectively cap
returns. FINRA identified the following contractual limitations
observed in indexed annuities:
---------------------------------------------------------------------------

\374\ Financial Industry Regulatory Authority, The Complicated
Risks and Rewards of Indexed Annuities, Financial Industry
Regulatory Authority, (July 2022), https://www.finra.org/investors/insights/complicated-risks-and-rewards-indexed-annuities.
\375\ Coryanne Hicks & Phillip Moeller, 17 Things You Need to
Know About Annuities, U.S. News and World Report, (May 3, 2021),
https://money.usnews.com/investing/investing-101/articles/things-you-need-to-know-now-about-annuities.
---------------------------------------------------------------------------

Participation rates explicitly set the percentage of index
returns that are credited to the annuity;
Spread, margin, or asset fees are subtracted from the
index returns; and

[[Page 75940]]

Interest caps limit the returns if the underlying index
sees large returns.\376\
---------------------------------------------------------------------------

\376\ Financial Industry Regulatory Authority, The Complicated
Risks and Rewards of Indexed Annuities, Financial Industry
Regulatory Authority, (July 2022), https://www.finra.org/investors/insights/complicated-risks-and-rewards-indexed-annuities.
---------------------------------------------------------------------------

FINRA also warns that indexed annuities may be able to change these
contractual limitations, depending on the terms of the contract.\377\
---------------------------------------------------------------------------

\377\ Id.
---------------------------------------------------------------------------

In a 2020 investor alert, the SEC warned, ``You can lose money
buying an indexed annuity. Read your contract carefully to understand
how your annuity works.'' \378\ The SEC listed several ways that
investors in these products can lose money, including through surrender
charges and withdrawals during a specified time period. The SEC further
cautioned:
---------------------------------------------------------------------------

\378\ Securities and Exchange Commission, Updated Investor
Bulletin: Indexed Annuities, Securities and Exchange Commission,
(July 2020), https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-13.
---------------------------------------------------------------------------

``Indexed annuity contracts describe both how the amount
of return is calculated and what indexing method they use. Based on the
contract terms and features, an insurance company may credit your
indexed annuity with a lower return than the actual index's gain.''
``Indexed annuity contracts commonly allow the insurance
company to change some of these features periodically, such as the rate
cap. Changes can affect your return. Read your contract carefully to
determine what changes the insurance company may make to your
annuity.'' \379\
---------------------------------------------------------------------------

\379\ Id.
---------------------------------------------------------------------------

The Department also has concerns about sales tactics of insurance
agents, brokers, and independent producers for annuity products. A
number of state regulators have issued website alerts regarding
deceptive sales practices to sell annuities to seniors, including
``high-pressure sales pitch[es]'' and ``quick-change tactics'' in which
an agent tries to convince an investor to change coverage quickly
without time for adequate research. State regulators also warned that a
licensed agent will be more than willing to show credentials and to
question an agent's ``[unwillingness or inability] to prove
credibility'' to prospective customers.\380\ One regulator noted,
``With billions of dollars in sales to be made, insurance companies may
offer commissions as high as 10 percent to agents to sell products like
long-term deferred annuities to senior citizens.'' \381\ As described
by the regulator:
---------------------------------------------------------------------------

\380\ See e.g., California Department of Insurance, Deceptive
Sales Practices When Purchasing Annuities, California Department of
Insurance, https://www.insurance.ca.gov/0150-seniors/0100alerts/DeceptiveSales.cfm; North Carolina Department of Insurance,
Annuities and Senior Citizens, North Carolina Department of
Insurance, https://www.ncdoi.gov/consumers/annuities/annuities-and-senior-citizens; Mississippi Insurance Department, Annuities and
Senior Citizens: Senior Citizens Should Be Aware Of Deceptive Sales
Practices When Purchasing Annuities, Mississippi Insurance
Department, https://www.mid.ms.gov/consumers/annuities-senior-citizens.aspx; Kentucky Department of Insurance, Annuities and
Senior Citizens Consumer Alert: Senior Citizens Should Be Aware of
Deceptive Sales Practices When Purchasing Annuities, Kentucky
Department of Insurance, https://insurance.ky.gov/ppc/Documents/AnnuitiesandSenior.pdf; Massachusetts Division of Insurance,
Annuities and Senior Citizens: Senior Citizens Should Be Aware Of
Deceptive Sales Practices When Purchasing Annuities, Massachusetts
Division of Insurance, https://www.mass.gov/service-details/annuities-and-senior-citizens; Georgia Office of the Commissioner of
Insurance and Safety Fire, Annuity Tips, Georgia Office of the
Commissioner of Insurance and Safety Fire, https://oci.georgia.gov/insurance-resources/annuity/annuity-tips; South Dakota Division of
Insurance, Consumer Alert: Annuities and Senior Citizens: Senior
Citizens Should Be Aware Of Deceptive Sales Practices When
Purchasing Annuities, South Dakota Division of Insurance, https://dlr.sd.gov/insurance/publications/alerts/documents/annuities_senior_citizens.pdf.
\381\ Minnesota Attorney General, Annuities: Unsuitable
Investments for Seniors, Minnesota Attorney General, https://www.ag.state.mn.us/consumer/Publications/AnnuitiesUnsuitableInvforSeniors.asp.

Some unscrupulous sellers use high-pressure sales pitches,
seminars, and telemarketing. Beware of agents who ``cold call'' you,
contact you repeatedly, offer ``limited time offers,'' show up
without an appointment, or won't meet with you if your family is
present. Beware of estate planning ``seminars'' that are actually
designed to sell annuities. Beware of seminars that offer free meals
or gifts. In the end, they are rarely free. Beware of agents who
give themselves fake titles to enhance their credibility.\382\
---------------------------------------------------------------------------

\382\ Ibid.

Supporting this call for caution, Egan et al. (2019) found
substantial amounts of misconduct disputes in the sales of annuities
between 2005 and 2015.\383\
---------------------------------------------------------------------------

\383\ Mark Egan, Gregor Matvos, & Amit Seru, The Market for
Financial Adviser Misconduct, 127(1) Journal of Political Economy
(February 2019), https://www.journals.uchicago.edu/doi/10.1086/700735.
---------------------------------------------------------------------------

Research shows that fiduciary protections in the annuity markets
lead to better outcomes for investors. By analyzing deferred annuity
sales at a large financial services provider during 2013 to 2015,
Bhattacharya et al. (2020) found that fiduciary duty increases risk-
adjusted returns by 25 basis points.\384\ This results from a
compositional shift in the set of products purchased by investors.
Fiduciary duty protections tend to shift sales towards fixed indexed
annuities and away from variable annuities. Within variable annuities,
sales shifted towards products with more and higher quality investment
options. The authors obtained these findings by exploiting the
variation in fiduciary duties between broker-dealers and registered
investment advisers as well as the variation between states as to
whether broker-dealers are subject to a common law fiduciary duty.
---------------------------------------------------------------------------

\384\ Vivek Bhattacharya, Gaston Illanes, & Manisha Padi,
Fiduciary Duty and the Market for Financial Advice, Working Paper
25861 National Bureau of Economic Research (2020), https://www.nber.org/papers/w25861.
---------------------------------------------------------------------------

Bhattacharya et al. (2020) also found that fiduciary duty led to a
16 percent reduction in the number of broker-dealers, which they
described as a ``potentially small'' effect. There was no change in
total annuity sales. Furthermore, the reduction in broker-dealers did
not result in poor quality products being sold. The authors developed a
model that shows that the benefits of improved advice under a fiduciary
standard, offset by the reduction in the number of broker-dealers and
the advice they provide, yields an overall effect of increasing average
returns by 20 basis points. On the whole, these results indicate that
this proposal would improve the quality of advice in the investment
market and protect the welfare of investors and retirees.\385\
---------------------------------------------------------------------------

\385\ Ibid.
---------------------------------------------------------------------------

The Bhattacharya et al. (2020) model is particularly helpful in
that it provides a framework to illustrate the quantitative impact of
extending the fiduciary duty. It takes into account both empirical
findings--the increase in returns of 25 basis points and the exit of 16
percent of the broker-dealers. While the model illustrates how these
results would apply to the larger market, the results are still subject
to the limitations of the empirical analysis, which looked only at
certain types of annuities sold by one large firm. The authors examined
the effects of variation in state-level fiduciary laws, but it is
unclear how similar those would be to the effects of a national
regulation.
Approximately $3.8 trillion in pension entitlements are held in
annuities at life insurance companies, including those within
IRAs.\386\ The recommendation of many of these assets are already
subject to a best interest

[[Page 75941]]

standard; for example, they were sold by a registered investment
adviser or sold in a state with a fiduciary standard. It is difficult
to know exactly how many assets fall into this category, but for
illustrative purposes, let us assume that 50 percent of the market is
not currently subject to a best interest standard and would be under
the proposal and would therefore expect an increase in average returns
of 20 basis points as suggested by Bhattacharya et al. In this
scenario, the expansion of fiduciary duty would lead to gains for
investors (a mix of societal benefits and transfers) of $3.6 billion,
assuming a 20 basis point increase in returns.\387\
---------------------------------------------------------------------------

\386\ Board of Governors of the Federal Reserve System,
Financial Accounts of the United States: Flow of Funds, Balance
Sheets, and Integrated Macroeconomic Accounts: First Quarter 2023,
Table L.227 Federal Reserve Statistical Release Z.1. (June 8, 2023),
https://www.federalreserve.gov/releases/z1/.
\387\ 0.20% x $3.6 trillion x 50% = $3.6 billion.
---------------------------------------------------------------------------

Good regulation may also improve the overall investment advice
market. According to Egan, Ge, and Tang (2022), after the Department
issued its 2016 Final Rule, total variable annuity sales fell
significantly--primarily driven by a 52 percent decrease in annuities
with expenses in the highest quartile, suggesting that broker-dealers
responded to the 2016 Final Rule by placing greater weight on investor
interests. These impacts persisted even after the rule was vacated by
the Fifth Circuit. Critics of the Department's 2016 Final Rule often
refer to a decline in variable annuity sales as evidence of the 2016
Final Rule having negative effects. Egan, Ge, and Tang (2002) conclude,
however, that investors on average experienced a net benefit from the
Rule, even taking into account the fact that some investors were no
longer participating in the annuity market.\388\ Other commenters
observed that even if the 2016 Final Rule could have reduced investors'
access to certain services or products, the impact would have been on
services and products that were not in the investors' best
interest.\389\
---------------------------------------------------------------------------

\388\ Mark Egan, Shan Ge, & Johnny Tang, Conflicting Interests
and the Effect of Fiduciary Duty--Evidence from Variable Annuities,
35(12) The Review of Financial Studies 5334-5486 (December 2022),
https://academic.oup.com/rfs/article-abstract/35/12/5334/6674521.
\389\ Ashley C. Vicere, Defining Fiduciary: Aligning Obligations
with Expectations. 82(4) Brooklyn Law Review 1783 (2016), https://brooklynworks.brooklaw.edu/blr/vol82/iss4/8/.
---------------------------------------------------------------------------

The benefits of this proposal's application of fiduciary status to
investment advice from insurance agents, brokers, and independent
producers include eliminating the incentives for regulatory arbitrage
by those agents. Without this proposal, insurers and insurance
intermediaries can secure excess profits at investors' expense by
rewarding investment advice providers for giving biased advice in ways
that broker-dealers operating under Regulation Best Interest cannot.
Protections Concerning Advice Given to Plan Fiduciaries
This proposal would also yield economic benefits by extending
protections to advice given to ERISA plan fiduciaries. Accordingly, the
proposal would ensure that investors and the Secretary could enforce
the fiduciary protections by pursuing claims for fiduciary misconduct
involving ERISA-covered plans. When a broker-dealer currently provides
advice to plan fiduciaries, the advice is not covered by Regulation
Best Interest because the plan fiduciaries are not retail
customers.\390\ Pool et al. (2016) offered evidence that mutual fund
companies acting as service providers to 401(k) plans display
favoritism toward their own affiliated funds, even when their
performance is worse, generating ``significant subsequent negative
abnormal returns for participants investing in those funds.'' \391\
This proposal aims to reduce or eliminate such harmful favoritism.
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\390\ Advice provided by an investment adviser to a plan
fiduciary is subject to the Advisers Act fiduciary duty.
\391\ Veronika K. Pool, Clemens Sialm, & Irina Stefanescu, It
Pays to Set the Menu: Mutual Fund Investment Options In 401(K)
Plans, 71(4) The Journal of Finance 1779-1812 (August 2016), https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12411.
---------------------------------------------------------------------------

Pool et al. (2022) demonstrated that funds who offer defined
contribution plan recordkeepers revenue-sharing payments are more
likely to be added as investment options on plan menus and are also
more likely to be retained. Additionally, plans whose menus include
funds that share revenue had higher expense ratios resulting in
significantly higher fees.\392\ Pool states that this is ``consistent
with the notion that . . . less transparent indirect payments allow
record keepers to extract additional rents from plan participants.''
\393\ Fiduciaries can negotiate the specific formula and methodology
under which revenue sharing will be credited to the plan or plan
service providers, indirectly reducing the fees the plan pays which
could in turn mitigate the conflict, but this requires a sophisticated
understanding of the underlying agreement.\394\ Given the proliferation
of fee arrangements for investment advice that are increasingly less
transparent to clients and regulators as well as the variation in
standards and safeguards across advice markets, the Department believes
it is critical to extend protections associated with fiduciary status
under ERISA, to protect retirement investors' assets.
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\392\ Veronika K. Pool, Clemens Sialm, & Irina Stefanescu,
Mutual Fund Revenue Sharing in 401(k) Plans, Vanderbilt Owen
Graduate School of Management Research Paper (November 8, 2022),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3752296.
\393\ Ibid.
\394\ See Employee Benefits Security Administration, 2013-03A,
Advisory Opinions, (2013), https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions/2013-03a.
---------------------------------------------------------------------------

Plan fiduciaries receive advice on many important topics. For
defined contribution plans, these topics can include plan design
provisions such as investment alternatives, whether the plan should
have automatic enrollment, default contribution rates, and default
investments. For defined benefit plans, it can include selection of
investments and investment strategies as well as distribution options.
Given the large number of participants in ERISA plans and the huge
asset holdings of such plans, the benefits of protecting the advice
received by plan fiduciaries is likely to be substantial.
Increased Confidence in Advisers and in the Reliability of Their Advice
The market for financial advice generally works best when investors
trust investment advice providers and their trust is well-placed. Both
conditions are necessary for optimal results. If investors distrust
investment advice providers, they will incur higher costs to select a
provider and monitor their conduct. Their provider may also incur
higher costs to counter prospective and existing customers' distrust.
Distrustful investors may be less likely to obtain beneficial advice
and more likely not to follow beneficial advice.\395\ Likewise, if
investors trust investment advice providers more than is warranted,
they may reduce their monitoring of the advisor's actions and accept
less transparency in policies, procedures and fees, making them more
vulnerable to harm from advice that is biased by advisory
conflicts.\396\ A 2019 survey regarding the Australian financial advice
industry reported that the biggest barriers for consumers in accessing
financial advice are cost (35 percent), limited financial

[[Page 75942]]

circumstances in which it is ``not worth getting financial advice'' (29
percent), the desire to manage an individual's own finances (26
percent), a lack of trust (19 percent), or a lack of perceived value in
paying for financial advice (18 percent).\397\
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\395\ Paul Gerrans & Douglas A. Hershey, Financial Adviser
Anxiety, Financial Literacy, and Financial Advice Seeking, 51(1)
Journal of Consumer Affairs 54-90 (2017), https://www.jstor.org/stable/44154765.
\396\ Winchester, Danielle & Sandra Huston, Trust Reduces Costs
Associated with Consumer-Financial Planner Relationship, 71(4)
Journal of Financial Service Professionals 80-91 (2017), https://web.p.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=0&sid=1ca603cd-53ca-4cbb-99b1-5fd43782b0c4%40redis.
\397\ Australian Securities and Investments Commission, Report
627- Financial Advice: What Consumers Really Think, Australian
Securities and Investments Commission, (August 2019), https://download.asic.gov.au/media/5243978/rep627-published-26-august-2019.pdf.
---------------------------------------------------------------------------

By holding all retirement investment advice providers to standards
that rightly instill trust, this proposal would facilitate efficient,
trust-based relationships between retirement investors and investment
advice providers of all types, so investors would be more likely to
obtain and follow beneficial advice, at lower cost.
There is extensive evidence that investors, including retail
investors and ERISA plan fiduciaries, are often subject to behavioral
biases that lead to costly systematic investment errors. There is
evidence that good advice can improve saving and investing decisions.
Accordingly, the proposal may result in a beneficial reallocation of
investment capital. Montmarquette and Viennot-Briot (2015) provided
evidence that ``having a financial advisor for at least four years has
a positive and significant impact on financial assets'' and that ``the
positive effect of advice on wealth creation cannot be explained by
asset performance alone: the greater savings discipline acquired
through advice plays the major role.'' \398\
---------------------------------------------------------------------------

\398\ Claude Montmarquette & Nathalie Viennot-Briot, The Value
of Financial Advice, 16(1) Annals of Economics and Finance 69-94
(2015), https://aeconf.com/articles/may2015/aef160104.pdf.
---------------------------------------------------------------------------

Fisch et al. (2016) also provided evidence that ``highlight[s] the
potential value of professional advice in mitigating the effects of
financial illiteracy in retirement planning.'' \399\ Fisch et al.
recruited Amazon Mechanical Turk users (MTurk sample), a crowdsourcing
marketplace, to allocate a hypothetical ten thousand dollars among ten
investments options as part of a 401(k) plan. Separately, professional
advisers--registered investment advisers, broker-dealers or dual
registrants--were asked to allocate ten thousand dollars on behalf of a
hypothetical 30-year-old, single client, with no children, a lower
middle-class income and no substantial outside savings or investments.
They found that professional advisers, on average, selected portfolios
with higher returns, allocated more money to cheaper index funds, paid
lower fees, and accessed more information in connection with the
allocation decision than the MTurk sample. For example, professional
advisers were ``uniformly sensitive to the fact that the equity risk
premium and the 30-year time horizon of the allocation decision
warranted substantial equity exposure-facts that the low-literacy
investors seemed to be unaware.'' \400\ Overall, professional advisers
had a higher level of financial knowledge, which enabled them to make
better retirement investing decisions from which unsophisticated
investors could benefit.
---------------------------------------------------------------------------

\399\ Jill E. Fisch, Tess Wilkinson-Ryan, & Kristin Firth, The
Knowledge Gap in Workplace Retirement Investing and the Role of
Professional Advisors, 66(3) Duke Law Journal (2016), https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3875&context=dlj.
\400\ Id.
---------------------------------------------------------------------------

Enforcement
Under the proposal, the full range of covered investment advice
interactions with Title I plans would be subject to the Department's
robust enforcement program as well as to a private right of action. In
general, participants and beneficiaries have the right to bring suit
under ERISA 502(a) against fiduciaries who breach their duties and
obligations to the plan, including engaging in non-exempt prohibited
transactions. This private right of action, which ensures participants
and beneficiaries have ready access to the Federal courts, provides
critical protection of tax-advantaged retirement plans. For advice
interactions not currently covered by relevant standards of conduct,
such as much advice provided to plan fiduciaries, these enforcement
measures will help to ensure the proposal is implemented effectively.
For advice interactions that are subject to state regulation, under the
proposal they will likely have stronger oversight, which will provide
greater protections to investors.
Charoenwong et al. (2019) showed that regulatory oversight has an
important impact on investment advice.\401\ They studied a policy
reform that did not affect the laws or rules that registered investment
advisers were operating under; instead, it changed the regulatory
oversight. The reform shifted some advisers from a federal regulator,
the SEC, to state-securities regulators. Registered investment advisers
who shifted to the state-securities regulators received 30-40 percent
more complaints from customers, relative to the unconditional complaint
rate. This effect mainly resulted from fiduciary violations.
Furthermore, the vigor of the enforcement program mattered; the more
resources a state-securities regulator had, the fewer complaints there
tended to be.
---------------------------------------------------------------------------

\401\ Ben Charoenwong, Alan Kwan, & Tarik Umar, Does Regulatory
Jurisdiction Affect the Quality of Investment-Adviser Regulation,
109(10) American Economic Review (October 2019), https://www.aeaweb.org/articles?id=10.1257/aer.20180412.
---------------------------------------------------------------------------

The proposal would also ensure the imposition of appropriate excise
taxes for prohibited transactions involving both ERISA-covered plans
and IRAs. As part of their retrospective review, financial institutions
would be required to report to the Department of the Treasury any non-
exempt prohibited transactions in connection with fiduciary investment
advice, correct those transactions, and pay any resulting excise taxes.
Failure to report, correct, and pay an excise tax, in addition to
existing factors, would make a financial institution ineligible to rely
on PTE 2020-02 and PTE 84-24. The Department believes these additional
conditions would provide important protections to retirement investors
by enhancing the existing protections of PTE 2020-02 and PTE 84-24.
Implications for Retirement Savings Estimates
To understand the potential magnitude of savings for retirement
investors from the proposed rule, the Department believes the
experience following the 2016 rulemaking and SEC's Regulation Best
Interest provides context. As discussed in the baseline discussion, the
regulatory and market environments have shifted since the 2016 Rule,
and accordingly, the Department acknowledges that there is significant
uncertainty about the magnitude of savings that would result for
retirement investors as a result of the proposed rulemaking. The
Department requests comment on this point.
One major market development resulting from the 2016 Final Rule and
exemptions involved the development of new mutual fund share classes
designed to eliminate advisory conflicts attributable to variation in
commissions. As discussed in the Baseline section, Mitchell, Sethi, and
Szapiro (2019) found that the share classes that are less likely to
have traditional conflicts of interest have become more popular in
recent years.\402\ In 2020, 94 percent of 401(k) mutual fund assets
were invested in no-load funds, compared to 66 percent in 2000.\403\
---------------------------------------------------------------------------

\402\ Lia Mitchell, Jasmin Sethi, & Aron Szapiro, Regulation
Best Interest Meets Opaque Practices: It's Time to Dive Past
Surface-Level Conflicts, Morningstar (November 2019), https://ccl.yale.edu/sites/default/files/files/wp_Conflicts_Of_Interest_111319%20FINAL.pdf.
\403\ Investment Company Institute, The Economics of Providing
401(k) Plans: Services, Fees, and Expenses, 2020, 27(6) ICI Research
Perspective Figure 5. (June 2021), https://www.ici.org/system/files/2021-06/per27-06.pdf.

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[[Page 75943]]

In the 2016 RIA, the Department estimated that broker-sold mutual
funds underperformed direct-sold mutual funds by approximately 50 basis
points per year.\404\ In response to this estimate, Morningstar opined
that transparency improvements associated with such shares ``should
encourage advisors to provide high quality advice to remain
competitive'' and that ``50 basis points is a reasonable estimate of
savings to investors from reducing conflicted advice.'' \405\ Their
support of the Department estimate was based on a study looking at
mutual fund T shares. However, this share class has faded following the
revocation of the 2016 rule.\406\ As a result, it is largely uncertain
how many retirement investors would have adopted the new share class
had it been permitted to go fully into effect. For the purposes of this
illustration, if it were assumed that half of the roughly $2.0 trillion
assets invested in long-term mutual funds with front-end load fees were
transitioned into T shares, investors could have saved approximately $5
billion.\407\
---------------------------------------------------------------------------

\404\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 162, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\405\ Aron Szapiro & Paul Ellenbogen, Early Evidence on the
Department of Labor Conflict of Interest Rule: New Share Classes
Should Reduce Conflicted Advice, Likely Improving Outcomes for
Investors, Morningstar Policy Research (April 2017).
\406\ Greg Iacurci, T Shares Are Dead, InvestmentNews (December
20, 2018), https://www.investmentnews.com/t-shares-are-dead-77482.
\407\ According to the Investment Company Institute, in 2017,
the total net assets invested in long-term mutual funds with front-
end load fees was $1.99 trillion. See Investment Company Institute.
``Trends in the Expenses and Fees of Funds, 2017.'' Figure 20. ICI
Research Perspective (April 2018), Vol. 24, No. 3. If it were
assumed that all $1.99 trillion in assets were invested in A shares
and that they were all then moved to T shares, then this would have
translated into an estimated increase in returns of $4.98 billion
for IRA investors.
---------------------------------------------------------------------------

The Department acknowledges that the Morningstar study only looks
at the IRA market, specifically examining share classes designed for
retail investors. The proposed rule, of course, applies more broadly
than just to IRAs. The Department believes the proposed rule would
encourage continued market trends away from share classes with
traditional conflicts of interest.
However, Mitchell, Sethi, and Szapiro (2019) also found that the
newer share classes appear to have their own conflicts that are opaque
to investors and regulators, such as revenue sharing.\408\ Many of the
commonly considered potential conflicts of interest are embedded in a
bundled share class arrangement, where the investor pays the mutual
fund a load or 12b-1 fee, and the mutual fund pays a portion back to an
intermediary, such as the intermediary that sold the fund to the
investor. Semi-bundled share classes use revenue sharing or sub-
accounting fees.
---------------------------------------------------------------------------

\408\ Lia Mitchell, Jasmin Sethi, & Aron Szapiro, Regulation
Best Interest Meets Opaque Practices: It's Time to Dive Past
Surface-Level Conflicts, Morningstar (November 2019), https://ccl.yale.edu/sites/default/files/files/wp_Conflicts_Of_Interest_111319%20FINAL.pdf.
---------------------------------------------------------------------------

The damages associated with conflicts of interest in compensation
structures are exacerbated in that many of these compensation
structures incentivize excessive trading. Good advice can help
investors avoid timing errors when trading by reducing panic-selling
during large and abrupt downturns. However, conflicted advice providers
may profit by encouraging investors' natural inclination to trade more
and ``chase returns,'' an activity that tends to produce harmful timing
errors.\409\
---------------------------------------------------------------------------

\409\ YiLi Chien, The Cost of Chasing Returns, 18 Economic
Synopses (2014), https://doi.org/10.20955/es.2014.18.
---------------------------------------------------------------------------

Friesen and Sapp (2007) found that equity mutual fund investors
made timing decisions that reduced fund investor average returns by
1.56 percent annually.\410\ Their evidence ``suggests that those
investors who are most likely relying on advice from a broker perform
especially poorly from a timing standpoint.'' Bullard, Friesen, and
Sapp (2008) found that the difference in performance between load and
no-load funds has two components: the difference in prospectus returns
across share classes and the difference in investor returns resulting
from differences in investor timing.\411\ Additionally, Christoffersen,
Evans, and Musto (2013) found that as the size of the load-share
increased, mutual fund returns decreased. This suggests that the
greater the adviser's conflict of interest, the worse off the IRA
investor can expect to be.^{412 413}
---------------------------------------------------------------------------

\410\ Geoffrey Friesen & Travis Sapp, Mutual Fund Flows and
Investor Returns: An Empirical Examination of Fund Investor Timing
Ability 31(9) Journal of Banking and Finance 2796-2816 (2007),
https://www.sciencedirect.com/science/article/abs/pii/S0378426607001422.
\411\ Mercer Bullard, Geoffrey C. Friesen, & Travis Sapp,
Investor Timing and Fund Distribution Channels, Social Science
Research Network (2008).
\412\ Susan Christoffersen, Richard Evans, & David Musto, What
Do Consumers' Fund Flows Maximize? Evidence From Their Broker's
Incentives, 68 Journal of Finance 201-235 (2013), https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2012.01798.x.
\413\ The performance reduction presented in Christoffersen,
Evans and Musto (2013) does not include loads paid by investors in
front-end-load funds.
---------------------------------------------------------------------------

A Department-sponsored study by Panis and Padmanabhan (2023)
examined how investors timed the purchase and sale of mutual funds
between 2007 and June 2023. During the decade from 2007 to 2016, the
authors found that investors in load funds had worse timing than
investors in no-load funds, with an excess performance gap, comparing
measures of the impact of purchase and sales timing, of 1.12 percent
per year for U.S. equity funds and 0.63 percent for all funds. After
Regulation Best Interest took effect, the authors observed that there
had been dramatic improvement in the timing of trades. Between July of
2020 and June of 2023, the excess performance gap was only 0.13 percent
for U.S. equity funds and was negative, -0.11 percent, overall. This
means that in the later period, looking across all funds in the
aggregate, investors in load funds timed their transactions slightly
better than investors in no-load funds. While it is not certain what
factors underlie the reduction in timing errors, it is consistent with
an interpretation that Regulation Best Interest enhanced the standard
of conduct for broker-dealers to act in the best interest of retail
customers and persuade their customers to refrain from return chasing
behavior.\414\
---------------------------------------------------------------------------

\414\ Constantijn Panis & Karthik Padmanabhan, Buy Low, Sell
High: The Ability of Investors to Time Purchases and Sales of Mutual
Funds, Intensity, LLC. (August 14, 2023). Unpublished draft.
---------------------------------------------------------------------------

The nature of the conflicts facing broker-dealers in the mutual
fund space is similar to that facing insurance agents and independent
producers in the annuity space. As discussed in the Baseline section,
commissions earned by selling annuities vary considerably even within a
certain type of product.\415\ For example, commissions for variable
annuities vary widely, creating a strong incentive for brokers to sell
some variable annuities over others. Egan, Ge, and Tang (2022) showed
that variable annuity sales were four times more sensitive to brokers'
financial interests than to investors' financial interests.\416\
---------------------------------------------------------------------------

\415\ The commission paid varies significantly, from as little
as 0 percent to as much as 10 percent of the investment with the
most common amount being 7 percent. See Mark Egan, Shan Ge, & Johnny
Tang, Conflicting Interests and the Effect of Fiduciary Duty--
Evidence from Variable Annuities, 35(12) The Review of Financial
Studies 5334-5486 (December 2022), https://academic.oup.com/rfs/article-abstract/35/12/5334/6674521.
\416\ Mark Egan, Shan Ge, & Johnny Tang, Conflicting Interests
and the Effect of Fiduciary Duty--Evidence from Variable Annuities,
35(12) The Review of Financial Studies 5334-5486 (December 2022),
https://academic.oup.com/rfs/article-abstract/35/12/5334/6674521.

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[[Page 75944]]

After the Department published its 2015 proposal, sales of high-
expense variable annuities fell by 52 percent, which Egan, Ge, and Tang
(2022) attributed to sales becoming more sensitive to expenses and
insurers increasing the availability of low-expense products. In fact,
the authors stated that the ``regulatory change improved the
distribution of products available to investors along the extensive
margin, in terms of the annuities available for sale, as well as the
intensive margin, in terms of the actual annuities sold by brokers.''
Thus, the authors concluded, the 2016 Final Rule resulted in improved
investor welfare, increasing risk-adjusted returns of investors by up
to 30 basis points per year, with two-thirds of the effect associated
with investors moving into lower-expense products and the remainder
from sales of annuities with more desirable investment options and
characteristics.\417\ The long-run impact of such a regulation can be
estimated by applying the 30 basis point figure to the assets held in
variable annuities in 2018, which was $2.2 trillion, yielding a total
annual increase in risk-adjusted returns of approximately $6.6
billion.\418\ Because the 2016 Final Rule was vacated, its long-run
effects on the annuity market remain unknown. The current proposal,
however, would help ensure a long-run positive impact on the market for
variable annuities.
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\417\ Id.
\418\ This estimate is based on variable annuity assets in 2018
of $2.2 trillion, as reported in the referenced study. See Mark
Egan, Shan Ge, & Johnny Tang, Conflicting Interests and the Effect
of Fiduciary Duty--Evidence from Variable Annuities, 35(12) The
Review of Financial Studies 5346 (December 2022), https://academic.oup.com/rfs/article-abstract/35/12/5334/6674521.
---------------------------------------------------------------------------

The Department is also concerned about the risks faced by
retirement investors purchasing indexed annuities. The benefits from
improved investment advice from the proposal would differ from those
estimated by Egan, Ge, and Tang (2022), as they would affect a
different segment of the market with distinctive characteristics.
The recent SEC actions extended new protections to retail customers
advised by broker-dealers on securities transactions. According to the
SEC, the Conflict of Interest Obligation under Regulation Best Interest
is ``intended to reduce the agency costs that arise when a broker-
dealer and its associated persons provide a recommendation to a retail
customer by addressing the effect of the associated person's or broker-
dealer's conflicts of interest on the recommendation.'' In its Economic
Analysis, the SEC explored the market mechanisms by which this and
other provisions would benefit retail investors. The SEC estimated that
the present value of potential future mutual fund fee reductions after
Regulation Best Interest would be between $14 billion to $76
billion.\419\ The SEC separately estimated that the potential present
value of improved future mutual fund performance net of fees (which
would overlap with fee reductions) would be between $7 billion to $35
billion. The SEC noted that these estimates represented only ``some of
the potential benefits'' and that more benefits were expected. It also
noted that while its estimates focused on mutual funds, it expected
that ``the same or similar dynamics could apply to other financial
products.''
---------------------------------------------------------------------------

\419\ Regulation Best Interest, 84 FR 33458, 33491 (July 12,
2019).
---------------------------------------------------------------------------

As discussed above, the preliminary evidence that is available for
the mutual fund and annuity markets following the 2016 Final Rule and
SEC's Regulation Best Interest reinforces the Department's view that
well-designed reforms that raise advisory conduct standards and
mitigate advisory conflicts would benefit retirement investors. The
Department requests comment on how the investment advice market has
evolved since following the enactment of such regulatory actions, with
particular interest in how investment returns, net of fees, have
changed for mutual funds and annuities.

6. Impact of the Proposal on Small Savers

Some observers have argued that some small savers, individuals, or
households with low account balances or of modest means, will lose
access to investment advice under this type of regulation and will be
worse off. The Department has considered in detail the overall impact
of the proposal on small savers.
The Department recognizes that investment advice is often very
valuable for small savers. There is also ample evidence and broad
consensus that many U.S. consumers struggle to make and implement good
retirement saving and investment decisions without effective help. Many
lack the skills, motivation, or discipline to accumulate adequate
savings, optimize their investment strategies, and thereby realize
financial security in retirement.\420\ Less sophisticated investors may
benefit from ``hand-holding'' to make sure they are taking basic steps
such as saving adequately and allocating their investments with an
appropriate amount of risk.
---------------------------------------------------------------------------

\420\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 108, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf. (``many IRA
investors lack sophistication''); 136 (older individuals often
``lack even a rudimentary understanding of stock and bond prices,
risk diversification, portfolio choice, and investment fees''); and
137 (``only one-half of individuals aged 50 and older in the United
States can correctly answer two simple financial questions that
involve calculations. Many respondents failed to correctly conclude
that $100 would grow to more than $102 after five years if interest
accrues at 2 percent per year, while others were unable to determine
that an account earning interest at 1 percent while inflation was 2
percent would lose buying power'').
---------------------------------------------------------------------------

The Department believes that small savers are especially vulnerable
to the detrimental effects of conflicted advice. With fewer economic
resources, small savers are particularly susceptible to any practices
that diminish their resources by extracting unnecessary fees or by
yielding lower returns. These savers cannot afford to lose any of their
retirement savings. Yet conflicts sometimes lead advisers to recommend
products with lower expected net returns than available alternatives.
Consumers' losses from advisory conflicts tend to exceed what can be
justified as fair compensation for good advice as these consumers could
often benefit more from competitively priced impartial advice.\421\
However, advisory conflicts have historically distorted the market in
ways that have prevented consumers from accessing less conflicted
investment alternatives. Less sophisticated investors frequently do not
know how much they are paying for advice and are not equipped to
effectively monitor the quality of the advice they receive.\422\
Indeed, Agnew et al. (2021) found in an experimental setting that
younger, less financially literate, and less numerate participants were
more likely to hire a low-quality adviser.\423\ It is possible that
they do not

[[Page 75945]]

understand the potential effects of their advisers' conflicts.\424\ By
itself, disclosure directly to the consumer is unlikely to change this
without other protections also in place.\425\
---------------------------------------------------------------------------

\421\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 155-158, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\422\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 136-40, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\423\ Julie Agnew, Hazel Bateman, Christine Eckert, Fedor
Iskhakov, Jordan Louviere, and Susan Thorp. Who Pays the Price for
Bad Advice?: The Role of Financial Vulnerability, Learning and
Confirmation Bias,'' ARC Centre of Excellence in Population Ageing
Research, Working Paper 2021/19, (July 1, 2021).
\424\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 143-144, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\425\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 268-271, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
---------------------------------------------------------------------------

Small investors often save using an ERISA plan. Frequently this is
the main vehicle they use to save for retirement; in fact,
approximately two-thirds of households participating in a pension plan
do not own an IRA.\426\ This proposal will require advice given to the
plan fiduciaries to meet a fiduciary standard. Improvements in plan
design and selection of investments on the menu will benefit small
savers. The vast majority of small savers choose investments from their
plan's platform rather than investing through a brokerage account, if
their plan even offers a brokerage account option.\427\ Research shows
that low-income participants tend to be influenced by default options
more than high income participants.\428\ Small savers will benefit from
plan fiduciaries choosing default options that are well selected and
well monitored.
---------------------------------------------------------------------------

\426\ Constantijn W.A. Panis & Michael J. Brien, Savers With and
Without a Pension (2015), https://www.dol.gov/sites/dolgov/files/EBSA/researchers/analysis/retirement/savers-with-and-without-a-pension.pdf.
\427\ In 2022, participants with annual income between $15,000
and $150,000 invested less than 0.5% of their defined contribution
plan assets through a brokerage account. See Vanguard, How America
Saves, (2023). https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf.
\428\ John Beshears, Ruofei Guo, David Laibson, Brigitte C.
Madrian, & James J. Choi, Automatic Enrollment with a 12% Default
Contribution Rate (August 18, 2023), https://spinup-000d1a-wp-offload-media.s3.amazonaws.com/faculty/wp-content/uploads/sites/27/2023/08/JPEF-20230802.pdf. James Choi, David Laibson, Brigette
Madrian, & Andrew Metrick, For Better or For Worse: Default Effects
and 401(k) Savings Behavior, In Wise DA (ed.), Perspectives on the
Economics of Aging. Chicago: University of Chicago Press, pp. 81-
121. https://spinup-000dla-wp-offload-media.s3.amazonaws.com/faculty/wp-content/uploads/sites/27/2019/06/betterorworse.pdf.
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During the 2016 Rulemaking, the Department devoted considerable
attention to the question of small investors' access to financial
services, including advice.\429\ The Department believed that the rule
would benefit small investors and generally would not adversely affect
their access to advice.\430\ It noted ongoing market innovations that
promised to make good advice more affordable and predicted that the
rule would accelerate these efforts.\431\ However, the Department also
acknowledged the potential for short-term disruption and transition
costs \432\ and noted that the services of independent brokers and
insurance agents might be most affected.\433\
---------------------------------------------------------------------------

\429\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiuciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 312-318 & 366-372, (April 2016),
https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulattions/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
``The Department believes that `small savers' (that is, those
individuals or households with low account balances and/or modest
means) are most negatively impacted by the detrimental effects of
conflicted advice. With fewer economic resources, small savers are
particlarly vulnerable to any practices that diminish their
resources by extracting unnecessary fees or by yielding lower
returns.'' (p. 366.)
\430\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 312-318, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\431\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 318-324, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\432\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 318, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\433\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 308-309, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
---------------------------------------------------------------------------

The 2016 Rulemaking was significantly different than the current
rulemaking in that it imposed a fiduciary obligation on virtually all
investment recommendations specifically directed to retirement
investors, imposed demanding contract and warranty requirements in the
IRA market, which gave investors a direct cause of action against firms
and advisers for breach of the Impartial Conduct Standards, and
represented a significant break from the then-existing regulatory
baseline. Confronted with these significant changes, a number of
industry commenters both during the rulemaking process of the 2016
Final Rule, and in the period immediately following the rule's
finalization, expressed concern that the regulatory changes could erode
small investors' access to affordable advice and to some beneficial
financial products, primarily based on surveys conducted by the
industry of its members.
The Department carefully reviewed such comments and papers prior to
the publishing of the 2016 Final Rule and found many contained analytic
flaws that rendered the comments' conclusions unsupported and
unreliable. The Department accordingly discussed in the 2016 RIA its
points of concern with the comments' methods and conclusions.\434\ The
Department also sought assistance from an outside consultant to help
review the comment letters and claims.\435\ The consultant generally
found ``the studies lacking in rigor, failing to recognize emerging
alternatives to traditional offerings of investment advice, incorrectly
equating the benefits of conflicted advice to those of non-conflicted
advice, or suffering from logical fallacies.''
---------------------------------------------------------------------------

\434\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 108-109 & 136-137, (April 2016),
https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
\435\ Karthik Padmanabhan, Constantijn Panis & Timothy Tardiff,
Review of Selected Studies and Comments in Response to the
Department of Labor's Conflicts of Interest 2015 Proposed Rule and
Exemptions, (March 2016), https://www.dol.gov/sites/dolgov/files/EBSA/researchers/analysis/retirement/review-of-selected-studies-and-comments-in-response-to-the-dol-coi-2015-proposed-rule-and-exemptions.pdf.
---------------------------------------------------------------------------

In 2021, the Hispanic Leadership Fund and Quantria prepared a paper
on the effects of reinstatement of the 2016 Rule. Based on the same
approach as Quantria's prior paper, they estimated that reinstatement
of the rule would reduce retirement savings of individuals with incomes
below $100,000 by $140 billion over 10 years.\436\ The 2021 findings
have shortcomings similar to those identified in the 2014 analysis,
such as assuming such policy action would eliminate all financial
advice received by these individuals or purporting causation from
correlation. Padmanabhan, Panis, and Tardiff (2016)

[[Page 75946]]

point out that several of the paper's key assertions, such as many
advisers will not be willing to operate under the fiduciary standard
set out by the Department's rule, do not have empirical support and are
not consistent with current practices. Furthermore, the paper's
findings are not applicable to the current proposal because it assumes
reinstatement of the 2016 Rulemaking, which was markedly different than
the current proposal. For instance, the 2016 Final Rule required
fiduciary advisers to enter into a written contract with a plan or IRA
investor, which is not included in this proposal.
---------------------------------------------------------------------------

\436\ Hispanic Leadership Fund and Quantria Strategies, LLC,
Analysis of the Effects of the 2016 Department of Labor Fiduciary
Regulation on Retirement Savings and Estimate of the Effects of
Reinstatement, (November 2021).
---------------------------------------------------------------------------

Similarly, the U.S. Chamber of Commerce cited surveys indicating
that firms reported they might limit the availability of advice in some
customer arrangements after the 2016 Final Rule and predicted that ``up
to 7 million IRA owners could lose access to investment advice
altogether.'' \437\ This prediction apparently did not consider the
potential for customers to move to different firms or the availability
of a full range of investment choices and advisory arrangements in the
market as a whole. The Chamber of Commerce and others also pointed to
an increase in the number of orphaned accounts from which advisers had
resigned and argued that many small customers would move to automated
advice arrangements.\438\
---------------------------------------------------------------------------

\437\ U.S. Chamber of Commerce, The Data is In: The Fiduciary
Rule Will Harm Small Retirement Savers, (Spring 2017), https://www.uschamber.com/assets/archived/images/ccmc_fiduciaryrule_harms_smallbusiness.pdf.
\438\ Investment Company Institute comment letter August 7,
2017. https://www.ici.org/system/files/attachments/17_conduct_sec_clayton_ltr.pdf.
---------------------------------------------------------------------------

Additionally, in 2017, Deloitte prepared a report that suggested
the 2016 Final Rule had accelerated the trend toward fee-based
accounts.\439\ Deloitte interviewed and collected data from 21
Securities Industry and Financial Markets Association (SIFMA) member
firms regarding their response to the 2016 Final Rule as of June 9,
2017, its initial applicability date.\440\ Of the member firms that
participated in the study, nearly half reported that they maintained
advice for all of their brokerage customers, while 29 percent limited
advice and 24 percent eliminated advice. Firms that eliminated or
limited their advised brokerage platforms gave retirement investors an
option to either transition to a fee-based program, self-directed
brokerage account, or in some cases, a new platform they were launching
(e.g., robo-advice, call-center, self-directed). According to Deloitte,
firms reported that many of the investors that moved into self-directed
accounts either did not want to move to a fee-based account, had
accounts too small to qualify for fee-based advisory accounts at the
same firms, wished to retain investments that were not eligible for the
same firms' fee-based accounts, or some combination.
---------------------------------------------------------------------------

\439\ Deloitte, The DOL Fiduciary Rule: A Study in How Financial
Institutions Have Responded and the Resulting Impacts on Retirement
Investors, (August 9, 2017).
\440\ Deloitte notes in the report that ``The findings were made
based on the analysis of information and data provided by the study
participants to Deloitte. Deloitte has analyzed, aggregated and
summarized the information provided, but was not asked to and did
not independently verify, validate or audit the information
presented by the study participants.''
---------------------------------------------------------------------------

In a report for the Financial Services Institute, a trade group
representing independent financial firms and advisers, Oxford Economics
(2017), predicted that ``smaller investors will be offered robo-
investing type account services and that these small, often entry
level, novice investors would lose access to personalized financial
planning.'' \441\ According to a survey conducted by the Insured
Retirement Institute, 70 percent of respondents either already had or
were considering exiting smaller markets such as small employer-based
plans and lower balance IRAs.\442\ In another survey, two-thirds of
responding advisers said they believed that small investors would have
less access to professional financial advice.\443\
---------------------------------------------------------------------------

\441\ Oxford Economics, How the Fiduciary Rule Increases Costs
and Decreases Choice, (April 15, 2017).
\442\ Comment letter submitted by dated on April 17, 2017
(#1413).
\443\ Comment letter by Lincoln Financial Network dated March
17, 2017 (#1420).
---------------------------------------------------------------------------

The preliminary market reaction to the 2016 Rule, however, differed
from those expected by the studies discussed above and are inconsistent
with more rigorous academic research. In a survey conducted in
September 2017, 82 percent of broker-dealers had not made changes to
their handling of smaller, retail retirement accounts, although about
18 percent had raised their minimum account threshold and closed
smaller accounts.\444\ In examining the effects of the 2016 Final Rule,
Egan, Ge, and Tang (2022) found that while variable annuity sales had
decreased, there is no evidence that the change affected investors with
less wealth more than others. They concluded that variable annuity
sales had become more sensitive to expenses and that insurers had
increased the relative availability of low-expense products. Even if
there is reporting error in the maximum upfront commission rates data,
it would tend to understate the effect of brokerage commissions on
investment transactions. Therefore, the study concluded that investor
welfare had improved because of the 2016 Rulemaking, despite the fact
that it was vacated.\445\
---------------------------------------------------------------------------

\444\ John Crabb, The Fiduciary Rule Poll, International
Financial Law Review, International Finance Law Review (October
2017), https://media2.mofo.com/documents/171000-fiduciary-rule-poll.pdf.
\445\ Egan, Mark, Shan Ge, & Johnny Tang, Conflicting Interests
and the Effect of Fiduciary Duty--Evidence from Variable Annuities,
35(12) The Review of Financial Studies 5334-5486. (December 2022).
---------------------------------------------------------------------------

A majority of surveyed independent registered investment advisers
believed that small investors would not lose access to advice due to
the 2016 Final Rule.\446\ Some expected that young advisers just
starting out would serve any abandoned investors to build their
clientele.\447\ According to one report, many larger and more
productive registered investment advisers viewed robo-advice platforms
as a tool to expand their client base and attract young and low-asset
investors, not simply as a tool to reduce costs.\448\
---------------------------------------------------------------------------

\446\ Cerulli Associates, U.S. Broker/Dealer Marketplace 2016:
Retooling for a New Competitive Landscape, The Cerulli Report.
\447\ Bruce Kelly, Plenty of Advisers Eager to Scoop Up
`Orphaned' Accounts, Investment News (August 2017).
\448\ Blackrock, Elite RIA Study, (2017).
---------------------------------------------------------------------------

The surveys, papers, and predictions described above do not support
a finding that small investors would lose or have lost access to
personalized advice as a result of fiduciary protections, even under
the 2016 Rulemaking, which imposed more onerous conditions--and
liability--on firms and advisers than is true of the proposed rule and
exemptions. The proposal broadly comports to Regulation Best Interest,
and the Department is not aware of any substantial, documented
reductions in access to advice as a result of Regulation Best Interest.
The proposal accommodates different types of business models.
Still, it is possible that, as the market evolves, small investors and
the firms that serve them will increasingly move away from commission-
based full-service or ``advised'' brokerage accounts or commission-
compensated advice from insurance agents. Instead, they may use one or
more of the following: target-date funds (which adjusts risk allocation
over time based on the target-date); receiving advice directly from
investment firms (which allows for interaction with a live adviser
though the advice tends to focus on in-house funds and investments);
hourly engagement or subscription-based firms (which are particularly
useful for financial planning); and robo-advice

[[Page 75947]]

(which generally provides a customized investment mix based on
information about the investor's financial circumstances and existing
investment assets).\449\ Robo-advisers and target-date funds, in
particular, are rapidly gaining market share.^{450 451}
---------------------------------------------------------------------------

\449\ Christine Benz & Jeremy Glaser, The Best Ways for Small
Investors to Get Advice, Morningstar (February 21, 2017), https://www.morningstar.com/articles/794212/the-best-ways-for-smaller-investors-to-get-advice.
\450\ Deloitte, The Expansion of Robo[hyphen]Advisory in Wealth
Management, (2016).
\451\ Sarah Holden, Jack VanDerhei, & Steven Bass, Target Date
Funds: Evidence Points to Growing Popularity and Appropriate Use by
401(k) Plan Participants, Employee Benefit Research Institute
(2021).
---------------------------------------------------------------------------

The Department requests comment on research or data demonstrating
how access to advice has changed, particularly for small savers,
following the 2016 Final Rule, vacatur of the Final rule, recent
regulatory actions taken by the Department and the SEC, and the
increased use of technology to provide advice.
The Department expects the proposed rule and exemptions would not
significantly impact the overall availability of affordable investment
advice but rather improve the quality of this advice as conflicts are
removed. This would apply as well to small investors who continue to
have access to advice. Furthermore, increasing the quality of advice
provided to retirement plan fiduciaries will benefit many workers who
are participating in a defined contribution or defined benefit pension
plan.
---------------------------------------------------------------------------

\452\ The U.K. Financial Conduct Authority, Evaluation of the
Impact of the Retail Distribution Review and the Financial Advice
Market Review, (December 2020), https://www.fca.org.uk/publication/corporate/evaluation-of-the-impact-of-the-rdr-and-famr.pdf.
---------------------------------------------------------------------------

This is supported by the experience in the U.K., which adopted a
far more aggressive stance in addressing conflicted advice than the
Department proposed in the 2016 Rulemaking or the current proposals.
When the U.K. initially banned commissions for investment advice and
required more stringent qualifications for advisers under its Retail
Distribution Review (RDR) in 2013, the advice rate fell both in the
lead up to the regulatory change and in the years immediately following
its implementation. However, more recent research has found evidence of
improvements in the market since 2017, including a 35 percent increase
in the number of U.K. adults that received financial advice, a 5
percent increase in the number of advisers, and a 9-percentage point
increase in consumer awareness of automated advice,\452\ which
suggested a greater focus on digital advice as a potential solution to
provide low-cost investment advice with specifically tailored outcomes
to individual investors at scale.\453\
---------------------------------------------------------------------------

\453\ The U.K. Financial Conduct Authority (FCA) has highlighted
that digital advice can be more convenient for consumers and can
offer efficiency and cost benefits to providers. See FCA, Feedback
Statement on Call for Input: Regulatory Barriers to Innovation in
Digital and Mobile Solutions (March 2016), https://www.fca.org.uk/static/fca/article-type/feedback%20statement/fs16-02.pdf).
---------------------------------------------------------------------------

The Department has reason to believe that such alternative forms of
advice have become more available in the U.S. and, as in the U.K., are
beneficial to small investors. In recent years, the investment advice
market has seen an increase in financial technology and robo-advice
service providers, which cater to small savers. In 2017, Morningstar
noted that advances in financial technology could increase personal
advisers' productivity and streamline compliance, enabling them to
offer higher service levels affordably to small investors even as they
adapt business practices to mitigate conflicts of interest.\454\
Because the core portfolio management functions are performed by
computer algorithm, robo-adviser services generally can be expanded
more easily than traditional advisory services. The marginal cost
incurred by a robo-adviser to serve additional customers is very small
relative to that incurred by traditional advisers. Robo-advisers often
serve investors with assets under $500,\455\ and some robo-advisers do
not require a minimum investment at all.\456\ The financial needs of
small investors often can be easily met by basic services and given the
low balance of many such accounts, there may be little need or
justification for a more intensively personalized (and expensive)
strategy. The increasing presence of robo-advice has proved to be such
an innovation.
---------------------------------------------------------------------------

\454\ Michael Wong, Financial Services: Weighing the Strategic
Tradeoffs of the Fiduciary Rule, Morningstar (February 2017),
https://www.morningstar.com/articles/798573/financial-services-weighing-the-strategic-tradeoffs-of-the-fiduciary-rule.
\455\ Wealthfront, Account Minimums to Invest with Wealthfront,
Wealthfront, https://support.wealthfront.com/hc/en-us/articles/210994423-Account-minimums-to-invest-with-Wealthfront.
\456\ One example is Betterment. See Betterment, Pricing at
Betterment, Betterment, https://www.betterment.com/pricing/.
---------------------------------------------------------------------------

Many robo-advice providers claim to offer relatively conflict-free
services, claiming no commission, no performance fees, and no
compensation from third parties. Others claim to serve investors as
fiduciaries. Robo-adviser offerings are typically comprised of ETFs
that, in comparison to mutual funds, offer little room for revenue
streams and payment shares that would create a conflict of interest for
investment advisers (e.g., 12b-1 fees, subtransfer agent fees).\457\
---------------------------------------------------------------------------

\457\ Jennifer Klass & Eric Perelman, Chapter 3: The
Transformation of Investment Advice: Digital Investment Advisors as
Fiduciaries, The Disruptive Impact of FinTech on Retirement Systems,
Oxford University Press 38 (2019).
---------------------------------------------------------------------------

Despite the increasing popularity of robo-advisers, empirical
evidence on their performance and returns, especially during market
downturns, is limited. In 2015, SEC Commissioner Kara Stein stated,
``Do investors using robo-advisors appreciate that, for all their
benefits, robo-advisors will not be on the phone providing counsel if
there is a market crash?'' \458\ However, a recent study by Liu et al.
(2021) looked specifically at the impact of using robo-advisers on
investment performance during the 2020 financial crisis caused by the
COVID-19 global pandemic.\459\ Using portfolio and transaction data
from investors at a Taiwanese mutual fund online investment platform,
Liu et al. (2021) found that robo-advice significantly reduced the
losses experienced by investors during the crisis and that investors
using robo-advice adjusted risk levels and trading to adapt to changes
in the market while other investors did not. Younger users and those
with less investment experience benefited the most from robo-advice.
---------------------------------------------------------------------------

\458\ Kara M. Stein, Comm'r, SEC, Surfing the Wave: Technology,
Innovation, and Competition--Remarks at Harvard Law School's
Fidelity Guest Lecture Series, (November 9, 2015), https://www.sec.gov/news/speech/surfing-wave-technology-innovation-and-competition-remarks-harvard-law-schools-fidelity.
\459\ Che-Wei Liu, Mochen Yang, & Ming-Hui Wen, Judge Me on My
Losers: Does Adaptive Robo-Advisors Outperform Human Investors
During the COVID-19 Financial Market Crash?, Production and
Operations Management Forthcoming, (Accessed Aug. 31, 2023), https://doi.org/10.1111/poms.14029.
---------------------------------------------------------------------------

7. Reform in the United Kingdom

As regulators in several countries have identified failures in
their investment advice markets, they have undertaken a range of
regulatory and legislative initiatives that directly address conflicted
investment advice. One of the most studied initiatives occurred in the
developed pension markets of the United Kingdom, where the Financial
Conduct Authority (FCA) issued new regulations effective January 1,
2013, called the Retail Distribution Review (RDR). The U.K. focused its
new regulatory regime on more transparent fee-for-service compensation
structures. The U.K. enacted an aggressive reform that banned
commissions on all retail investment products, not just those

[[Page 75948]]

related to retirement savings; \460\ required that customers in the
U.K. be charged directly for advice; and raised qualification standards
for advisers.
---------------------------------------------------------------------------

\460\ ``Non-advised'' services, or execution-only sales, where
no advice or recommendation is given, fall outside of the RDR. Thus,
a commission is still permitted for non-advised annuity sales. The
FCA is currently examining the risks that exist with the purchase of
``non-advised'' annuities. Please see: https://www.fca.org.uk/static/documents/consultation-papers/cp15-30.pdf.
---------------------------------------------------------------------------

In marked contrast to these reforms, the Department's proposal does
not ban commissions or eliminate conflicted compensation structures,
but rather relies upon conduct standards and oversight structures
designed to minimize the harmful impact of conflicts of interest, while
permitting a wide range of business practices and models. The
Department's proposal represents a middle ground between no reform and
the outright bans on conflicted payments, allowing businesses to use a
range of compensation practices while minimizing the harmful impact of
conflicts of interest on the quality of advice.
Moreover, the Department's proposed regulatory action is narrower
than the rules passed by the U.K. as it does not prescribe additional
qualification standards for existing financial advisers or broadly ban
commissions. Those rules also sought to overhaul the entire financial
advice market, while this rule focuses on advice to retirement
investors and seeks to harmonize all advice to retirement investors
under a uniform standard and oversite structure including disclosure
requirements, rather than the existing patchwork of regulatory
standards. Still, an important aim of all these interventions is to
reduce incentives for financial advisers to recommend investments that
are not in their client's best interest and thereby increase investor
confidence in financial advice.
The experience of the U.K. suggests that while there are
transitional costs of overhauling the incentive structure and
qualifications of the financial advisers, the changes have resulted in
a modest increase in the number of adults accessing financial advice as
well as their satisfaction with the advice they are receiving.\461\ In
general, the U.K., experience, which was more broadly applied,
indicates that these reforms will not result in a significant reduction
of advice but will instead increase confidence in that advice's value.
---------------------------------------------------------------------------

\461\ UK Financial Conduct Authority, Evaluation of the Impact
of the Retail Distribution Review and the Financial Advice Market
Review, U.K. Financial Conduct Authority, (December 2020), https://www.fca.org.uk/publication/corporate/evaluation-of-the-impact-of-the-rdr-and-famr.pdf.
---------------------------------------------------------------------------

8. Cost

To estimate compliance costs associated with the proposal, the
Department considers the marginal cost associated with the proposed
amendments. The Department estimates that the proposal would impose
total costs of $253.2 million in the first year and $216.2 million in
each subsequent year. The estimated compliance costs associated with
the proposed amendments in the rule and PTEs are summarized in the
table below. Over 10 years, the costs associated with the proposal
would total approximately $1,553.1 million, annualized to $221.1
million per year (using a 7 percent discount rate).\462\
---------------------------------------------------------------------------

\462\ The costs would be $1,880.2 million over 10-year period,
annualized to $220.4 million per year if a 3 percent discount rate
were applied.

Table 4--Summary of Marginal Cost and Per-Entity Cost by Exemption
------------------------------------------------------------------------
Total cost
-----------------------------------
First year Subsequent years
------------------------------------------------------------------------
3(21)(A)(ii) of ERISA: ................ ................
PTE 2020-02..................... $231,518,275 $197,282,110
PTE 84-24....................... 18,107,613 15,302,629
Mass Amendments: ................ ................
PTE 75-1........................ 3,005,854 3,005,854
PTE 77-4........................ 0 0
PTE 80-83....................... 0 0
PTE 83-1........................ 0 0
PTE 86-128...................... 609,487 609,487
-----------------------------------
Total....................... 253,241,229 216,200,080
------------------------------------------------------------------------

The estimated costs associated with each exemption are broken down
and explained below. More details can be found in the Paperwork
Reduction Act sections of each respective exemption, also published in
today's Federal Register.\463\
---------------------------------------------------------------------------

\463\ As noted above, the Department is proposing to amend the
following exemptions: PTE 2020-02 (Improving Investment Advice for
Workers & Retirees), PTE 84-24 (Class Exemption for Certain
Transactions Involving Insurance Agents and Brokers, Pension
Consultants, Insurance Companies, and Investment Company Principal
Underwriters), PTE 75-1 (Exemptions From Prohibitions Respecting
Certain Classes of Transactions Involving Employee Benefit Plans and
Certain Broker-Dealers, Reporting Dealers and Banks), PTE 80-83
(Class Exemption for Certain Transactions Between Investment
Companies and Employee Benefit Plans), PTE 80-83 (Class Exemption
for Certain Transactions involving Purchase of Securities where
Issuer May Use Proceeds to Reduce or Retire Indebtedness to Parties
In Interest), PTE 83-1 (Class Exemption for Certain Transactions
Involving Mortgage Pool Investment Trusts) and PTE 86-128 (Class
Exemption for Securities Transactions Involving Employee Benefit
Plans and Broker-Dealers).
---------------------------------------------------------------------------

The quantified costs are significantly lower than costs in the 2016
RIA due to the smaller scope of the proposal relative to the 2016 Final
Rule as well as compliance structures adopted by the industry to reduce
conflicted advice in response to state regulations, Regulation Best
Interest, PTE 2020-02, and the Department's 2016 Rulemaking. The
methodology for estimating the costs of the proposed amendments to the
rule and PTEs is consistent with the methodology and assumptions used
in the 2020 analysis for the current PTE 2020-02.
Preliminary Assumptions and Cost Estimate Inputs
The Department acknowledges that not all entities would decide to
use the amended PTE 2020-02 and PTE 84-24 for transactions resulting
from fiduciary investment advice. Some may instead rely on other
existing exemptions that better align with their business models.
However, for this cost estimation, the Department assumes that all
eligible

[[Page 75949]]

entities would use the PTE 2020-02 and PTE 84-24 for such transactions.
The Department recognizes that this may result in an overestimate.
The Department does not have information on how many retirement
investors--including plan beneficiaries, plan participants, and IRA
owners--receive electronic disclosures from investment advice
fiduciaries. For the purposes of this analysis, the Department assumes
that the percent of retirement investors receiving electronic
disclosures would be similar to the percent of plan participants
receiving electronic disclosures under the Department's 2020 and 2002
electronic disclosure safe harbors.\464\ Accordingly, the Department
estimates that 94.2 percent of the disclosures sent to retirement
investors would be sent electronically, and the remaining 5.8 percent
would be sent by mail.\465\ For disclosure sent by mail, the Department
estimates that entities will incur a cost of $0.66 \466\ for postage
and $0.05 per page for material and printing costs.
---------------------------------------------------------------------------

\464\ 67 FR 17263 (Apr. 9, 2002); 85 FR 31884 (May 27, 2020).
\465\ The Department estimates 94.2 percent of retirement
investors receive disclosures electronically. This is the sum of the
estimated share of retirement investors receiving electronic
disclosures under the 2002 electronic disclosure safe harbor (58.2
percent) and the estimated share of retirement investors receiving
electronic disclosures under the 2020 electronic disclosure safe
harbor (36 percent).
\466\ United States Postal Service, First-Class Mail, United
States Postal Service (2023), https://www.usps.com/ship/first-class-mail.htm.
---------------------------------------------------------------------------

Additionally, the Department assumes that several types of
personnel would perform the tasks associated with information
collection requests at an hourly wage rate of $63.45 for clerical
personnel, $128.11 for a top executive, $133.05 for a computer
programmer, $158.94 for an insurance sales agent, $159.34 for a legal
professional, $190.63 for a financial manager, and $219.23 for a
financial adviser.\467\
---------------------------------------------------------------------------

\467\ Internal DOL calculation based on 2023 labor cost data.
For a description of the Department's methodology for calculating
wage rates, see Internal DOL calculation based on 2023 labor cost
data. For a description of the Department's methodology for
calculating wage rates. See Employee Benefits Security
Administration, Labor Cost Inputs Used in the Employee Benefits
Security Administration, Office of Policy and Research's Regulatory
Impact Analyses and Paperwork Reduction Act Burden Calculations,
Employee Benefits Security Administration, https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
---------------------------------------------------------------------------

Finally, the Department assumes affected entities would likely
incur only incremental costs if they were already subject to rules or
requirements from the Department or another regulator.
Costs Associated With Amendments to Section 3(21)(A)(ii) of the
Employee Retirement Income Security Act of 1974 and Section
4975(e)(3)(B) of the Code
As discussed in the Affected Entities section, the proposed
amendment to the rule would change the definition of a fiduciary such
that some financial institutions previously not considered fiduciaries
would be so under the proposed rule. Additionally, some financial
institutions, who already provide fiduciary services for some clients
or types of services, would be required to act as a fiduciary for more
services under the proposed rule.
Entities may incur some cost associated with the proposed
amendments to regulations under section 3(21)(A)(ii) of ERISA and
section 4975(e)(3)(B) of the Code. While most of the cost incurred
would be associated with the proposed amendments to related PTEs,
entities who did not previously identify as a fiduciary may also incur
some transition costs. These costs would likely differ significantly by
type of financial institution. For instance, retail broker-dealers
subject to Regulation Best Interest or registered investment advisers
subject to the Investment Advisers Act would be closer to satisfying
the requirements of a fiduciary under ERISA than an insurance company
or independent producer selling annuity products. The Department
requests comment on the costs these entities would incur as a result of
becoming a fiduciary under this rule, as well as the underlying data to
estimate these costs. The Department is particularly interested in
costs that would not be incurred in satisfying the requirements to the
PTEs, such as legal costs, fiduciary insurance costs, technology costs,
human capital costs, or other costs of this nature. The Department also
requests comment on how plans would be affected by the proposed rule.
Costs Associated With PTE 2020-02
The Department proposes to amend PTE 2020-02 to require the
provision of additional disclosures to retirement investors receiving
advice from financial institutions and to provide more guidance for
financial institutions and investment professionals complying with the
Impartial Conduct Standards and implementing the policies and
procedures. This proposal is intended to align with other regulators'
rules and standards of conduct. As such, the Department expects that
satisfying the proposal would not be unduly burdensome.
Summary of Affected Entities
The entities that the Department expects to be affected by the
proposed amendments to the PTE are also affected by the existing PTE
2020-02. The Department estimates that 19,290 financial institutions,
composed of 1,894 broker-dealers, 15,982 registered investment
advisers,\468\ 183 insurers, 200 pure robo-advisers, 1,011 pension
consultants, and 20 investment company underwriters would be affected
by the proposed amendments.\469\
---------------------------------------------------------------------------

\468\ The Department estimates that 15,982 registered investment
advisers that do not provide pure robo-advice.
\469\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

The Department recognizes that the proposed amendments may change
the number of financial institutions who choose to rely on PTE 2020-02.
Consistent with its initial analysis of the exemption in 2020, this
analysis assumes that all eligible entities currently rely on the
exemption and would continue to rely on the exemption if amended as
proposed. As a result, this analysis does not reflect any change in the
number of entities relying on the exemption in response to these
amendments. The Department requests comment on how the proposed
amendments might change the number of affected entities relying on PTE
2020-02.
Additionally, the Department recognizes that entities within the
insurance industry are subject to different regulatory regimes,
depending on the types of products they offer. The Department does not
have data on what proportion of entities are subject to the
requirements in the NAIC Model regulation, or obligations subject to
regulation by the SEC or state insurance departments. The analysis
below considers cost to comply if the entity currently meets none of
the requirements. This likely is an overestimate, as many of these
entities are already meeting some, if not most, of the requirements of
this proposal. The Department requests comments on this assumption.
Costs To Review the Rule
The Department estimates that all of the 19,290 financial
institutions discussed above would be affected by the proposed
amendments to PTE 2020-02 and would need to review the rule. The
Department estimates that such a review would take a legal
professional, on average, nine hours to review the rule, resulting in
an estimated cost of

[[Page 75950]]

$27.7 million in the first year.\470\ This estimate also assumes all
effected financial institutions expend the effort, however, that may
not be the case as other arrangements may exist where individual
financial firms receive compliance assistants from other sources. The
Department asks for comments on this estimate.
---------------------------------------------------------------------------

\470\ The burden is estimated as: (19,290 entities x 9 hours) =
173,610 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (38,580 entities x 9 hours) x $159.34 = $27,663,017.
---------------------------------------------------------------------------

Costs Associated With General Disclosures for Investors
Costs Associated With Modifications of Existing Disclosure Requirements
As discussed in the preamble, Section II(b) currently requires
financial institutions to provide certain disclosures to retirement
investors before engaging in a transaction pursuant to the exemption.
These disclosures include:
(1) a written acknowledgment that the financial institution and its
investment professionals are fiduciaries;
(2) a written description of the services to be provided and any
conflicts of interest of the investment professional and financial
institution; and
(3) documentation of the financial institution and its investment
professional's conclusions as to whether a rollover is in the
retirement investor's best interest, before engaging in a rollover or
offering recommendations on post-rollover investments.
As discussed in more detail in the preamble and below, the proposed
amendments make minor language edits to the existing disclosures.
The proposed amendment makes minor edits to the written
acknowledgment that the financial institution and its investment
professionals are fiduciaries. Financial institutions would be required
to provide a written acknowledgment that the Financial Institution and
its Investment Professionals are providing fiduciary investment advice
to the Retirement Investor and are fiduciaries under Title I, the Code,
or both when making an investment recommendation. This condition would
not be met if the fiduciary acknowledgement states that the financial
institution and its investment professionals ``may'' be fiduciaries or
would become fiduciaries only ``if'' or ``when'' providing fiduciary
investment advice as defined under the applicable regulation.
The Department does not have data on how many financial
institutions would need to modify their disclosures in response to this
amendment; however, the Department expects that the disclosures
required under the existing form of PTE 2020-02 likely satisfy this
requirement for most financial institutions covered under the existing
exemption. For the purposes of this analysis, the Department assumes
that 10 percent of financial entities under the existing exemption
would need to update their disclosures and that it would take a legal
professional at a financial institution, on average, 10 minutes to
update existing disclosures. Robo-advisers, pension consultants, and
investment company underwriters, who are not covered under the existing
exemption would need to draft the acknowledgement. The Department
estimates that it would take a legal professional at these entities, on
average, 30 minutes to draft the acknowledgement. Updating and drafting
the acknowledgement is estimated to result in a cost of approximately
$0.1 million in the first year.\471\
---------------------------------------------------------------------------

\471\ The number of financial entities needing to update their
written acknowledgement is estimated as: (1,894 broker-dealers x
10%) + (7,570 SEC-registered investment advisers x 10%) + (8,412
state-registered investment advisers x 10%) + (183 insurers x 10%) =
1,806 financial institutions updating existing disclosures. The
number of financial entities needing to draft their written
acknowledgement is estimated as: 200 robo-advisers + 1,011 pension
consultants + 20 investment company underwriters = 1,231 financial
institutions drafting new disclosures. The burden is estimated as:
(1,806 financial institutions x (10 minutes / 60 minutes)) + (1,231
financial institutions x (30 minutes / 60 minutes) = 917 hours. A
labor rate of $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: [(1,806 financial
institutions x (10 minutes / 60 minutes)) + (1,231 financial
institutions x (30 minutes / 60 minutes)] x $159.34 = $146,035.
---------------------------------------------------------------------------

The proposed amendments would also expand on the existing
requirement for a written description of the services provided to also
require a statement on whether the retirement investor would pay for
such services, directly or indirectly, including through third-party
payments. The Department assumes it would take a legal professional at
a financial institution under the existing exemption 30 minutes to
update existing disclosures to include this information. Robo-advisers,
pension consultants, and investment company underwrites, who are not
covered under the existing exemption, would need to draft a written
description of services provided, which the Department estimates would
take a legal professional a large institution five hours and a legal
professional at a small institution one hour, on average, to prepare
such a draft.\472\ The Department requests comment on how long it would
take entities of varying size to prepare such a disclosure. This
results in an estimated cost of approximately $1.8 million in the first
year.\473\
---------------------------------------------------------------------------

\472\ As discussed in the Regulatory Flexibility Act analysis,
the Department estimates that 10 robo-advisers, 930 pension
consultants, and 20 investment company underwriters are considered
small entities. For more information, refer to the Affected Entities
discussion in the Regulatory Flexibility Act section of this
document.
\473\ The number of financial entities needing to update their
written description of services is estimated as: (1,894 broker-
dealers + 7,750 SEC-registered investment advisers + 8,412 state-
registered investment advisers + 183 insurers) = 18,059 financial
institutions updating existing disclosures. The number of financial
entities needing to draft their written description of services is
estimated as: (200 robo-advisers + 1,011 pension consultants + 20
investment company underwriters) = 1,231 financial institutions
drafting new descriptions. Of these, 960 financial institutions, or
10 robo-advisers, 930 pension consultants, and 20 investment company
underwriters, are considered small entities. For more information,
refer to the Affected Entities discussion in the Regulatory
Flexibility Act section of this document. The burden is estimated
as: (18,059 financial institutions x (30/60 hours)) + (960 small
financial institutions x 1 hour) + [(1,231 financial institutions-
960 small financial institutions) x 5 hours] = 11,345 hours. A labor
rate of $159.34 is used for a legal professional. The labor rate is
applied in the following calculation: {(18,059 financial
institutions x (30/60 minutes)) + (960 small financial institutions
x 1 hour) + [(1,231 financial institutions -960 small financial
institutions) x 5 hours]{time} x $159.34 = $1,807,712.
---------------------------------------------------------------------------

The Department requests comment on the average time estimates to
satisfy each of the new requirements in the proposed amendments.
Costs Associated With New Disclosure Requirements
As amended, PTE 2020-02 would require financial institutions to
provide investors with the following additional disclosures:
(1) a written statement of the best interest standard of care owed;
and
(2) a written statement that the retirement investor has the right
to obtain specific information regarding costs, fees, and compensation,
described in dollar amounts, percentages, formulas, or other means
reasonably designed to present full and fair disclosure that is
materially accurate in scope, magnitude, and nature, sufficient detail
to permit the Retirement Investor to make an informed judgment about
the costs of the transaction and about the significance and severity of
the Conflicts of Interest, and describes how the Retirement Investor
can get the information, free of charge.
Under the Investment Advisers Act and the SEC's Regulation Best
Interest, most registered investment advisers and broker-dealers with
retail investors already provide disclosures that the

[[Page 75951]]

Department expects would satisfy these requirements.\474\
---------------------------------------------------------------------------

\474\ Form CRS Relationship Summary; Amendments to Form ADV, 84
FR 33492 (July 12, 2019).
---------------------------------------------------------------------------

The Department expects that the written statement of the Best
Interest standard of care owed would not take a significant amount of
time to prepare and would be uniform across clients. The Department
assumes that a legal professional employed by a broker-dealer or
registered investment advisers, on average, would take 30 minutes to
modify existing disclosures and that it would take insurers, robo-
advisers, pension consultants, and investment company underwriters, on
average, one hour to prepare the statement. This results in a cost
estimate of approximately $1.7 million in the first year.\475\
---------------------------------------------------------------------------

\475\ The burden is estimated as: [(1,894 broker-dealers +
15,982 registered investment advisers) x (30 minutes / 60 minutes)]
+ [(183 insurers + 200 robo-advisers + 1,011 pension consultants,
and 20 investment company underwriters) x 1 hour] = 10,352 hours. A
labor rate of $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: {[(1,894 broker-
dealers + 15,982 registered investment advisers) x (30 minutes / 60
minutes)] + [(183 insurers + 200 robo-advisers + 1,011 pension
consultants, and 20 investment company underwriters) x 1
hour]{time} x $159.34 = $1,649,488.
---------------------------------------------------------------------------

The added requirement of a written statement informing the investor
of their right to obtain a written description of the financial
institution's policies and procedures and information regarding costs,
fees, and compensation would require financial institutions to maintain
sufficient records to allow them to meaningfully respond to investors'
requests to demonstrate how the financial institution and its
investment professionals are compensated in connection with their
recommendations. The Department expects that many financial
institutions' disclosures already substantially comply with this
regulation or would require modest adjustments to do so. To satisfy
this requirement, the Department estimates that a legal professional
for broker-dealers and registered investment advisers would require, on
average, 30 minutes to modify existing statements and that it would
take insurers, robo-advisers, pension consultants, and investment
company underwriters, on average, one hour to prepare the statement.
This results in a cost estimate of approximately $1.7 million in the
first year.\476\
---------------------------------------------------------------------------

\476\ The burden is estimated as: [(1,894 broker-dealers +
15,982 registered investment advisers) x (30 minutes / 60 minutes)]
+ [(183 insurers + 200 robo-advisers + 1,011 pension consultants,
and 20 investment company underwriters) x 1 hour] = 10,352 hours. A
labor rate of $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: {[(1,894 broker-
dealers + 15,982 registered investment advisers) x (30 minutes / 60
minutes)] + [(159 insurers + 200 robo-advisers + 1,060 pension
consultants, and 20 investment company underwriters) x 1
hour]{time} x $159.34 = $1,649,488.
---------------------------------------------------------------------------

The Department requests comment on the average time estimates to
satisfy each of the new requirements in the proposed amendments.
Costs Associated With the Provision of Disclosures to Retirement
Investors
Financial institutions would incur costs associated with preparing
and sending the new disclosure requirements. The Department does not
have data on the number of retirement investors that have relationships
with financial institutions that would engage in transactions covered
under the amended exemption. For the purposes of this analysis, the
Department uses the number of participants who roll over defined
contribution plan assets to IRAs as a proxy for the number of
retirement investors that would receive general disclosures.
Accordingly, the Department estimates that approximately 3.2 million
retirement investors have relationships with financial institutions and
are likely to engage in transactions covered under this PTE.\477\
---------------------------------------------------------------------------

\477\ The Department estimates the number of affected plans and
IRAs to be equal to 50 percent of rollovers from retirement plans to
IRAs. As discussed in the Affected Entities section, the Department
estimates that there are 6,367,005 total rollovers annually.
---------------------------------------------------------------------------

Of these 3.2 million retirement investors, it is assumed that 5.8
percent, or 184,643 retirement investors would receive paper
disclosures.\478\ The Department assumes that there would not be a
measurable increase in the time burden for a clerical worker to prepare
the additional disclosures for individuals already receiving
disclosures. The Department estimates that providing the additional
disclosures would require two additional pages, resulting in a material
cost estimate of $18,464.\479\
---------------------------------------------------------------------------

\478\ The number of retirement investors receiving paper
disclosures is estimated as: (3,183,503 retirement investors x 5.8%)
= 184,643 paper disclosures.
\479\ The cost is estimated as: (184,643 paper disclosures x 2
pages) x $0.05 = $18,464.
---------------------------------------------------------------------------

Financial institutions would also incur costs associated with
preparing and sending requested written descriptions of policies and
procedures and information regarding costs, fees, and compensation. The
Department does not have data on how often investors would request this
information. The Department assumes that, on average, each financial
institution would receive 10 such requests annually and that most
financial institutions already have such information available. The
Department requests comments on the assumption that financial
institutions readily have this information available and the time
necessary to gather such information. The Department estimates it would
take a clerical worker five minutes to distribute, regardless of
whether it is sent electronically or by mail. This results in an
estimated cost of approximately $1.0 million.\480\ As discussed at the
beginning of the cost section, the Department assumes that 5.8 percent
of these disclosures (11,188 disclosures) would be mailed. Financial
institutions would incur $0.66 for postage and $0.10 for the paper and
printing costs of two pages for each of the disclosures, which the
Department estimates to cost approximately $8,503.\481\
---------------------------------------------------------------------------

\480\ The burden is estimated as: (19,290 financial institutions
x 10 disclosures) x (5 minutes / 60 minutes) = 16,075 hours. A labor
rate of $63.45 is used for a clerical worker. The labor rate is
applied in the following calculation: [(19,290 financial
institutions x 10 disclosures) x (5 minutes / 60 minutes)] x $63.45
= $1,019,959.
\481\ The cost is estimated as: (19,290 financial institutions x
10 disclosures x 2 pages x $0.05) + (19,290 financial institutions x
10 disclosures x $0.66)) x (5.8%) = $8,503.
---------------------------------------------------------------------------

Summary Costs Associated With the General Disclosures
The Department estimates that the total cost associated with
preparing and providing the general disclosures discussed above would
be approximately $6.3 million in the first year and $1.0 million in
subsequent years.\482\
---------------------------------------------------------------------------

\482\ The cost in the first year is estimated as: ($146,035 to
prepare the written acknowledgment + $1,807,633 to prepare the
written description of services provided + $1,649,488 to prepare the
written statement of the Best Interest standard of care + $1,649,488
to prepare the written statement informing the investor of their
right to obtain a written description of the financial institution's
policies and procedures + $18,464 to prepare and send disclosures +
$1,019,959 to prepare requested written policies and procedures +
$8,053 for material costs associated with requested policies and
procedures) = $6,299,569. The cost in subsequent years is
attributable to the $18,464 to prepare and send disclosures +
$1,019,959 to prepare requested written policies and procedures +
$8,503 for material costs associated with requested policies and
procedures = $1,046,926. Note that the total value may not equal the
sum of the parts due to rounding.
---------------------------------------------------------------------------

Costs Associated With Rollover Documentation and Disclosure for
Financial Institutions
Compared to the requirements in the existing exemption, the
proposed amendment would clarify the rollover disclosure requirements
in Sections II(b)(3) and II(c)(3) of PTE 2020-02. Before engaging in a
rollover or making

[[Page 75952]]

a recommendation to a plan participant as to the post-rollover
investment of assets, the investment professional must consider and
document their conclusions as to whether a rollover is in the
retirement investor's best interest and provide that documentation to
the retirement investor. Relevant factors to consider must include but
are not limited to:
(i) the alternatives to a rollover, including leaving the money in
the plan or IRA, if applicable;
(ii) the comparative fees and expenses;
(iii) whether an employer or other party pays for some or all
administrative expenses; and
(iv) the different levels of fiduciary protection, services, and
investments available.
As discussed in the Affected Entities section, the Department
estimates that 3,119,832 rollovers would be affected by the proposed
amendments to PTE 2020-02.\483\
---------------------------------------------------------------------------

\483\ For more information on how the number of IRA rollover is
estimated, refer to the Affected Entities section. In light of
ongoing litigation, the Department is assuming for purposes of this
discussion that all Affected Entities will become subject to these
requirements, regardless of whether they currently provide fiduciary
investment advice.
\484\ Deloitte, Regulation Best Interest: How Wealth Management
Firms are Implementing the Rule Package, Deloitte, (Mar. 6, 2020).
\485\ The burden is estimated as: (3,119,833 rollovers x 48% x
(30 minutes / 60 minutes)) + (3,119,833 rollovers x 52% x (5 minutes
/ 60 minutes)) = 883,953 hours. A labor rate of $219.23 is used for
a personal financial adviser. The labor rate is applied in the
following calculation: (3,119,833 rollovers x 48% x (30 minutes / 60
minutes)) + (3,119,833 rollovers x 52% x (5 minutes / 60 minutes)) x
$219.23 = $193,788,961.
---------------------------------------------------------------------------

As a best practice, the SEC already encourages firms to record the
basis for significant investment decisions, such as rollovers, although
doing so is not required under Regulation Best Interest. In addition,
some firms may voluntarily document significant investment decisions to
demonstrate compliance with applicable law, even if not required. SIFMA
commissioned Deloitte to conduct a survey of its member firms to learn
how they expected to implement Regulation Best Interest. The survey was
conducted by December 31, 2019, prior to Regulation Best Interest's
effective date of June 30, 2020. Just over half (52 percent) of the
firms surveyed will require their financial advisers to provide best
interest rationale documentation for rollover recommendations.\484\ The
Department estimates that documenting each rollover recommendation will
require 30 minutes for a personal financial adviser whose firms
currently do not require rollover documentations and five minutes for
financial advisers whose firms already require them to do so. This
results in an estimated annual cost of approximately $193.8
million.\485\ The Department requests comment on how long such
documentation would take.
The Department assumes financial institutions that do not have
enhanced technology capabilities for other regulations will take a
mixed approach, combining current technology solutions with manual
processes. Accordingly, the Department estimates that financial
institutions already requiring rollover documentation will face no more
than a nominal burden increase, and only to the extent that their
current compliance systems do not meet the requirements of this
exemption. Those firms currently not documenting rollover
recommendations will likely face a larger, but still somewhat limited
burden.
Costs Associated With Disclosures for PEPs
Financial institutions providing investment advice for PEPs must
give each participating employer an additional disclosure detailing any
amounts the financial institution pays to or receives from the PPP or
its affiliates, in addition to any conflicts of interest that arise in
connection with the investment advice it provides to a PEP. According
to filings submitted to the Department as of August 22, 2023, there are
382 PEPs and 134 PPPs.\486\
---------------------------------------------------------------------------

\486\ For more information on this estimate, refer to the
Affected Entities section.
---------------------------------------------------------------------------

The Department does not have data on what percent of PEPs would be
affected by the exemption. For the purposes of this analysis, the
Department assumes that all PEPs would be affected. The Department
requests comment on this assumption. The Department assumes that, on
average, one financial institution would need to prepare one disclosure
for each PEP in the first year. The Department requests comment on this
assumption and how frequently PPPs would provide investment advice to a
PEP within the framework of the exemption. The Department estimates
that, on average, it would take a legal professional at each entity two
hours to prepare the disclosure, resulting in a cost of approximately
$0.1 million in the first year.\487\
---------------------------------------------------------------------------

\487\ The burden is estimated as: (382 financial institutions x
2 hours) = 764 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (382 financial institutions x 2 hours) x $159.34 =
$121,736.
---------------------------------------------------------------------------

In addition to providing the disclosure described above to each
PEP, financial institutions must also provide these disclosures to each
participating employer. According to filings submitted to the
Department by August 22, 2023, there are 955 employers in PEPs.\488\
The Department assumes that all of these disclosures will be sent
electronically. Distributing the disclosures is estimated to take
clerical personnel one minute per disclosure, resulting in an estimated
cost of approximately $1,010.\489\
---------------------------------------------------------------------------

\488\ Estimates are based on 2021 EFAST filings as of August 22,
2023. The inaugural filing deadline for Form 5500 filings for PEPs
with plan years beginning after January 1, 2021 was July 31, 2022.
The Department based its estimates on those filings it had received
by August 22, 2023. However, since this is the first year PEPs could
file, the Department anticipates that this understates the true
number of PEPs affected by this proposed rule.
\489\ The burden is estimated as: (955 employers x (1 minute /
60 minutes)) = 16 hours. A labor rate of $63.45 is used for a
clerical worker. The labor rate is applied in the following
calculation: (955 employers x (1 minute / 60 minutes)) x $63.45 =
$1,010.
---------------------------------------------------------------------------

Costs Associated With Annual Report of Retrospective Review for
Financial Institutions
PTE 2020-02 currently requires financial institutions to conduct a
retrospective review at least annually that is reasonably designed to
prevent violations of, and achieve compliance with the conditions of
this exemption, the Impartial Conduct Standards, and the policies and
procedures governing compliance with the exemption. The Department is
clarifying that the Financial Institution must update the policies and
procedures as business, regulatory, and legislative changes and events
dictate, and to ensure they remain prudently designed, effective, and
compliant with the exemption. Under the original exemption, financial
institutions were already required to maintain their policies and
procedures. The Department's estimates for any additional cost for
entities updating their policies and procedures are discussed in the
discussion of costs associated with written policies and procedures for
financial institutions, below.
Robo-advisers, pension consultants, and investment company
underwrites, who are not covered under the existing exemption, would
incur costs associated with conducting the annual review. The
Department does not have data on how many would incur costs associated
with this requirement; however, the Department expects that many of
these entities already develop an audit report. The Department assumes
that 10 percent of these entities do not currently

[[Page 75953]]

produce an audit report, while the remaining 90 percent would need to
make modifications to satisfy the requirements. This results in an
estimate of 123 entities not currently producing audit reports, of
which 96 are small entities and 27 are large entities.\490\ The
Department requests comment on this assumption.
---------------------------------------------------------------------------

\490\ The number of total entities affected is estimated as:
(200 robo-advisers + 1,011 pension consultants + 20 investment
company underwriters) x 10% = 123 entities. As discussed in the
Regulatory Flexibility Act analysis of this document, 10-robo
advisers, 930 pension consultants, and 20 investment company
underwriters are estimated to be small entities. The number of small
entities affected is estimated as: (10 robo-advisers + 930 pension
consultants + 20 investment company underwriters) x 10% = 96 small
entities.
---------------------------------------------------------------------------

The Department estimates that it would take a legal professional
five hours for small firms and ten hours for large firms to produce a
retrospective review report, resulting in an estimated cost of $0.1
million.\491\ The Department estimates that it would take a legal
professional one hour for small firms and two hours for large firms to
modify existing reports, on average. This results in an estimated cost
of $0.2 million.\492\
---------------------------------------------------------------------------

\491\ The burden is estimated as: (96 financial institutions x 5
hours) + (27 financial institutions x 10 hours) = 750 hours. A labor
rate of $159.34 is used for a legal professional. The labor rate is
applied in the following calculation: [(96 financial institutions x
5 hours) + ((27 financial institutions x 10 hours)] x $159.34 =
$119,505.
\492\ The number of total entities affected is estimated as:
(200 robo-advisers + 1,011 pension consultants + 20 investment
company underwriters) x 90% = 1,108 entities. As discussed in the
Regulatory Flexibility Act analysis of this document, 10 robo-
advisers, 930 pension consultants, and 20 investment company
underwriters are estimated to be small entities. The number of small
entities affected is estimated as: (10 robo-advisers + 930 pension
consultants + 20 investment company underwriters) x 90% = 864 small
entities. The burden is estimated as: (905 financial institutions x
1 hours) + (248 financial institutions x 2 hours) = 1,401 hours. A
labor rate of $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: [(864 financial
institutions x 1 hour) + (244 financial institutions x 2 hours)] x
$159.34 = $215,428.
---------------------------------------------------------------------------

The Department estimates it will take a certifying officer two
hours for small firms and four hours for large firms to review the
report and certify the exemption, resulting in an estimated cost burden
of approximately $0.6 million.\493\
---------------------------------------------------------------------------

\493\ The burden is estimated as: (960 financial institutions x
2 hours) + ((1,231- 960 financial institutions) x 4 hours) = 3,004
hours. A labor rate of $190.63 is used for a top executive. The
labor rate is applied in the following calculation: [(960 financial
institutions x 2 hours) + ((1,231- 960 financial institutions) x 4
hours)] x $190.63 = $572,653.
---------------------------------------------------------------------------

The results in a total cost annual cost of $0.9 million.\494\
---------------------------------------------------------------------------

\494\ This is estimated as: ($119,505 + $215,428 + $572,653) =
$907,586.
---------------------------------------------------------------------------

Costs Associated With Written Policies and Procedures for Financial
Institutions
The time required to establish, maintain, and enforce written
policies and procedures prudently designed to ensure compliance with
the Impartial Conduct Standards would depend on the size and complexity
as of the financial institution. The Department estimates that this
would take a legal professional 10 hours at a large firm and five hours
at a small firm in the first year and 30 minutes in subsequent
years.\495\ The Department assumes that most financial institutions
affected by the existing exemption likely already satisfy much of this
requirement, as it would be a customary business practice to
periodically review required policies and procedures.
---------------------------------------------------------------------------

\495\ As discussed in the Regulatory Flexibility Act analysis,
the Department estimates that 960 entities, consisting of 10 robo-
advisers, 930 pension consultants, and 20 investment company
underwriters, are considered small entities. For more information,
refer to the Affected Entities discussion in the Regulatory
Flexibility Act section of this document.
---------------------------------------------------------------------------

The proposed amendments would also require financial institutions
to provide their complete policies and procedures to the Department
upon request. Based on the number of past cases as well as current open
cases that would merit such a request, the Department estimates that
the Department would request 165 policies and procedures in the first
year and 50 policies and procedures in subsequent years. The Department
assumes that a clerical worker would prepare and send their complete
policies and procedures to the Department and that it would take them
15 minutes. The Department requests comment on these assumptions. The
Department estimates that the requirement would result an estimated
cost of approximately $2,600 in the first year \496\ and $790 in
subsequent years.\497\ The Department assumes financial institutions
would send the documents electronically and thus would not incur costs
for postage or materials.
---------------------------------------------------------------------------

\496\ The burden is estimated as: (165 x (15 minutes / 60
minutes)) = 41 hours. A labor rate of $63.45 is used for a clerical
worker. The labor rate is applied in the following calculation: (165
x (15 minutes / 60 minutes)) x $63.45 = $2,617.
\497\ The burden is estimated as: (50 x (15 minutes / 60
minutes)) = 12.5 hours. A labor rate of $63.45 is used for a
clerical worker. The labor rate is applied in the following
calculation: (50 x (15 minutes / 60 minutes)) x $63.45 = $793.
---------------------------------------------------------------------------

This results in a total cost of $2.6 million in the first year and
$1.5 million in subsequent years.\498\
---------------------------------------------------------------------------

\498\ The cost in the first year is estimated as: ($2,635,404 +
$2,617) = $2,638,021. The cost in subsequent years is estimated as:
($1,536,834 + $793) = $1,537,627.
---------------------------------------------------------------------------

Summary of Total Cost for the Proposed Amendments to PTE 2020-02
The Department estimates that in order to meet the additional
conditions of the amended PTE 2020-02, affected entities would incur a
total cost of $231.6 million and a per-firm cost of $12,002 in the
first year and a total cost of $197.3 million and a per-firm cost of
$10,227 in subsequent years.\499\
---------------------------------------------------------------------------

\499\ The first-year total cost includes: ($27,663,017 for rule
review + $6,422,616 for general disclosures + $193,788,961 for
rollover disclosures + 907,585 for the retrospective review +
$2,736,095 for policies and procedures) = $231,518,275. The total
cost in subsequent years includes: ($1,047,936 for general
disclosures + $193,788,961 for rollover disclosures + 907,585 for
the retrospective review + $1,537,627 for policies and procedures) =
$197,282,110. Note, the total values may not equal the sum of the
parts due to rounding.
---------------------------------------------------------------------------

Costs Associated With PTE 84-24
Currently, PTE 84-24 provides an exemption for insurance agents,
insurance brokers, and pension consultants to receive a sales
commission from an insurance company for the purchase of an insurance
or annuity contract with plan or IRA assets. Relief is also provided
for a principal underwriter for an investment company registered under
the Investment Company Act of 1940 to receive a sales commission for
the purchase of securities issued by the investment company with plan
or IRA assets.
The Department is proposing an amendment to PTE 84-24 that would
exclude many investment advice fiduciaries from the existing relief.
Except for independent producers, fiduciary advisers would be expected
to rely on the relief provided by PTE 2020-02, rather than PTE 84-24.
The proposed amendment would provide exemptive relief to fiduciaries
who are independent producers that recommend annuities from an
unaffiliated financial institution to retirement investors. Relief for
independent producers depends on protective conditions that
substantially mirror those contained in PTE 2020-02. The conditions are
tailored to protect retirement investors from the specific conflicts
that arise for independent producers who are compensated through
commissions when providing investment advice to retirement investors
regarding the purchase of an annuity.
The Department recognizes that entities within the insurance
industry are subject to different regulatory regimes, depending on the
types of products they offer. The Department does not have data what
proportion of

[[Page 75954]]

entities are subject to the requirements in the NAIC Model regulation,
SEC, or state insurance departments. The analysis below considers the
full cost of compliance. This likely is an overestimate, as many of
these entities are already meeting some, if not most, of the
requirements of this proposal. The Department requests comment on this
assumption.
Summary of Affected Entities
The Department expects that 5,246 financial entities would be
affected by the proposed amendments, consisting of 1,011 pension
consultants, 10 investment company principal underwriters that service
plans, 10 investment company principal underwriters that service IRAs,
4,000 independent producers, and 215 insurance companies would be
affected by the proposed amendments to PTE 84-24.\500\ Additionally,
the Department estimates that 1,722 plans would be affected by the
proposed amendments.\501\
---------------------------------------------------------------------------

\500\ For more information on how the number of each entity type
is calculated, refer to the Affected Entities section.
\501\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

Costs to Rule Review
The Department estimates that the financial entities--including
pension consultants, investment company principal underwriters, and
insurance companies--currently relying on the exemption and independent
producers affected by the proposed amendments would need to review the
rule. The Department estimates that such a review will take a legal
professional, on average, two hours to review the rule, resulting in an
estimated cost of approximately $1.7 million.\502\
---------------------------------------------------------------------------

\502\ The burden is estimated as: (5,246 entities x 2 hours) =
10,492 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (5,246 entities x 2 hours) x $159.34 = $1,671,795.
---------------------------------------------------------------------------

Costs Associated With Disclosures for Investors
The proposed amendment would require independent producers to
provide disclosures to retirement investors before engaging in a
transaction covered by this exemption. Under the proposed amendments,
independent producers seeking relief would be required to provide:
a written fiduciary acknowledgement,
a written statement of the Best Interest standard of care
owed,
a written description of the service provided by the
independent producer and the products they are licensed to sell,
a written statement of the independent producer's material
conflicts of interest and the amount of insurance commission paid in
connection with the purchase by a retirement investor of the
recommended annuity, and
a written explanation of whether a rollover is in the
retirement investor's best interest before engaging in a rollover or
making a recommendation to a plan participant.
Costs Associated With Preparing General Disclosure Documents
For more generalized disclosures, the Department assumes that
insurance companies would prepare and provide disclosures to
independent producers selling their products. However, some of the
disclosures are tailored specifically to the independent producer. For
these, the Department assumes that the disclosure would need to be
prepared by the independent producer themselves. The Department
recognizes that some may rely on intermediaries in the distribution
channel to prepare more specific disclosures and that the costs
associated with the preparation would be covered by a commission
retained by the intermediary for its services. The costs for the
intermediary to prepare the disclosure may result in an increase in
commission. The Department expects that this increase in commission
would not exceed the cost of preparing the disclosure in house.
The Department is including model language in the preamble to PTE
84-24 that details what should be included in fiduciary acknowledgment
for financial institutions. The Department assumes that the time
associated with preparing the disclosures would be minimal. Further,
these disclosures are expected to be uniform in nature. Accordingly,
the Department estimates that these disclosures would not take a
significant amount of time to prepare.
Due to the nature of independent producers, the Department assumes
that most financial institutions would make draft disclosures available
to independent producers, pertaining to their fiduciary status.
However, the Department expects that a small percentage of independent
producers may draft their own disclosures. The Department assumes that
an in-house attorney for all 215 insurance companies and 5 percent of
independent producers, or 200 independent producers, would spend 10
minutes of legal staff time to produce a written acknowledgement in the
first year. This results in an estimated cost of approximately $11,000
in the first year.\503\
---------------------------------------------------------------------------

\503\ The burden is estimated as: (215 insurance companies + 200
independent producers) x (10 minutes / 60 minutes) = 69 hours. A
labor rate of approximately $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: [(215 insurance companies + 200 independent producers)
x (10 minutes / 60 minutes)] x $159.34 = $11,021.
---------------------------------------------------------------------------

Regarding the required written statement of the Best Interest
standard of care owed by the independent producer, the Department
similarly assumes that most financial institutions would make draft
disclosures available to independent producers. The Department assumes
that an in-house attorney for all 215 insurance companies and 5 percent
of independent producers, or 200 independent producers, would spend 30
minutes of legal staff time to prepare the statement in the first year.
This results in an estimated cost of approximately $33,100 in the first
year.\504\
---------------------------------------------------------------------------

\504\ The burden is estimated as: (215 insurance companies + 200
independent producers) x (30 minutes / 60 minutes) = 208 hours. A
labor rate of approximately $159.43 is used for a legal
professional. The labor rate is applied in the following
calculation: [(215 insurance companies + 200 independent producers)
x (30 minutes / 60 minutes)] x $159.34 = $33,063.
---------------------------------------------------------------------------

The written description of the services provided and the products
the independent producer is licensed to sell would likely need to be
produced by the independent producer. The Department recognizes that
many independent producers may not have the internal resources to
prepare such disclosure. The Department expects that some may rely on
intermediaries in the distribution channel to prepare the disclosures
and some may seek external legal support. However, the Department
expects that the costs associated with the preparation would be covered
by commissions retained by the intermediary for its services or by the
fee paid to external legal support. As such, the Department still
attributes this cost to the independent producer. The Department
requests comment on this assumption.
Accordingly, the Department assumes that all 4,000 independent
producers in this analysis would need to prepare the disclosure. The
Department assumes that for each of these independent producers, an
attorney would spend 30 minutes of legal staff time drafting the
written description. This results in an estimated cost of approximately
$0.3 million in the first year.\505\
---------------------------------------------------------------------------

\505\ The burden is estimated as: (4,000 independent producers x
(30 minutes / 60 minutes)) = 2,000 hours. A labor rate of
approximately $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: (4,000 independent
producers x (30 minutes / 60 minutes)) x $159.34 = $318,680.

---------------------------------------------------------------------------

[[Page 75955]]

Similarly, the Department expects that the statement of the
independent producer's material conflicts of interest and the amount of
insurance commission paid in connection with the purchase by a
retirement investor of the recommended annuity would need to be
prepared by the individual producer. As with the written statement on
the description of services, the Department recognizes that many
independent producers may not have the internal resources to prepare
such disclosures, however they may already have similar statements to
satisfy other legal requirements. The Department expects that some may
rely on intermediaries in the distribution channel to prepare the
disclosures and some may seek external legal support. However, the
Department expects that the costs associated with the preparation would
be covered by commissions retained by the intermediary for its services
or by the fee paid to external legal support. As such, the Department
still attributes this cost to the independent producer. The Department
requests comment on this assumption.
Accordingly, the Department assumes that all 4,000 independent
producers in this analysis would need to prepare the disclosure. The
Department assumes that, for each of these entities, an attorney would
spend one hour of legal staff time drafting the written description.
This results in an estimated cost of approximately $0.6 million the
first year.\506\
---------------------------------------------------------------------------

\506\ The burden is estimated as: (4,000 independent producers x
1 hour) = 4,000 hours. A labor rate of approximately $159.34 is used
for a legal professional. The labor rate is applied in the following
calculation: (4,000 independent producers x 1 hour) x $159.34 =
$637,360.
---------------------------------------------------------------------------

Costs Associated With Documenting Whether a Rollover Is in the
Investor's Best Interest, Before Recommending an Annuity, Engaging in a
Rollover, or Making a Recommendation to a Plan Participant as to the
Post-Rollover Investment of Assets Currently Held in a Plan
In addition, the proposed amendment would require an independent
producer to provide a disclosure to investors that documents their
consideration as to whether a recommended annuity or rollover is in the
retirement investor's best interest. Due to the nature of this
disclosure, the Department assumes that the content of the disclosure
would need to be prepared by the independent producer. The Department
recognizes that some may rely on intermediaries in the distribution
channel, and some may seek external legal support to assist with
drafting the disclosures. However, the Department expects that most
independent producers would prepare the disclosure themselves. The
Department requests comment on this assumption.
The Department estimates that 52,449 retirement investors would
receive documentation on whether the recommended annuity is in their
best interest each year.\507\ The Department assumes that, for each of
these retirement investors, an independent producer would spend one
hour of a financial manager's time drafting the documentation. This
results in an estimated cost of approximately $8.3 million
annually.\508\
---------------------------------------------------------------------------

\507\ For information on this estimate, refer to the estimate of
IRAs affected by the proposed amendments to PTE 84-24 in the
Affected Entities section.
\508\ The burden is estimated as: (52,449 rollovers x 1 hour) =
52,449 hours. A labor rate of approximately $158.94 is used for an
independent producer. The labor rate is applied in the following
calculation: (52,449 rollovers x 1 hour) x $158.94 = $8,336,244.
---------------------------------------------------------------------------

Costs Associated With the Provision of Disclosures to Retirement
Investors
The Department does not have data on the number of retirement
investors that have relationships with independent producers that would
engage in transactions covered under the exemption. For the purposes of
this analysis, the Department uses its estimate for the number of new
IRA accounts held by insurance companies as a proxy for the number of
retirement investors that have relationships with independent producers
that would engage in transactions covered under the exemption. As such,
the Department estimates that 52,449 retirement investors would receive
documentation on whether the recommended annuity is in their best
interest each year.\509\
---------------------------------------------------------------------------

\509\ For information on this estimate, refer to the estimate of
IRAs affected by the proposed amendments to PTE 84-24 in the
Affected Entities section.
---------------------------------------------------------------------------

As discussed at the beginning of the cost section, the Department
assumes that 5.8 percent of disclosures sent to retirement investors
would be mailed. Accordingly, of the estimated 52,449 affected
retirement investors, 3,042 retirement investors are estimated to
receive paper disclosures.\510\ For paper copies, a clerical staff
member is assumed to require five minutes to prepare and mail the
required information to the retirement investor. This requirement
results in an estimated labor cost of approximately $16,100.\511\ The
Department assumes that this information would include seven pages,
resulting annual cost burden for material and paper costs of
approximately $3,100.\512\
---------------------------------------------------------------------------

\510\ This is estimated as: (52,449 retirement investors x 5.8%)
= 3,042 paper disclosures.
\511\ This is estimated as: (3,042 paper disclosures x (5
minutes / 60 minutes)) = 253.5 hours. A labor rate of $63.45 is used
for a clerical worker. The labor rate is applied in the following
calculation: (3,042 paper disclosures x (5 minutes / 60 minutes)) x
$63.45 = $16,085.
\512\ This is estimated as: 3,042 rollovers resulting in a paper
disclosure x [$0.66 postage + ($0.05 per page x 7 pages)] = $3,072.
---------------------------------------------------------------------------

\513\ The cost in the first year is estimated as: ($11,021 for
the disclosure confirming fiduciary status + $33,063 for the written
statement of the Best Interest standard of care + $318,680 for the
written description of services provided + $637,360 for the
statement on material conflicts of interest and commissions paid +
$8,336,244 for the rollover disclosure + $16,085 to prepare and send
disclosures + $3,072 for material and postage costs) = $9,355,525.
The cost in subsequent years is estimated as: ($8,336,244 for the
rollover disclosure + $16,085 to prepare and send disclosures +
$3,072 for material and postage costs) = $8,355,401. Note, the total
values may not equal the sum of the parts due to rounding.
---------------------------------------------------------------------------

Costs Associated With Policies and Procedures
The proposed amendment would require insurance companies to
establish, maintain, and enforce written policies and procedures to
review each recommendation from an independent producer before an
annuity is issued to a retirement investor. The insurance company's
policies and procedures must mitigate conflicts of interest to the
extent that a reasonable person reviewing the policies and procedures
and incentive practices as a whole would conclude that they do not
create an incentive for the independent producer to place its
interests, or those of the insurance, or any affiliate or related
entity, ahead of the interests of the retirement investor. Insurance
companies' policies and procedures include a prudent process for
determining whether to authorize an independent producer to sell the
insurance company's annuity contracts to retirement investors, and for
taking

[[Page 75956]]

action to protect retirement investors from independent producers who
have failed or are likely to fail to adhere to the impartial conduct
standards, or who lack the necessary education, training, or skill.
Finally, insurance companies must provide their complete policies and
procedures to the Department within 10 days upon request.
These requirements are consistent with, though more protective
than, the requirements in NAIC Model Regulation 275. Model Regulation
275 has been updated and revised several times; however, both the 2010
Model Regulation 275 \514\ and the 2020 revisions to Model Regulation
275 \515\ include a requirement to ``establish and maintain procedures
for the review of each recommendation prior to issuance of an
annuity.'' \516\ While the 2010 version required such procedures ``are
designed to ensure that there is a reasonable basis to determine that a
recommendation is suitable,'' \517\ the 2020 version requires such
procedures are ``are designed to ensure there is a reasonable basis to
determine that the recommended annuity would effectively address the
particular consumer's financial situation, insurance needs and
financial objectives.'' \518\ The 2020 revisions impose a higher best
interest standard, compared to the suitability standard in 2010
standard.
---------------------------------------------------------------------------

\514\ NAIC, Model Suitability Regulations, Sec. 6(F)(1)(d) NAIC
(2010), https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/25201.
\515\ NAIC, Model Suitability Regulations, Sec. 6(F)(1)(d) NAIC
(2010), https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/25201.
\516\ This language was included in both the 2010 and 2020
versions of Model Regulation 275. See NAIC, Model Suitability
Regulations, Sec. 6(F)(1)(d) NAIC (2010), https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/25201. ;
NAIC, Model Suitability Regulations, Sec. 6(F)(1)(d) NAIC (2020).
\517\ NAIC, Model Suitability Regulations, Sec. 6(F)(1)(d) NAIC
(2010), https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/25201.
\518\ NAIC, Model Suitability Regulations, Sec. 6(F)(1)(d) NAIC
(2020), https://content.naic.org/sites/default/files/inline-files/MDL-275.pdf.
\519\ Based on internal Department analysis, the modified Model
Regulation #275, including a best interest standard, was adopted by
Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware,
Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky,
Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi,
Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio,
Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin,
and Wyoming.
---------------------------------------------------------------------------

Most states have adopted some form of the Model Regulation 275,
and, to date, 39 states have adopted the most recent version.\519\ The
Harkin amendment, Section 989J of the Dodd-Frank Act requires states to
adopt rules that meet or exceed the minimum requirements of model
regulation modifications within five years of adoption.\520\
---------------------------------------------------------------------------

\520\ NAIC. Suitability in Annuity Transactions Model Regulation
(#275) Best Interest Standard of Conduct Revisions Frequently Asked
Question, (May 2021).
---------------------------------------------------------------------------

While many insurance companies may have policies and procedures in
place that would largely satisfy the requirements of the proposed
amendments, the Department expects that many would need to change and
improve policies and procedures to be fully compliant. The Department
requests comment on how extensive and costly changes to existing
policies and procedures would need to be, both in terms of establishing
and updating policies and procedures and in terms of the annual review
in subsequent years.
The Department expects that satisfying this requirement would be
more time consuming for larger entities due to the complexity of their
business. The Department assumes that, for each large insurance
company, an in-house attorney would spend on average, 10 hours of legal
staff time drafting or modifying the policies and procedures, and for
each small insurance company, an in-house attorney would spend on
average, five hours of legal staff time. This results in an estimated
cost of approximately $0.2 million in the first year.\521\ The
Department requests comment on this assumption.
---------------------------------------------------------------------------

\521\ This is estimated as: (177 small insurance companies x 5
hours) + (38 large insurance companies x 10 hours) = 1,265 hours. A
labor rate of $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: [(177 small insurance
companies x 5 hours) + (38 large insurance companies x 10 hours)] x
$159.34 = $201,565.
---------------------------------------------------------------------------

In the following years, the Department assumes for each insurance
company, an in-house attorney would spend two hours of legal staff time
reviewing. This results in an estimated cost of approximately $68,500
in subsequent years.\522\
---------------------------------------------------------------------------

\522\ This is estimated as: (215 insurance companies x 2 hours)
= 430 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (215 insurance companies x 2 hours) x $159.34 =
$68,516.
---------------------------------------------------------------------------

The proposed rule would also require insurance companies to review
each of the independent producer's recommendations before an annuity is
issued to a retirement investor to ensure compliance with the Impartial
Conduct Standards and other conditions of this exemption. Given the
requirements established in both the 2010 and 2020 versions of Model
Regulation 275, the Department expects that reviewing recommendations
before an annuity is issued is common industry practice. Accordingly,
the Department expects that for those insurance companies already
complying with Model Regulation 275, the cost to review and comply with
the proposed amendment would be small. The Department lacks data on how
many recommendations are already reviewed or how many additional
recommendations would need to be reviewed based on this proposal. The
Department requests data and comment to inform its estimate.
The proposed amendments would also require insurance companies to
provide their complete policies and procedures to the Department upon
request. As discussed above for PTE 2020-02, the Department estimates
that it would request 165 policies and procedures in the first year and
50 in subsequent years. Assuming that the number of requests for the
entities covered under PTE 2020-02 is equivalent to the number of
requests for the entities covered under PTE 84-24, the Department
assumes that it will request two policies and procedures from insurers
in the first year and one request in subsequent years, on average.\523\
This results in an estimated cost of approximately $30 in the first
year \524\ and $15 in subsequent years.\525\
---------------------------------------------------------------------------

\523\ The number of requests in the first year is estimated as
215 insurance companies x (165 requests in PTE 2020-02/19,290
financial institutions in PTE 2020-02) = 2 requests. The number of
requests in subsequent years is estimated as: 215 insurance
companies x (50 requests in PTE 2020-02/19,290 financial
institutions in PTE 2020-02) = 1 request.
\524\ The burden is estimated as: (2 x (15 minutes / 60
minutes)) = 0.5 hours. A labor rate of $63.45 is used for a clerical
worker. The labor rate is applied in the following calculation: (2 x
(15 minutes / 60 minutes)) x $63.45 = $32.
\525\ The burden is estimated as: (1 x (15 minutes / 60
minutes)) = 0.25 hours. A labor rate of $63.45 is used for a
clerical worker. The labor rate is applied in the following
calculation: (1 x (15 minutes / 60 minutes)) x $63.45 = $16.
---------------------------------------------------------------------------

The Department believes that policies and procedures requested by
the Department under the proposed PTE 84-24 would be accounted for in
the paperwork burden of PTE 2020-02. Accordingly, this analysis does
not include an additional burden.
The Department estimates that satisfying the requirements described
above would result in an estimated total cost of approximately $0.2
million in first year and $68,500 in subsequent years.\526\
---------------------------------------------------------------------------

\526\ The cost in the first year is estimated as: ($201,565 to
develop policies and procedures + $32 to provide policies and
procedures upon request) = $201,597. The cost in subsequent years is
estimated as: ($68,516 to review policies and procedures + $16 to
provide policies and procedures upon request) = $68,532. Note, the
total values may not equal the sum of the parts due to rounding.

---------------------------------------------------------------------------

[[Page 75957]]

Costs Associated With Retrospective Review
The proposed amendment would require insurance companies to conduct
a retrospective review at least annually. The review would be required
to be reasonably designed to prevent violations of and achieve
compliance with (1) the Impartial Conduct Standards, (2) the terms of
this exemption, and (3) the policies and procedures governing
compliance with the exemption. The review would be required to evaluate
the effectiveness of the supervision system, any noncompliance
discovered in connection with the review, and corrective actions taken
or recommended, if any. The retrospective review must also include a
review of independent producers' rollover recommendations and the
required rollover disclosure. As part of this review, the insurance
company must prudently determine whether to continue to permit
individual independent producers to sell the insurance company's
annuity contracts to retirement investors. Additionally, the insurance
company must update the policies and procedures as business,
regulatory, and legislative changes and events dictate, and to ensure
they remain prudently designed, effective, and comply with the
exemption.
The insurance company annually must provide a written report to a
Senior Executive Officer which details the review. The Senior Executive
must annually certify that (A) the officer has reviewed the report of
the retrospective review report; (B) the insurance company has, within
90 days of discovery, reported to the Department of the Treasury any
non-exempt prohibited transaction discovered by the insurance company
in connection with investment advice covered under Code section
4975(e)(3)(B), advised the independent producer of the violation and
any resulting excise taxes owed under Code section 4975, and notified
the Department of Labor of the violation via email; (C) the insurance
company has established policies and procedures prudently designed to
ensure that independent producers achieve compliance with the
conditions of this exemption, and has updated and modified the policies
and procedures as appropriate after consideration of the findings in
the retrospective review report; and (D) the insurance company has in
place a prudent process to modify such policies and procedures.
Insurers would also be required to provide the independent producer
with the underlying methodology and results of the retrospective
review. The Department assumes that the insurance company would provide
the methodology and results electronically.
The Department lacks data on the average number of independent
producers selling annuities per insurance company. For the purposes of
this analysis, the Department assumes that, on average, each
independent producer sells the products of three insurance companies.
From each of these insurance companies, they may sell multiple
products. As such, the Department assumes that each year, insurance
companies would need to prepare a total 12,000 retrospective
reviews,\527\ or on average, each insurance company would need to
prepare approximately 56 retrospective reviews.\528\ The Department
requests comment on this estimate.
---------------------------------------------------------------------------

\527\ This is estimated as: (4,000 independent producers x 3
insurance companies covered) = 12,000 retrospective reviews.
\528\ This is estimated as: (12,000 retrospective reviews/215
insurance companies) = 55.8 retrospective reviews, on average.
---------------------------------------------------------------------------

The Department assumes that, for each independent producer selling
an insurance company's products, an in-house attorney at the insurance
company would spend one hour of legal staff time, on average,
conducting and drafting the retrospective review. This results in an
estimated cost of approximately $1.9 million.\529\
---------------------------------------------------------------------------

\529\ This is estimated as: (12,000 retrospective reviews x 1
hour) = 12,000 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (12,000 retrospective reviews x 1 hour) x $159.34 =
$1,912,080.
---------------------------------------------------------------------------

The Department assumes it would take a Senior Executive Officer 15
minutes to review and certify the report. This results in an estimated
annual cost of approximately $0.4 million.\530\
---------------------------------------------------------------------------

\530\ This is estimated as: (12,000 retrospective reviews x (15
minutes / 60 minutes)) = 3,000 hours. A labor rate of $128.11 is
used for a senior executive officer. The labor rate is applied in
the following calculation: (12,000 retrospective reviews x (15
minutes / 60 minutes)) x $128.11 = $384,330.
---------------------------------------------------------------------------

The Department assumes that the insurance company would provide the
methodology and results electronically. The Department requests comment
on this assumption. The Department estimates that it would take
clerical staff five minutes each to prepare and send each of the
estimated 12,000 retrospective reviews. This results in an estimated
annual cost of approximately $63,500.\531\ The Department expects that
the results would be provided electronically, thus the Department does
not expect there to be any material costs with providing independent
producers with the retrospective review.
---------------------------------------------------------------------------

\531\ This is estimated as: (12,000 retrospective reviews x (5
minutes / 60 minutes)) = 1,000 hours. A labor rate of $63.45 is used
for a clerical worker. The labor rate is applied in the following
calculation: (12,000 retrospective reviews x (5 minutes / 60
minutes)) x $63.45 = $63,450.
---------------------------------------------------------------------------

The Department estimates that satisfying the requirements for
retrospective reviews would result in an estimated total annual cost of
approximately $2.4 million.\532\
---------------------------------------------------------------------------

\532\ The annual cost is estimated as: ($1,912,080 to conduct
the retrospective review + $384,330 for the review of the
retrospective review + $63,450 for the provision of the report to
Independent Producers) = $2,359,860.
---------------------------------------------------------------------------

Costs Associated With Recordkeeping
The proposed amendment would change the current recordkeeping
requirements to incorporate a new provision that is similar to the
recordkeeping provision in PTE 2020-02. This requirement would replace
the more limited existing recordkeeping requirement in the current
version of PTE 84-24, which requires sufficient records to demonstrate
that the conditions of the exemption have been met. The Department does
not have data on how many pension consultants, insurance companies, and
investment company principal underwriters would continue to rely on PTE
84-24 as amended without also complying with the amended PTE 2020-02.
In this analysis, the Department assumes that all of the pension
consultants and investment company principal underwriters continuing to
rely on the amended PTE 84-24 would also rely on the amended on the PTE
2020-02. Thus, to avoid double counting the compliance cost, this
analysis does not include the cost associated with the proposed
recordkeeping requirement for these entities.
For this analysis, the Department only considers the cost for
insurance companies and independent producers complying with the
proposed recordkeeping requirements. The Department estimates that the
additional time needed to maintain records to be consistent with the
exemption would require an independent producer two hours, resulting in
an estimated cost of $1.3 million.\533\
---------------------------------------------------------------------------

\533\ This is estimated as: (4,000 independent producers + 215
insurance companies) x 2 hours = 8,430 hours. A labor rate of
$158.94 is used for an independent producer and $159.34 for a legal
professional at an insurance company. The labor rate is applied in
the following calculation: (4,000 independent producers x 2 hours x
$159.34) + (215 insurance companies x 2 hours x $158.34) =
$1,340,036.
---------------------------------------------------------------------------

The proposed amendment would require fiduciaries engaging in all
transactions covered by the exemption to maintain records necessary for
the

[[Page 75958]]

following entities to determine whether the conditions of this
exemption have been met.
(1) any authorized employee of the Department or the IRS or another
state or federal regulator,
(2) any fiduciary of a plan that engaged in a transaction pursuant
to this exemption,
(3) any contributing employer and any employee organization whose
members are covered by a plan that engaged in a transaction pursuant to
this exemption, or
(4) any participant or beneficiary of a plan or beneficial owner of
an IRA acting on behalf of the IRA that engaged in a transaction
pursuant to this exemption.
The Department does not have data on how often independent
producers would receive requests for records. For the purposes of this
analysis, the Department assumes that, on average, independent producer
would receive 10 requests per year and that preparing and sending each
request would take a legal professional, on average, 30 minutes. Based
on these assumptions, the Department estimates that the proposed
amendments would result in an annual cost of approximately $3.2
million.\534\ The Department requests comment on how often financial
institutions would receive requests for records, who would prepare such
reports, and how long the preparation of such records would take.
---------------------------------------------------------------------------

\534\ The burden is estimated as: (4,000 independent producers x
10 requests) x (30 minutes / 60 minutes) = 20,000 hours. A labor
rate of $158.94 is used for an independent producer. The labor rate
is applied in the following calculation: [(4,000 independent
producers x 10 requests) x (30 minutes / 60 minutes)] x $158.94 =
$3,178,800.
---------------------------------------------------------------------------

This results in a total annual cost of $4.5 million associated with
recordkeeping.\535\
---------------------------------------------------------------------------

\535\ The annual cost is estimated as: ($1,340,036 to maintain
records + $3,178,800 to distribute records) = $4,518,836.
---------------------------------------------------------------------------

Summary of Total Cost for the Proposed Amendments to PTE 84-24
The Department estimates that in order to meet the additional
conditions of the amended PTE 84-24, affected entities would incur a
total cost of $18.1 million in the first year and $15.3 million in
subsequent years.\536\
---------------------------------------------------------------------------

\536\ The first-year total cost includes: ($1,671,795 for rule
review + $9,355,525 for general disclosures + $201,597 for policies
and procedures + $2,359,860 for the retrospective review +
$4,518,836 for recordkeeping) = $18,107,613. The total cost in
subsequent years includes: ($8,355,401 for disclosures + $68,532 for
policies and procedures + $2,359,860 for the retrospective review +
$4,518,836 for recordkeeping) = 15,302,629. Note, the total values
may not equal the sum of the parts due to rounding.
---------------------------------------------------------------------------

Costs Associated With the Mass Amendments
The following analysis summarizes the proposed changes and
associated costs to PTE 75-1, PTE 77-4, PTE 1980-3, and 86-128. For
more information on the cost estimates, refer to the Paperwork
Reduction Act statements for the proposed amendments, published
elsewhere in today's edition of the Federal Register.
Costs Associated With PTE 75-1
Summary of Affected Entities
The amendment to PTE 75-1 would affect banks, reporting dealers,
and broker-dealers registered under the Security Exchange Act of 1934.
As discussed in the Affected Entities section above, the Department
estimates that 1,894 broker-dealers and 2,048 banks would use PTE 75-
1.\537\
---------------------------------------------------------------------------

\537\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

Costs Associated With Disclosure Requirements in Part V
The Department proposes to amend PTE 75-1 Part V to allow an
investment advice fiduciary to receive reasonable compensation for
extending credit to a plan or IRA to avoid a failed purchase or sale of
securities involving the plan or IRA if (1) the potential failure of
the purchase or sale of the securities is not caused by such fiduciary
or an affiliate, and (2) the terms of the extension of credit are at
least as favorable to the plan or IRA as the terms available in an
arm's length transaction between unaffiliated parties. Prior to the
extension of credit, the plan or IRA receives written disclosure,
including the interest rate or other fees that will be charged on the
credit extension as well as the method of determining the balance upon
which interest will be charged. The Department believes that it is a
usual and customary business practice to maintain records required to
demonstrate compliance with SEC-mandated disclosure distribution
regulations. The Department believes that this new requirement is
consistent with the disclosure requirement mandated by the SEC in 17
CFR 240.10b-16(1) for margin transactions.\538\ Therefore, the
Department concludes that this requirement produces no additional
burden to the public.
---------------------------------------------------------------------------

\538\ Employee Benefits Security Administration, Regulating
Advice Markets Definition of the Term ``Fiduciary'' Conflicts of
Interest--Retirement Investment Advice Regulatory Impact Analysis
for Final Rule and Exemptions, pp. 258, (April 2016), https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf.
---------------------------------------------------------------------------

Costs Associated With Recordkeeping in Parts II and V
The Department is also amending PTE 75-1 Parts II and V to adjust
the recordkeeping requirement to shift the burden from plans and IRAs
to financial institutions. The amended class exemption requires
financial institutions engaging in the exempted transactions (rather
than the plans or IRAs) to maintain all records pertaining to such
transactions for six years and provide access to the records upon
request to the specified parties.
The Department has estimated that the amount of time needed for
financial professional to maintain records for the financial
institutions to be consistent with the exemption and to make the record
available for inspection would require four hours, on average,
resulting in an estimated cost of $3.0 million.\539\
---------------------------------------------------------------------------

\539\ The burden is estimated as: (3,942 financial institutions
x 4 hours) = 15,768 hours. A labor rate of $190.63 is used for a
financial manager. The labor rate is applied in the following
calculation: (3,942 x 4 hours) x $190.63 = $3,005,854.
---------------------------------------------------------------------------

Costs Associated With Removing Fiduciary Investment Advice From Parts
III and IV
Finally, the Department is proposing to amend PTE 75-1 Parts III
and IV, which currently provide relief for investment advice
fiduciaries, by removing fiduciary investment advice from the covered
transactions. Investment advice providers would instead have to rely on
the amended PTE 2020-02 for exemptive relief covering investment advice
transactions. The Department believes that since investment advice
providers were already required to provide records and documentation
under PTE 2020-02, this amendment would not result in additional costs.
Summary of Total Cost for the Proposed Amendments to PTE 75-1
The Department estimates that in order to meet the additional
conditions of the amended PTE 75-1, affected entities would annually
incur a total cost of $3.0 million.\540\
---------------------------------------------------------------------------

\540\ This cost is the estimated $3,005,854 cost to maintain
recordkeeping.
---------------------------------------------------------------------------

Costs Associated With PTE 77-4, PTE 80-83, PTE 83-1
Summary of Affected Entities
The amendment to PTE 77-4 would affect mutual fund companies. As
discussed in the Affected Entities section, the Department estimates
that

[[Page 75959]]

825 mutual fund companies would be affected by the amended PTE 77-
4.\541\
---------------------------------------------------------------------------

\541\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

PTE 80-83 allows banks to purchase, on behalf of employee benefit
plans, securities issued by a corporation indebted to the bank that is
a party in interest to the plan. The Department estimates that 25
fiduciary-banks with public offering services would be affected by the
amended PTE 80-83.\542\
---------------------------------------------------------------------------

\542\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

PTE 83-1 provides relief for the sale of certificates in an initial
issuance of certificates by the sponsor of a mortgage pool to a plan or
IRA when the sponsor, trustee, or insurer of the mortgage pool is a
fiduciary with respect to the plan or IRA assets invested in such
certificates.
Summary of Total Cost for the Proposed Amendments to PTE 77-4, PTE 80-
83, and PTE 83-1
The Department is proposing to amend PTE 77-4, PTE 80-83, and PTE
83-1 which currently include relief for investment advice fiduciaries,
by removing fiduciary investment advice from the covered transactions.
Investment advice providers would instead have to rely on the amended
PTE 2020-02 for exemptive relief covering investment advice
transactions. The Department believes that since investment advice
providers were already required to provide documentation under PTE
2020-02, these amendments would not result in additional costs.
Costs Associated With PTE 86-128
The Department is proposing to amend Section VI of PTE 86-128 to
require financial institutions to maintain for six years the records
necessary for the Department, the IRS, the plan fiduciary, the
contributing employer, or employee organization whose members are
covered by the plan, plan participants, plan beneficiaries, and IRA
owners to determine whether conditions of this exemption have been met.
In addition, the amendment would extend and impose conditions on
IRAs. Section III of PTE 86-128 imposes requirements on investment
advice providers and the independent plan fiduciaries authorizing the
IRA to engage in the transactions with the investment advice providers
(``authorizing fiduciary'') under the conditions contained in the
exemption.
Summary of Affected Entities
The amendment to PTE 86-128 would affect fiduciaries of employee
benefit plans that effect or execute securities transactions and
independent plan fiduciaries that authorize the plan or IRA to engage
in the transactions. As discussed in the Affected Entities section, the
Department estimates that 1,894 investment advice providers would be
affected by the proposed amendments to PTE 86-128. Additionally, the
Department estimates that 10,000 IRAs will engage in transactions
covered under this class exemption, of which 210 are new IRAs.\543\
---------------------------------------------------------------------------

\543\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

With the removal of exemptive relief for investment advice, the
Department requests comment on what types of financial institutions
would continue to rely on PTE 86-128, as well as how many entities
would do so. Additionally, the Department requests comment on how many
plans or managed IRAs would receive services from these entities.
Costs Associated With Recordkeeping
Each of the estimated 1,894 investment advice providers will
maintain these records on behalf of their client plans in their normal
course of business. The Department estimates that the additional time
needed to maintain records consistent with the exemption would require
a financial professional 30 minutes annually, resulting in an estimated
cost of $0.2 million.\544\ The Department estimates that the proposed
amendments would also require 15 minutes of clerical time to prepare
and send the documents for inspection, resulting estimated cost of
approximately $30,000.\545\
---------------------------------------------------------------------------

\544\ The burden is estimated as: (1,894 investment advice
providers x (30 minutes / 60 minutes)) = 947 hours. A labor rate of
$190.63 is used for a financial manager. The labor rate is applied
in the following calculation: (1,894 investment advice providers x
(30 minutes / 60 minutes)) x $190.63 per hour = $180,527.
\545\ The burden is estimated as: (1,894 investment advice
providers x (15 minutes / 60 minutes)) = 474 hours. A labor rate of
$63.45 is used for a clerical worker. The labor rate is applied in
the following calculation: (1,894 investment advice providers x (15
minutes / 60 minutes)) x $63.45 per hour = $30,044.
---------------------------------------------------------------------------

Costs Associated With Written Authorization From the Authorizing
Fiduciary to the Investment Advice Provider
Authorizing fiduciaries of IRAs entering into a relationship with
an investment advice provider are required to provide the investment
advice provider with advance written authorization to perform
transactions for the IRA. The Department estimates that there are
approximately 210 IRAs that are new or that enter new arrangements each
year.\546\ Therefore, the Department estimates that approximately 210
authorizing fiduciaries are expected to send an advance written
authorization. It is assumed that a legal professional will spend 15
minutes per IRA reviewing the disclosures and preparing an
authorization form, resulting in an estimated cost of approximately
$8,400.\547\
---------------------------------------------------------------------------

\546\ The Department estimates that there are 10,000 managed
IRAs. Of these managed IRAs, the Department assumes that 2.1 percent
are new accounts or new financial advice relationships See Cerulli
Associates. ``U.S. Retirement End-Investor 2023: Personalizing the
401(k) Investor Experience.'' Exhibit 6.02. The Cerulli Report., and
that 100 percent of these managed IRAs will engage in transactions
covered under this class exemption. These assumptions are applied in
the following manner: 10,000 managed IRAs x 2.1 percent of plans are
new x 100 percent of plans with broker-dealer relationships = 210
IRAs.
\547\ The burden is estimated as: (210 IRAs x (15 minutes / 60
minutes) per IRA) = 52.5 hours. A labor rate of $159.34 is used for
a legal professional. The labor rate is applied in the following
calculation: (210 IRA x (15 minutes / 60 minutes)) per IRA) x
$159.34 per hour = $8,365.
---------------------------------------------------------------------------

As discussed at the beginning of the cost section, the Department
assumes that 5.8 percent of these authorizations will be mailed. For
paper and electronic authorizations, the Department assumes that
clerical staff will spend five minutes per participant to prepare and
send the authorization, resulting in an estimated labor cost of
approximately $1,100.\548\ It is assumed that the authorization will be
two pages and paper authorizations will cost $0.76 each, which results
in a cost burden of approximately $9.\549\
---------------------------------------------------------------------------

\548\ The burden is estimated as: (210 IRA x (5 minutes / 60
minutes) per IRA) = 17.5 hours. A labor rate of $63.45 is used for a
clerical worker. The labor rate is applied in the following
calculation: (210 IRA x (5 minutes / 60 minutes) per IRA) x $63.45 =
$1,110.
\549\ The burden is estimated as: (2 pages x $0.05 per page) +
$0.66 for postage = $0.76; The mailing rate is applied in the
following calculation: (210 authorizations for IRAs x 5.8%) x $0.76
= $9.
---------------------------------------------------------------------------

This results in a total cost for the written authorization of
approximately $9,500.\550\
---------------------------------------------------------------------------

\550\ This is estimated as: ($8,365 to prepare the written
authorization + $1,110 to send the written authorization + $9 for
material costs) = $9,485.
---------------------------------------------------------------------------

Cost Associated With the Provision of Materials for the Evaluation of
Authorization of Transaction
Prior to a written authorization, the investment advice provider
must provide the authorizing fiduciary with a copy of the exemption, a
form for termination of authorization, a description of broker's
placement

[[Page 75960]]

practices, and any other reasonably available information. The
Department assumes that this information is readily available. As
discussed at the beginning of the cost section, the Department assumes
that 5.8 percent of these authorizations will be mailed, while the
remaining 94.2 percent will be delivered electronically. A clerical
staff member is assumed to require five minutes per participant to
electronically send and mail the required information to the
authorizing fiduciary. This information will be sent to the authorizing
fiduciaries of 210 IRAs entering into an agreement with an investment
advice provider. Based on the above, the Department estimates that this
requirement results in estimated cost of approximately $1,100.\551\ It
is assumed that this information will be seven pages and paper
distribution will cost $1.01 each, which results in an estimated cost
of approximately $12.\552\
---------------------------------------------------------------------------

\551\ The burden is estimated as: (210 IRAs x (5 minutes / 60
minutes) per IRA) = 17.5 hours. A labor rate of $63.45 is used for a
clerical worker. The labor rate is applied in the following
calculation: (210 IRAs x (5 minutes / 60 minutes) per IRA) x $63.45
= $1,110.
\552\ The burden is estimated as: (7 pages x $0.05 per page) +
$0.66 for postage = $1.01; The mailing rate is applied in the
following calculation: (210 materials packages for IRAs x 5.8%) x
$1.01 = $12.
---------------------------------------------------------------------------

This results in a total cost of approximately $1,100.\553\
---------------------------------------------------------------------------

\553\ This is estimated as: ($1,110 to prepare the information +
$12 for materials and postage) = $1,123.
---------------------------------------------------------------------------

Costs Associated With the Provision of an Annual Termination Form
Investment advice providers must annually supply each authorizing
fiduciary with a form expressly providing an election to terminate the
written authorization. It is assumed that legal professionals with each
of the estimated 1,894 investment advice providers would spend one hour
preparing the termination forms, which results in an estimated cost of
approximately $0.3 million.\554\
---------------------------------------------------------------------------

\554\ The burden is estimated as: (1,894 investment advice
providers x 1 hour per broker-dealer) = 1,894 hours; A labor rate of
$159.34 is used for a legal professional. The labor rate is applied
in the following calculation: (1,894 investment advice providers x 1
hour per broker-dealer) x $159.34 per hour = $301,790.
\555\ For more information on how the number of IRAs is
estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

As discussed in the Affected Entities section, the Department
estimates that 10,000 IRAs will engage in transactions covered under
this class exemption and would receive the form.\555\ As discussed at
the beginning of the cost section, the Department assumes that 5.8
percent of IRAs will receive paper copies of the termination forms. The
Department estimates that clerical staff will spend five minutes per
IRA preparing and distributing the paper and electronic termination
forms, resulting in an estimated cost of approximately $52,900.\556\ It
is assumed that the form will be two pages, so paper copies will cost
$0.76 each for materials and postage, which results in a cost burden of
approximately $441.\557\
---------------------------------------------------------------------------

\556\ The burden is estimated as: (10,000 IRAs x (5 minutes / 60
minutes) per IRA) = 833 hours. A labor rate of $63.45 is used for a
clerical worker. The labor rate is applied in the following
calculation: (10,000 IRAs x (5 minutes / 60 minutes) per IRA) x
$63.45 per hour = $52,875.
\557\ The mailing cost is estimated as: (2 pages x $0.05 per
page) + $0.66 for postage = $0.76; The mailing rate is applied in
the following calculation: (10,000 IRAs x 5.8%) x $0.76 = $441.
---------------------------------------------------------------------------

This results in a total cost of 0.4 million.\558\
---------------------------------------------------------------------------

\558\ This cost is estimated as: ($301,790 to prepare the
termination form + $52,875 to distribute the termination form + $441
for material and postage costs) = $355,106.
---------------------------------------------------------------------------

Cost Associated With Transaction Reporting
The investment advice provider engaging in a covered transaction
must give the authorizing fiduciary either a confirmation slip for each
securities transaction or a quarterly report. As discussed above, the
provision of the confirmation is already required under SEC
regulations. Therefore, if the transaction reporting requirement is
satisfied by sending confirmation slips or quarterly reporting, no
additional hour and cost burden will occur.
Costs Associated With the Annual Statement
Investment advice providers are required to send to each
authorizing fiduciary an annual report that contains the same
information as the quarterly report, including all security
transaction-related charges, the brokerage placement practices, and a
portfolio turnover ratio. As such, the Department does not expect that
financial institutions would incur an additional burden to produce the
annual statement, aside from what is already incurred to produce the
quarterly report. Additionally, the Department assumes that this
information could be sent with the annual termination form. Therefore,
the clerical staff hours required to prepare and distribute the report,
as well as postage costs, have been included with the provision of
annual termination form requirement, and no additional burden has been
reported. It is assumed that the annual statement will be five pages,
and the paper and print costs are $0.25 each. Therefore, the overall
cost burden for the paper and print costs are approximately $145.\559\
---------------------------------------------------------------------------

\559\ The mailing cost is estimated as: (5 pages x $0.05 per
page) = $0.25. The mailing cost is applied in the following
calculation: (10,000 IRAs x 5.8%) x $0.25 = $145.
---------------------------------------------------------------------------

Costs Associated With the Report of Commissions Paid
A discretionary trustee must provide an authorizing fiduciary with
an annual report that separately shows the commissions paid to
affiliated brokers and non-affiliated brokers on both a total dollar
basis and a cents-per-share basis. The clerical hour burden to prepare
and distribute the report is included with the provision of annual
termination form requirement, because both items are required to be
sent annually. However, the collecting and generating information for
the report of commissions paid is reported as a cost burden.
An investment advice provider that is a discretionary trustee must
provide each of the 10,000 authorizing fiduciaries with this annual
commissions report.\560\ As discussed at the beginning of the cost
section, the Department assumes that 5.8 percent of investment advice
providers will mail the annual reports. As the report is sent annually,
it is assumed that it could be sent with the transaction report,
therefore postage costs are not counted here. It is assumed that the
report will be two pages, and the paper and print costs are $0.10 each.
Therefore, the overall cost burden of the paper and print costs is
approximately $58.\561\
---------------------------------------------------------------------------

\560\ For more information on how the number of IRAs is
estimated, refer to the Affected Entities section.
\561\ The mailing cost is estimated as: (2 pages x $0.05 per
page) = $0.10. The mailing cost is applied in the following
calculation: (10,000 IRAs x 5.8%) x $0.10 = $58.
---------------------------------------------------------------------------

Investment advice providers are required to report the total of all
transaction-related charges incurred by the plan in connection with
covered transactions, the allocation of such charges among various
persons, as well as a conspicuous statement about the negotiability of
brokerage commissions and an estimate of future commission rates to the
plan fiduciaries. The information must be tracked, assigned to specific
plans, and reported. It is assumed that it costs the investment advice
provider $3.30 per IRA to track this information.\562\ With
approximately 10,000 affected IRAs, this results in a cost burden of
approximately $33,000 annually.\563\
---------------------------------------------------------------------------

\562\ This estimate is based on information from a Request for
Information and from industry sources.
\563\ This burden is estimated as: (10,000 IRAs x $3.30) =
$33,000.

---------------------------------------------------------------------------

[[Page 75961]]

This results in a total cost of approximately $33,100.\564\
---------------------------------------------------------------------------

\564\ This cost is estimated as: ($58 for material and post
costs + $33,000 to track relevant information for mailing annual
reports) = $33,058.
---------------------------------------------------------------------------

Summary of Total Cost for the Proposed Amendments to PTE 86-128
The Department estimates that in order to meet the additional
conditions of the amended PTE 86-128, affected entities would annually
incur a total cost of $0.6 million.\565\
---------------------------------------------------------------------------

\565\ The annual cost is estimated as: ($180,527 for
recordkeeping + $30,044 for preparing and sending documents for
inspection + $9,485 for the written authorization + $1,123 for the
materials for the evaluation of authorization of transaction +
$355,106 for the annual termination form + $145 for materials for
the annual statement + $33,058 for the report on commissions paid) =
$609,487. Note, the total may not equal the sum of components due to
rounding.
---------------------------------------------------------------------------

9. Regulatory Alternatives

The Department considered various alternative approaches in
developing this proposal. Those alternatives are discussed below.
Broader Rule
The Department considered proposing a definition of an investment
advice fiduciary that would be broader in scope, similar to the 2016
Final Rule. In promulgating the 2016 Final Rule, the Department
expanded the definition of a fiduciary beyond the five-part test
included in the 1975 regulation. The 2016 Final Rule covered as
fiduciary investment advice:
recommendations by a person who represents or acknowledges
their fiduciary status under the Act or the Code;
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;
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; and
recommendations to buy, sell or hold assets held in IRAs
and non-ERISA plans.
In developing this proposal, the Department has crafted a more
focused definition that would consider the scope issues identified by
the Fifth Circuit while still protecting retirement investors. The
Department was also cognizant of stated concerns of some stakeholders
that the compliance costs associated with the broader 2016 Final Rule
would lead to adverse consequences such as increases in the cost of
investment advice and potential loss of access by retirement investors
with small account balances.
The current proposal bases investment advice fiduciary status on
circumstances that indicate the retirement investor may place trust and
confidence in the recommendation as a professional recommendation based
upon the particular needs of the investor. The proposal reflects the
Department's interpretation of the text of the statute, as informed by
the Fifth Circuit's emphasis on relationships of trust and confidence.
Accordingly, the proposed definition, unlike the 2016 Final Rule, does
not automatically treat as fiduciary advice all compensated
recommendations directed to a specific retirement investor regarding
the advisability of a particular investment or management decision with
respect to securities or other investment property of the plan or IRA.
For example, an entity can satisfy the test under (c)(1)(ii) of this
proposal, only if they satisfy each part, including the requirement
that the retirement adviser provides investment advice on a regular
basis as part of their business. This is more limiting than the 2016
Final Rule, and it ensures that individuals like human resource
professionals discussing 401(k) investment options, and the car
salesman who recommends a retiree cash in their 401(k) for a new
convertible are not caught up in the definition. In publishing this
proposal, the Department was mindful of concerns with respect to the
2016 Final Rule, specifically regarding access to investment advice for
all retirement investors.
No Amendment to PTE 2020-02
The Department considered not amending PTE 2020-02 and leaving the
exemption in its present form. The Department supports the existing PTE
2020-02 and has retained its core components in the amendment,
including the Impartial Conduct Standards and the requirement for
strong policies and procedures. These are fundamental investor
protections that are necessary to ensure the financial institutions and
investment professionals provide investment advice that is in the best
interest of retirement investors. The retention of the core elements of
PTE 2020-02 will also ensure that any work financial institutions have
done to comply with PTE 2020-02 will prepare them to comply with the
amended exemption.
However, the Department believes that additional protections are
necessary to ensure that fiduciary investment advice providers adhere
to the stringent standards outlined in PTE 2020-02. Therefore, as
discussed in detail earlier, the proposed amendments clarify and
tighten the existing text of PTE 2020-02 to enhance the disclosure
requirements. In order to more fully protect retirement investors, the
Department is proposing additional disclosures to ensure that investors
have sufficient information to make informed decisions about the costs
of an investment advice transaction and about the significance and
severity of the investment advice fiduciary's conflicts of interest.
In addition to the need for additional protections, upon reviewing
the implementation of PTE 2020-02, the Department determined it is
necessary to provide financial institutions and investment
professionals with additional guidance on implementing the exemption's
core elements. As a result, the proposed amendment would also provide
more guidance on how to best comply with the Impartial Conduct
Standards and implement the policies and procedures condition.
No Amendment to PTE 84-24
The Department is aware that insurance companies sometimes sell
insurance products through independent agents that sell multiple
insurance companies' products. In connection with this business
structure, when the Department finalized PTE 2020-02, the Department
explained that insurance companies could rely on either PTE 2020-02 or
PTE 84-24. As a result, the Department considered the option of leaving
PTE 84-24 unaltered.
Through outreach with financial institutions after issuing PTE
2020-20, the Department heard concerns from insurance companies that
distribute annuities through independent agents and believed that they
may not be able to effectively comply with PTE 2020-02. This is
primarily due to the difficulty insurers confront when overseeing
independent insurance producers who do not work for any one insurance
company and are not obligated to recommend only one company's
annuities. The Department understands that this compliance issue has
been resolved by reliance on PTE 84-24.
However, the Department is concerned that PTE 84-24, if left in its
current state, offers few of the protections provided by PTE 2020-02.
Further, insurance companies' continued reliance on PTE 84-24 instead
of PTE 2020-02 could prevent retirement investors from being able to
fully compare varying products and services. In order to address these

[[Page 75962]]

concerns, the Department proposes to amend PTE 84-24 to provide an
exemption to independent insurance producers to sell annuities or other
insurance products. The proposed amendment addresses insurance industry
concerns regarding the workability of PTE 2020-02's conditions, while
providing a tailored exemption for insurance companies and independent
agents that ensures that fiduciary investment advice with respect to
all products is delivered pursuant to the same core principles that
protect retirement investors.
Including an Individual Contract Requirement
The Department also considered amending PTE 2020-02 to include an
enforceable written contract between the financial institution and the
retirement investor. While the predecessor to PTE 2020-02, the Best
Interest Contract Exemption,\566\ required such an enforceable
contract, PTE 2020-02 did not include a contract or warranty provision
enforceable by IRA owners.
---------------------------------------------------------------------------

\566\ See 81 FR 21002 (Apr. 8, 2016).
---------------------------------------------------------------------------

In crafting the proposed amendment, the Department reviewed the
decision to not include an enforceable written contract in PTE 2020-02
but concluded that the better course of action was not to include such
a requirement. Given that the Fifth Circuit found that the contractual
requirement for IRAs exceeded the scope of the Department's authority,
a proposal attempting to reinstate that requirement would likely be
invalidated in the Fifth Circuit, leading to uncertainty in the
regulated community. Such uncertainty could lead to the potential for
disruption in the market for investment advice, and in crafting an
exemption that does not include an enforceable written contract, the
Department intends to avoid this potential disruption.
Instead, the exemption includes many protective measures and
targeted opportunities for the Department to review compliance within
its existing oversight and enforcement authority under ERISA. For
example, financial institutions' reports regarding their retrospective
review are required to be certified by a senior executive officer of
the financial institution and provided to the Department within 10
business days of request. The exemption also includes eligibility
provisions, which the Department believes will encourage financial
institutions and investment professionals to maintain an appropriate
focus on compliance with legal requirements and with the exemption.
The Department also intends to ensure that financial institutions
relying on the exemption comply with excise tax provisions. The
Department has proposed to bolster this protection by requiring
financial institutions, as part of their retrospective review, to
report to the Department of the Treasury any non-exempt prohibited
transactions in connection with fiduciary investment advice, correct
those transactions, and pay any resulting excise taxes. Further, the
proposed amendment would add failure to report, correct, and pay an
excise tax to the list of factors that could make a financial
institution ineligible to rely on PTE 2020-02. The Department believes
these additional conditions would provide important protections to
retirement investors by enhancing the existing protections of PTE 2020-
02.
Relying on Disclosure Alone
Some commenters responding to the 2015 NPRM \567\ argued that
disclosure of potential adviser conflicts is, by itself, sufficiently
protective of plan and IRA investors' interests. According to these
comments, if conflicts are transparent, then investors can choose
between more and less conflicted advisers. The commenters advocated
that the Department should issue broad PTEs that exempt all or almost
all existing and potential adviser business models and compensation
arrangements on the sole condition that material conflicts be
disclosed. The Department does not believe that disclosure alone is
adequately protective of retirement investors. The Department chose not
to take that approach in the 2016 Final Rule and chooses not to take
that approach with this proposal.
---------------------------------------------------------------------------

\567\ See FR 21927 (Apr. 20, 2015).
---------------------------------------------------------------------------

As discussed above in the ``Need for Regulatory Action'' section,
most retirement investors are not financially sophisticated, and even
those who are financially sophisticated are unlikely to detect lapses
in the quality of financial advice. Due to the complexity of some
disclosures as well as investors' propensity to ignore lengthy
disclosures, disclosures often fail to accomplish their goals.
Retirement investors regularly fail to understand advisers' conflicts,
let alone the impacts that those conflicts could have on their
investments. A large body of research discussed in the RIA for the 2016
Final Rule suggested that disclosures alone can have, at best, a minor
impact on conflicts, and can sometimes exacerbate the conflicted
behavior.\568\ Advisers may inflate the bias in their advice to
counteract any discounting that might occur because of the disclosure
of conflicts.\569\ In addition, even when inexpert retirement investors
receive easy-to-understand disclosures alerting them to conflicts,
there is no ready way for them to use that knowledge to improve
investment outcomes, inasmuch as they are still dependent on the
adviser's recommendations and expertise.
---------------------------------------------------------------------------

\568\ See FR 20946, 20950-51 (Apr. 8, 2016).
\569\ George Loewenstein, Daylian M. Cain & Sunita Sah, The
Limits of Transparency: Pitfalls and Potential of Disclosing
Conflicts of Interest, 101(3) American Economic Review 423-28, (May
2011).
---------------------------------------------------------------------------

Adding a Requirement for a Web Disclosure
The Department considered amending PTE 2020-02 and PTE 84-24 to
require financial institutions to disclosure the sources of third-party
compensation received in connection with recommended investment
products on a public web page. The Department believes such disclosures
would allow market-based forces to extend protections to consumers by
discouraging and eliminating the most conflicted compensation
practices. Moreover, public disclosure of firms' compensation
arrangements with the third parties whose products they recommend would
provide an additional focus on firm-level, as opposed to individual
adviser-level, conflicts of interest.
Such public disclosure could produce market effects similar to
public disclosures required by the SEC (e.g., public companies' 10-K
filings). Conflicted compensation practices are often complex, opaque,
and shrouded from view. Requiring public disclosure of conflicted
compensation practices would allow investment professionals, experts,
and consultants, as well as academic researchers, to draw attention to
the concerning aspects of the conflicts and even rate firms based on
the scope of their conflicts. As noted by Landier and Thesmar (2011),
data availability feeds research intensity.\570\ A wide range of
literature suggest that when financial data are available to
researchers, these researchers uncover problematic behaviors and draw
attention to the behaviors, which has the effect of curbing the
practices in the future.\571\ Making compensation

[[Page 75963]]

information publicly available could allow intermediaries and
consultants to package this information as part of their ratings and
evaluations, likely improving investor information.
---------------------------------------------------------------------------

\570\ Augustin Landier & David Thesmar, Regulating Systemic Risk
Through Transparency: Tradeoffs in Making Data Public, Working Paper
17664 National Bureau of Economic Research (December 2011), 320,
https://www.nber.org/system/files/working_papers/w17664/w17664.pdf.
\571\ For example: Randall A. Heron & Erik Lie, Does Backdating
Explain the Stock Price Pattern Around Executive Stock Option
Grants?, 83(2) Journal of Financial Economics 271-295 (2007).;
Randall A. Heron & Erik Lie, What Fraction of Stock Option Grants to
Top Executives Have Been Backdated or Manipulated?, 55(4) Management
Science 513-525.; Mark Carhart, Ron Kaniel & Adam Reed, Leaning for
the Tape: Evidence of Gaming Behavior in Equity Mutual Funds, 57(2)
Journal of Finance 661-693 (2002).; Truong X. Duong & Felix Meschke,
The Rise and Fall of Portfolio Pumping Among U.S. Mutual Funds, 60
Journal of Corporate Finance (February 2020).
---------------------------------------------------------------------------

Further, a web disclosure of this nature may encourage financial
institutions to stop engaging in conflicted behaviors due to litigation
risk from unsatisfied clients, risk of complaints made to the
Department that might result in enforcement actions, and the risk to
their public reputations.
The Department estimates that, if such a disclosure were required,
it would require eight hours of labor annually from a computer
programmer, on average, resulting in an annual cost of approximately
$20.5 million for PTE 2020-02 \572\ And $$4.5 million for PTE 84-
24.\573\ The Department welcomes comments on the accuracy of
Department's estimates on the required time to maintain the disclosure,
and how many financial institutions currently have the technology
infrastructure to post a web disclosure. The Department is also
interested in the benefits of such a disclosure, as well as in any data
that commenters may have that estimate how frequently retirement
investors may visit a web page that includes such disclosures, and the
extent to which various consultants and financial intermediaries would
likely use the website to assist retirement investors and others.
---------------------------------------------------------------------------

\572\ The burden is estimated as: (19,290 entities x 8 hours) =
154,320 hours. A labor rate of $133.05 is used for a computer
programmer professional. The labor rate is applied in the following
calculation: (19,290 entities x 8 hours) x $133.05 = $20,532,276.
\573\ The burden is estimated as: (215 insurance companies +
4,000 independent producers) x 8 hours = 33,720 hours. A labor rate
of $133.05 is used for a computer programmer professional. The labor
rate is applied in the following calculation: (215 insurance
companies + 4,000 independent producers) x 8 hours x $133.05 =
$4,486,446.
---------------------------------------------------------------------------

Allowing for More Parties To Review Records
For the proposed amendment to PTE 2020-02, the Department
considered allowing more parties to review the records necessary to
determine whether the exemption is satisfied, such as:
any authorized employee of the Department or the
Department of the Treasury,
any fiduciary of a plan that engaged in a transaction
pursuant to this exemption,
any contributing employer, any employee organization whose
members are covered by a plan that engaged in a transaction pursuant to
this exemption, and
any participant or beneficiary of a plan or beneficial
owner of an IRA acting on behalf of the IRA that engaged in a
transaction pursuant to this exemption.
The Department does not have data on how often financial
institutions would receive such requests. For the purposes of this
analysis, the Department assumes that, on average, financial
institutions would receive 10 requests per year and that preparing and
sending each request would take a legal professional, on average, 30
minutes. Based on these assumptions, the Department estimates that the
proposed amendments would result in an annual cost of approximately
$15.4 million.\574\ The Department requests comment on how often
financial institutions would receive requests for records, who would
prepare such reports, and how long the preparation of such records
would take.
---------------------------------------------------------------------------

\574\ The burden is estimated as follows: (19,290 financial
institutions x 10 requests) x (30 minutes / 60 minutes) = 96,450
hours. A labor rate of $159.34 is used for a legal professional. The
labor rate is applied in the following calculation: [(19,290
financial institutions x 10 requests) x (30 minutes / 60 minutes)] x
$159.34 = $15,368,343.
---------------------------------------------------------------------------

10. Uncertainty

In estimating costs associated with rollover documentations, the
Department faces uncertainty in determining the number of rollovers
affected by the amendments to PTE 2020-02 and PTE 84-24. Some financial
services professionals who do not generally serve as fiduciaries may
act in a fiduciary capacity when making certain rollover
recommendations, and thus will be affected by the exemptions.
Alternatively, the opposite can also be true. Financial services
professionals who generally serve as fiduciaries may act in a non-
fiduciary capacity in handling certain rollover recommendations, and
thus will not be affected by the exemptions. Thus, there is uncertainty
in estimating the cost of compliance.
The Department welcomes any comments and data that can help
estimate the number of rollovers affected by the exemptions. The
Department also invites comments about financial services
professionals' practices for documenting rollover recommendations,
particularly the extent to which financial services professionals use
standardized forms or templates to document the reasons for
recommending rollovers and how long on average it would take for a
financial services professional to document a rollover
recommendation.\575\
---------------------------------------------------------------------------

\575\ The Department assumes that financial services
professionals would spend, on average, 10 minutes to document the
basis for rollover recommendations in addition to their work
researching and determining the recommendations. The Department
understands that financial services professionals seek and gather
information regarding investor profiles in accordance with other
regulators' rules. Further, financial professionals often discuss
the basis for their recommendations and associated risks with their
clients as a best practice. After collecting relevant information
and discussing the basis for certain recommendations with clients,
the Department believes that it would take a relatively short time
to document justifications for rollover recommendations. However,
the Department welcomes comments about the burden hours associated
with documenting rollover recommendations.
---------------------------------------------------------------------------

While the Department expects that the proposed rule would result in
lower fees and expenses for plan participants, the Department faces
uncertainty in estimating the magnitude of savings. The Department
welcomes any comments and data that can help estimate the amount of
decrease in fees and expenses. The Department also expects the proposed
rule would result in a reallocation of capital, but the Department
faces uncertainty on estimating the new market equilibrium across
products and services. The Department welcomes any comments and data
that can help estimate how much capital may be reallocated and how much
efficiency will be gained.

G. Paperwork Reduction Act

As part of its continuing effort to reduce paperwork and respondent
burden, the Department conducts a preclearance consultation program to
allow the general public and Federal agencies to comment on proposed
and continuing collections of information in accordance with the
Paperwork Reduction Act of 1995 (PRA). This helps ensure that the
public understands the Department's collection instructions,
respondents can provide the requested data in the desired format,
reporting burden (time and financial resources) is minimized,
collection instruments are clearly understood, and the Department can
properly assess the impact of collection requirements on respondents.
The Department is soliciting comments regarding the information
collection request (ICR) included in the proposed amendments to the
prohibited transaction exemptions. To obtain a copy of the ICR, contact
the PRA addressee below or go to RegInfo.gov. The Department has
submitted a copy of

[[Page 75964]]

the rule to the Office of Management and Budget (OMB) in accordance
with 44 U.S.C. 3507(d) for review of its information collections. The
Department and OMB are particularly interested in comments that:
Evaluate whether the collection of information is
necessary for the functions of the agency, including whether the
information will have practical utility;
Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
Enhance the quality, utility, and clarity of the
information to be collected; and
Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology (e.g., permitting
electronically delivered responses).
Commenters may send their views on the Departments' PRA analysis in
the same way they send comments in response to the proposed rule as a
whole (for example, through the www.regulations.gov website), including
as part of a comment responding to the broader proposed rule. Comments
are due by January 2, 2024 to ensure their consideration.
ICRs are available at RegInfo.gov (reginfo.gov/public/do/PRAMain).
Requests for copies of the ICR can be sent to the PRA addressee:
By mail: James Butikofer, Office of Research and Analysis, Employee
Benefits Security Administration, U.S. Department of Labor, 200
Constitution Avenue NW, Room N-5718, Washington, DC 20210.
By email: [email protected].
There is no paperwork burden associated with the proposed rule.
However, there is paperwork burden associated with the amendments to
PTEs 75-1, 84-24, 86-128, and 2020-02. The Department estimates that
the proposed amendments would not affect the paperwork burden related
to PTEs 77-4, 80-3, and 83-1.The PRA analysis for the amendments is
included with each of the respective amendments.

PTE 75-1

Type of Review: Revision of an existing collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Titles: Prohibited Transaction Exemption 75-1 (Security
Transactions with Broker-Dealers, Reporting Dealers and Banks).
OMB Control Number: 1210-0092.
Affected Public: Businesses or other for-profits; not for profit
institutions.
Estimated Number of Respondents: 3,942.
Estimated Number of Annual Responses: 3,942.
Frequency of Response: Initially, Annually, When engaging in
exempted transaction.
Estimated Total Annual Burden Hours: 15,768 hours.
Estimated Total Annual Burden Cost: $0.

PTE 84-24

Type of Review: Revision of an Existing Collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Prohibited Transaction Exemption (PTE) 84-24 for Certain
Transactions Involving Insurance Agents and Brokers, Pension
Consultants, Insurance Companies, and Investment Company Principal
Underwriters.
OMB Control Number: 1210-0158.
Affected Public: Businesses or other for-profits; not for profit
institutions.
Estimated Number of Respondents: 7,221.
Estimated Number of Annual Responses: 119,376.
Frequency of Response: Initially, Annually, When engaging in
exempted transaction.
Estimated Total Annual Burden Hours: 123,726 hours.
Estimated Total Annual Burden Cost: $8,457.

PTE 86-128

Type of Review: Revision to an existing collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Titles: PTE 86-128 (Securities Broker-Dealers).
OMB Control Number: 1210-0059.
Affected Public: Businesses or other for-profits; not for profit
institutions.
Estimated Number of Respondents: 2,179.
Estimated Number of Annual Responses: 33,570.
Frequency of Response: Initially, Annually, When engaging in
exempted transaction.
Estimated Total Annual Burden Hours: 2,929 hours.
Estimated Total Annual Burden Cost: $37,034.

PTE 2020-02

OMB Control Number: 1210-0163.
Affected Public: Businesses or other for-profits; not for profit
institutions.
Estimated Number of Respondents: 19,290.
Estimated Number of Annual Responses: 6,504,119.
Frequency of Response: Initially, Annually, When engaging in
exempted transaction.
Estimated Total Annual Burden Hours: 1,044,050 hours.
Estimated Total Annual Burden Cost: $167,296.

H. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) \576\ imposes certain
requirements on rules subject to the notice and comment requirements of
section 553(b) of the Administrative Procedure Act or any other
law.\577\ Under section 603 of the RFA, agencies must submit an initial
regulatory flexibility analysis (IRFA) of a proposal that is likely to
have a significant economic impact on a substantial number of small
entities, such as small businesses, organizations, and governmental
jurisdictions. Below is the Department's IRFA.
---------------------------------------------------------------------------

\576\ 5 U.S.C. 601 et seq.
\577\ 5 U.S.C. 601(2), 603(a); also see 5 U.S.C. 551.
---------------------------------------------------------------------------

1. Need for and Objectives of the Rule

As discussed earlier, the Department believes that changes to the
marketplace since 1975, when ``fiduciary'' was first defined, have made
the existing definition inadequate and obsolete. This proposal will
update the definition of ``fiduciary'' to reflect changes to the
retirement and financial advice marketplaces since 1975 and add
important protections to existing prohibited transaction class
exemptions. More detail can be found in the ``Need for Regulatory
Action'' section of this RIA.
Smaller plans may be more exposed to conflicts of interest on the
part of service providers, because they are less likely than larger
plans to receive investment assistance from a service provider that is
acting as a fiduciary. Smaller plans have historically received
investment assistance from insurance brokers or broker-dealers, who may
be subject to conflicts of interest.\578\ Larger plans may also have
sufficient resources and in-house expertise to make investment
decisions without outside assistance.\579\ Additionally, many sponsors
of smaller plans may have a lack of knowledge of whether the providers
to the plan are fiduciaries and how the provider's compensation varies

[[Page 75965]]

based on the investment options selected.\580\
---------------------------------------------------------------------------

\578\ U.S. Government Accountability Office, GAO-11-119, 401(K)
Plans: Improved Regulation Could Better Protect Participants from
Conflicts of Interest, U.S. Government Accountability Office (2011),
https://www.gao.gov/products/GAO-11-119.
\579\ Id.
\580\ Id.
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2. Affected Small Entities

The Small Business Administration (SBA) ^{581 582} defines
small businesses and issues size standards by industry. The SBA defines
a small business in the financial investments and related activities
sector as a business with up to $47.0 million in annual receipts. Over
97 percent of broker-dealers \583\ and 99 percent of registered
investment advisers \584\ are small businesses according to the SBA
size standards.
---------------------------------------------------------------------------

\581\ 13 CFR 121.201.
\582\ 15 U.S.C. 631 et seq.
\583\ This is estimated on the percent of entities with less
than $47.0 million for the industry Securities Brokerage, NAICS
523120. See NAICS Association, Count by NAICS Industry Sectors,
NAICS Association, https://www.naics.com/business-lists/counts-by-naics-code/.
\584\ This is estimated on the percent of entities with less
than $47.0 million for the industry Investment Advice, NAICS 523930.
See NAICS Association, Count by NAICS Industry Sectors, NAICS
Association, https://www.naics.com/business-lists/counts-by-naics-code/.
---------------------------------------------------------------------------

The Department requests comments on the appropriateness of the size
standards used to evaluate the impact of the proposal on small
entities.

Table 5--Affected Small Financial Entities
--------------------------------------------------------------------------------------------------------------------------------------------------------
Prohibited transaction exemptions
-----------------------------------------------------------------------------------------------
2020-02 84-24 75-1 77-4 80-83 86-128
--------------------------------------------------------------------------------------------------------------------------------------------------------
Broker-Dealers.......................................... 1,835 .............. 1,835 .............. .............. ..............
Registered Investment Advisers.......................... 15,775 .............. .............. .............. .............. ..............
Pure Robo-Advisers.................................. 10 .............. .............. .............. .............. ..............
Discretionary Fiduciaries............................... .............. .............. .............. .............. .............. 1,835
Insurance Companies..................................... 151 177 .............. .............. .............. ..............
Insurance Producers..................................... .............. 3,960 .............. .............. .............. ..............
Banks................................................... .............. .............. 1,568 .............. 19 ..............
Mutual Fund Companies................................... .............. .............. .............. 796 .............. ..............
Investment Company Principal Underwriters............... 20 20 .............. .............. .............. 20
Pension Consultants..................................... 930 930 .............. .............. .............. 930
--------------------------------------------------------------------------------------------------------------------------------------------------------

In its economic analysis for its 2020 rulemaking, the Department
included all entities eligible for relief on a variety of transactions
and compensation that may not have been covered by prior exemptions in
its cost estimate. In 2020, the Department acknowledged that not all
these entities will serve as investment advice fiduciaries to plans and
IRAs within the meaning of Title I and the Code. Additionally, the
Department acknowledged that because other exemptions are also
currently available to these entities, it is unclear how widely
financial institutions will rely upon the new exemptions and which
firms are most likely to choose to rely on it.
This analysis, like the analysis from 2020, includes all entities
eligible for relief in its cost estimate. These estimates are subject
to caveats like those in 2020, though this proposal will expand the
parties that will be considered investment advice fiduciaries and also
will narrow the exemption alternatives.
The Department requests comments on which, and how many, entities
may rely on each of the exemptions, as amended.
Registered Investment Advisers
Small, registered investment advisers who provide investment advice
to retirement plans or retirement investors and registered investment
advisers who act as pension consultants would be directly affected by
the proposed amendments to PTE 2020-02. As discussed in the Affected
Entities section of the RIA, the Department estimates that 16,182
registered investment advisers, including 200 robo-advisers, would be
affected by the proposed amendments.\585\ The Department estimates that
98.7 percent of broker-dealers are small businesses according to the
SBA size standards.\586\ Based on these statistics, the Department
estimates that 15,775 registered investment advisers, including those
registered with the SEC and the state, would be affected by the
proposed amendments.\587\
---------------------------------------------------------------------------

\585\ For more information on this estimate, refer to the
Affected Entities section of the RIA.
\586\ This is estimated on the percent of entities with less
than $47.0 million for the industry Investment Advice, NAICS 523930.
See NAICS Association, Count by NAICS Industry Sectors, NAICS
Association, https://www.naics.com/business-lists/counts-by-naics-code/.
\587\ The number of small investment advisers, who do not
provide pure robo-advice, is estimated as: (16,182 investment
advisers - 200 robo-advisers) x 98.7% = 15,775 small investment
advisers.
---------------------------------------------------------------------------

Robo Advisers
The proposed changes to PTE 2020-02 would affect robo-advisers. As
discussed in the RIA, the Department estimates that 200 robo-advisers
will be affected by the proposed amendments. The Department does not
have information on how many of these robo-advisers would be considered
small entities. The Department expects that most robo-advisers would
not be considered small. For the purposes of this analysis, the
Department assumes that 5 percent of robo-advisers, or 10 robo-
advisers, are small entities. The Department requests comment on these
estimates.
Broker-Dealers
Small broker-dealers who provide investment advice to retirement
plans or retirement investors and registered investment advisers who
act as pension consultants would be directly affected by the proposed
amendments to PTE 2020-02. Additionally, the proposed amendments would
modify PTE 75-1 and PTE 86-128 such that small broker-dealers would no
longer be able to rely on the exemption for investment advice. The
Department does not have information about how many small broker-
dealers provide investment advice to plan fiduciaries, plan
participants and beneficiaries, and IRA owners. However, the Department
believes that few broker-dealers, including small broker-dealers, will
continue to rely on PTE 75-1 and PTE 86-128 for transactions that do
not involve investment advice.
As discussed in the RIA, the Department assumes that 1,894 broker-
dealers would be affected by the proposed amendments.\588\ The
Department estimates that 96.9 percent of broker-dealers are small
businesses according to the SBA size standards.\589\ Accordingly, the
Department assumes

[[Page 75966]]

that 1,835 small broker-dealers would be affected by the proposed
amendments.\590\ The Department requests comment on this estimate.
---------------------------------------------------------------------------

\588\ For more information on this estimate, refer to the
Affected Entities section of the RIA.
\589\ This is estimated on the percent of entities with less
than $47.0 million for the industry Securities Brokerage, NAICS
523120. See NAICS Association, Count by NAICS Industry Sectors,
NAICS Association, https://www.naics.com/business-lists/counts-by-naics-code/.
\590\ The estimated of retail broker-dealers affected by this
exemption is estimated as: (1,894 broker-dealers x 96.9%) = 1,835
broker dealers.
---------------------------------------------------------------------------

Discretionary Fiduciary
The proposed amendments to PTE 86-128 would delete Section IV(a),
which provides an exclusion from the conditions of the exemption for
certain plans not covering employees, including IRAs, to increase the
safeguards available to these retirement investors. Therefore,
investment advice fiduciaries to IRAs would have to rely on another
exemption, such as PTE 2020-02. Fiduciaries that exercise full
discretionary authority or control with respect to IRAs could continue
to rely on PTE 86-128, as long as they comply with all of the
exemption's conditions. Under PTE 86-128, discretionary fiduciaries
would still be able to effect or execute securities transactions. Any
discretionary fiduciaries seeking relief for investment advice,
however, would be required to rely on the amended PTE 2020-02. The
Department lacks reliable data on the number of investment advice
providers who are discretionary fiduciaries that would rely on the
amended exemption.
---------------------------------------------------------------------------

\591\ For more information on this estimate, refer to the
Affected Entities section of the RIA.
---------------------------------------------------------------------------

For the purposes of this analysis, the Department assumes that the
number of discretionary fiduciaries relying on the exemption is no
larger than the estimated number of broker-dealers estimated to be
affected by the amendments to PTE 2020-02. As discussed in the RIA, the
Department assumes that 1,894 broker-dealers would be affected by the
proposed amendments.\591\ The Department estimates that 96.9 percent of
broker-dealers are small businesses according to the SBA size
standards.\592\ Accordingly, the Department assumes that 1,835 small
discretionary fiduciaries would be affected by the proposed
amendments.\593\
---------------------------------------------------------------------------

\592\ This is estimated on the percent of entities with less
than $47.0 million for the industry Securities Brokerage, NAICS
523120. See NAICS Association, Count by NAICS Industry Sectors,
NAICS Association, https://www.naics.com/business-lists/counts-by-naics-code/.
\593\ The estimated of retail broker-dealers affected by this
exemption is estimated as: (1,894 broker-dealers x 96.9%) = 1,835
broker dealers.
---------------------------------------------------------------------------

The Department requests comment on this assumption, particularly
with regard to what types of entities would be likely to rely on the
amended exemption, as well as any underlying data.
Insurance Companies
The proposed amendments to PTE 2020-02 and PTE 84-24 would affect
small insurance companies and captive agents. The existing version of
PTE 84-24 granted relief for captive insurance agents, overseen by
insurance companies; however, the proposed amendments would exclude
insurance companies and captive agents currently relying on the
exemption for investment advice. These entities would be required to
comply with the requirements of PTE 2020-02 for relief involving
investment advice.
As discussed in the RIA, the Department estimates that 398
insurance companies would be affected by the proposed rulemaking. The
Department estimates that 70 of these entities are large entities.\594\
The Department does not have data on whether small insurance companies
are more likely to rely on captive or independent distribution
channels. For the purposes of this analysis, the Department assumes the
percent of small insurance companies using each distribution channel is
the same as for all insurance companies. That is, the Department
assumes that 46 percent of insurance companies (183 insurance
companies) sell annuities through captive distribution channels, of
which 151 are estimated to be small insurance companies and 32 are
estimated to be large insurance companies.\595\ Additionally, 54
percent (215 insurance companies) sell annuities through independent
distribution channels, of which 177 are estimated to be small insurance
companies and the remaining 38 are large insurance companies.\596\ The
Department requests comment on this assumption.
---------------------------------------------------------------------------

\594\ LIMRA estimates that, in 2016, 70 insurers had more than
$38.5 million in sales. See LIMRA, U.S. Individual Annuity Yearbook:
2016 Data, LIMRA Secure Retirement Institute (2017).
\595\ The number of large insurance companies using a captive
distribution channel is estimated as: (70 large insurance companies
x 46%) = 32 insurance companies. The number of small insurance
companies using a captive distribution channel is estimated as: (183
insurance companies - 32 large insurance companies) = 151 small
insurance companies.
\596\ The number of large insurance companies using an
independent distribution channel is estimated as: (70 large
insurance companies x 54%) = 38 insurance companies. The number of
small insurance companies using an independent distribution channel
is estimated as: (215 insurance companies - 38 large insurance
companies) = 177 small insurance companies.
---------------------------------------------------------------------------

Captive Insurance Agents
Additionally, as discussed in the Affected Entities section of the
RIA, the Department estimates that 1,577 captive insurance agents would
be affected by the proposed amendments. The Department estimates that
99 percent of these captive agents work for small entities.\597\ Thus,
the Department estimates there are 1,561 captive insurance agents and
brokers that would be affected by the proposed amendments.\598\
---------------------------------------------------------------------------

\597\ This is estimated on the percent of entities with annual
receipts less than $15.0 million for the industry Insurance Agencies
and Brokerages, NAICS 524210. See NAICS Association, Count by NAICS
Industry Sectors, NAICS Association, https://www.naics.com/business-lists/counts-by-naics-code/.; Small Business Administration, Table
of Size Standards, Small Business Administration, (December 2022),
https://www.sba.gov/document/support--table-size-standards.
\598\ The number of captive insurance agents is calculated as:
(1,577 captive agents x 99.0%) = 1,561 captive insurance agents
serving the annuity market.
---------------------------------------------------------------------------

Independent Producers
The proposal would also affect independent insurance producers that
recommend annuities from unaffiliated financial institutions to
retirement investors, as well as the financial institutions whose
products are recommended. While captive insurance agents are employees
of an insurance company, other insurance agents are ``independent'' and
work with multiple insurance companies. Though these independent
insurance producers may rely on PTE 2020-02, the Department believes
they are more likely to rely on PTE 84-24. For this reason, the
Department only considers captive insurance agents in the analysis for
PTE 2020-02. The Department requests comment on how captive insurance
agents and independent insurance producers would be affected by the
proposed amendments to PTE 2020-02 and PTE 84-24.
The Independent Insurance Agents and Brokers of America estimated
that there were 40,000 independent producers in 2022. The Department
does not have data on what percent of independent producers serve the
retirement market. For the purposes of this analysis, the Department
assumes that 10 percent, or 4,000, of these independent producers serve
the retirement market. The Department estimates that 99 percent of
these entities are small entities.\599\ As such, the Department
estimates that 3,960

[[Page 75967]]

small independent producers would be affected by the proposed
amendment.
---------------------------------------------------------------------------

\599\ This is estimated on the percent of entities with annual
receipts less than $15.0 million for the industry Insurance Agencies
and Brokerages, NAICS 524210. See NAICS Association, Count by NAICS
Industry Sectors, NAICS Association, https://www.naics.com/business-lists/counts-by-naics-code/; Small Business Administration, Table of
Size Standards, Small Business Administration, (December 2022),
https://www.sba.gov/document/support--table-size-standards.
---------------------------------------------------------------------------

Pension Consultants
The Department expects that pension consultants would continue to
rely on the existing 84-24; however, the proposed amendment would
exclude pension consultants for plans and IRAs currently relying on the
existing PTE 84-24 for investment advice. As such, any pension
consultants relying on the existing exemption for investment advice
would be required to comply with PTE 2020-02 for relief. In this
analysis, the Department includes pension consultants in the affected
entities for continued relief for the existing provisions of PTE 84-24
as well as the amended PTE 2020-02.
As discussed in the Affected Entities section of the RIA, the
Department estimates that 1,011 pension consultants serve the
retirement market. The Department estimates that approximately 92
percent of these entities are small entities.\600\ As such, the
Department estimates that 930 pension consultants would be affected by
the proposed amendments.
---------------------------------------------------------------------------

\600\ This is estimated on the percent of entities with annual
receipts less than $45.5 million for the industry Third Party
Administration of Insurance and Pension Funds, NAICS 524292. See
NAICS Association, Count by NAICS Industry Sectors, NAICS
Association, https://www.naics.com/business-lists/counts-by-naics-code/; Small Business Administration, Table of Size Standards, Small
Business Administration, (December 2022), https://www.sba.gov/document/support--table-size-standards.
---------------------------------------------------------------------------

Principal Company Underwriter
The Department expects that some investment company principal
underwriters for plans and IRAs rely on the existing PTE 84-24. The
proposed amendment would exclude investment company principal
underwriters for plans and IRAs currently relying on the existing PTE
84-24 for investment advice. As such, any principal company underwriter
relying on the existing exemption for investment advice would be
required to comply with PTE 2020-02 for relief. In this analysis, the
Department includes principal company underwriters in the affected
entities for continued relief for the existing provisions of PTE 84-24
as well as the amended PTE 2020-02.
As discussed in the Affected Entities section, the Department
assumes that 10 investment company principal underwriters for plans and
10 investment company principal underwriters for IRAs will use this
exemption once with one client plan. The Department estimates that
approximately 97 percent of these entities are small entities.\601\ As
a result, the Department estimates that all 10 of the estimated small
investment company principal underwriters for plans and all 10 of the
estimated small investment company principal underwriters for IRAs
would be affected by the proposed amendments.
---------------------------------------------------------------------------

\601\ This is estimated on the percent of entities with less
than $47.0 million for the industry Investment Banking and
Securities Intermediation, NAICS 523150. See NAICS Association,
Count by NAICS Industry Sectors, NAICS Association, https://www.naics.com/business-lists/counts-by-naics-code/.
---------------------------------------------------------------------------

Banks and Credit Unions
The proposed amendments to PTE 80-83, PTE 75-1, and PTE 2020-02
would affect banks. The proposed amendments would exclude banks
currently relying on the existing PTE 80-83 and PTE 75-1 for investment
advice. Banks relying on the existing exemptions for investment advice
would be required to comply with PTE 2020-02 for relief. Banks with
discretionary control could still rely on PTE 80-83 and PTE 75-1.
The Department estimates that approximately 77 percent of
commercial banks are small banks.\602\ As discussed in the Affected
Entities section of the RIA, the Department estimates that 4,096 banks
would use the amended PTE 75-1, of which 3,135 commercial banks are
estimated to be small.\603\ Additionally, in the Affected Entities
section of the RIA, the Department estimates that 25 fiduciary-banks
with public offering services would use the amended PTE 80-83, of
which, 19 are estimated to be small.\604\ The Department recognizes
that these estimates assume that the proportion of small banks using
the aforementioned PTEs would be the same as the proposition of all
banks using the PTEs. The Department recognizes that the banking
industry within the United States is characterized by high market
concentration.\605\ The Department requests comment on whether small
banks are equally as likely as large banks to rely on such exemptions.
---------------------------------------------------------------------------

\602\ This is estimated on the percent of commercial banks with
assets less than $850 million. See Federal Deposit Insurance
Corporation, FOIA RIS Data Bulk Download, Federal Deposit Insurance
Corporation, (December 2022), https://www.fdic.gov/foia/ris/; Small Business Administration, Table of Size Standards,
Small Business Administration, (December 2022), https://www.sba.gov/document/support--table-size-standards.
\603\ The number of small commercial banks that would use PTE
75-1 is estimated as: (4,096 banks x 76.5%) = 3,135 small banks.
\604\ The number of small banks that would use PTE 80-83 is
estimated as: (25 fiduciary-banks with public offering services x
76.5%) = 19 banks.
\605\ Jim DiSalvo, Banking Trends: Has the Banking Industry
Become Too Concentrated?, Federal Reserve Bank of Philadelphia,
(2023), https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/economic-insights/2023/q1/bt-has-the-banking-industry-become-too-concentrated.pdf.
---------------------------------------------------------------------------

The Department requests comments on how many small banks would seek
exemptive relief under PTE 80-83 and PTE 75-1.
As discussed in the Affected Entities section of the RIA, the
proposed amendments could also affect credit unions that offer IRAs.
The Department estimates that there are approximately 4,782 credit
unions.\606\ In 2023, the SBA estimated that there are 4,586 small
credit unions.\607\ The Department requests comment on what proportion
of small credit unions offer IRAs and what proportion sell share
certificate products. Additionally, the Department requests comment on
how many of these entities currently rely on PTE 2020-02, 75-1, and PTE
80-83 for investment advice.
---------------------------------------------------------------------------

\606\ For more information on how the number of credit unions is
estimated, refer to the Affected Entities section of the RIA.
\607\ 88 FR 18906 (March 29, 2023).
---------------------------------------------------------------------------

Mutual Fund Companies
The proposed amendments would modify PTE 77-4 such that mutual fund
company as their providing services to plans can no longer rely on the
exemption when giving investment advice. Under the proposal, these
mutual funds would need to rely on PTE 2020-02 for relief concerning
investment advice.
As discussed in the Affected entities section of the RIA, the
Department estimates that 812 mutual fund companies would be affected
by the proposed amendments to PTE 77-4. The Department estimates that
approximately 98 percent of these mutual fund companies, or 796 mutual
fund companies, are small.\608\
---------------------------------------------------------------------------

\608\ This is estimated on the percent of entities with annual
receipts less than $40 million for the industry Open End Investment
Fund, NAICS 525910. See NAICS Association, Count by NAICS Industry
Sectors, NAICS Association, https://www.naics.com/business-lists/counts-by-naics-code/; Small Business Administration, Table of Size
Standards, Small Business Administration, (December 2022), https://www.sba.gov/document/support--table-size-standards.
---------------------------------------------------------------------------

[[Page 75968]]

entities would need to rely on PTE 2020-02 for relief concerning
investment advice. The Department requests comment on how many small
entities currently rely on PTE 83-1, and how many of these entities
rely on PTE 83-1 for investment advice.

3. Impact of the Rule

The Department believes the costs associated with the proposed
amendments are modest because the proposal was developed in
consideration of other regulatory conduct standards. The Department
believes that many financial institutions and investment professionals
have already developed compliance structures for similar regulatory
standards. The Department does not expect that the proposal will impose
a significant compliance burden on small entities. As discussed, the
Department estimates that the proposal would impose costs of
approximately $253.2 million in the first year and $216.2 million in
each subsequent year, of which approximately $248.0 million in the
first year and $212.7 million in each subsequent year would be imposed
on small financial institutions.
The table below summarizes the estimated aggregate cost for small
entities due to the proposed amendments to each exemption. The
following section describes estimated cost for each entity type for
each exemption.

Table 6--Summary of Total Cost and Average Per-Entity Cost by Exemption
----------------------------------------------------------------------------------------------------------------
Total cost Per-entity cost
-----------------------------------------------------------------------
First year Subsequent years First year Subsequent years
----------------------------------------------------------------------------------------------------------------
PTE 84-24............................... $17,425,393 $14,733,328 $3,425 $2,896
PTE 2020-02............................. 227,505,836 194,922,497 18,029 2,757
Mass Amendments:
PTE 75-1............................ 2,594,856 2,594,856 763 763
PTE 77-4............................ 0 0 0 0
PTE 80-83........................... 0 0 0 0
PTE 83-1............................ 0 0 0 0
PTE 1986-128........................ 444,296 444,296 242 242
-----------------------------------------------------------------------
Total........................... 247,970,380 212,694,976 22,459 6,657
----------------------------------------------------------------------------------------------------------------
Note: The sum of the columns may not sum to total due to rounding.

Preliminary Assumptions and Cost Estimate Inputs
The Department also assumes affected entities will likely incur
only incremental costs if they are already subject to rules or
requirements from the Department or another regulator. The Department
acknowledges that not all entities will decide to use the amended PTE
2020-02 and PTE 84-24 for transactions resulting from fiduciary
investment advice. Some may instead rely on other existing exemptions
that better align with their business models. However, for this cost
estimation, the Department assumes that all eligible entities will use
the PTE 2020-02 and PTE 84-24 for such transactions. The Department
recognizes that this may result in an overestimate, as not all entities
will necessarily rely on these exemptions.
The Department does not have information on how many retirement
investors--including plan beneficiaries, plan participants, and IRA
owners--receive electronic disclosures from investment advice
fiduciaries. For the purposes of this analysis, the Department assumes
that the percent of retirement investors receiving electronic
disclosures would be similar to the percent of plan participants
receiving electronic disclosures under the Department's 2020 and 2002
electronic disclosure safe harbors.\609\ Accordingly, the Department
estimates that 94.2 percent of the disclosures sent to retirement
investors would be sent electronically, and the remaining 5.8 percent
would be sent by mail.\610\ The Department requests comment on these
assumptions.
---------------------------------------------------------------------------

\609\ 85 FR 31884 (May 27, 2020); 67 FR 17263 (Apr. 9, 2002).
\610\ The Department estimates approximately 94.2 percent of
retirement investors receive disclosures electronically. This is the
sum of the estimated share of retirement investors receiving
electronic disclosures under the 2002 electronic disclosure safe
harbor (58.2 percent) and the estimated share of retirement
investors receiving electronic disclosures under the 2020 electronic
disclosure safe harbor (36 percent).
---------------------------------------------------------------------------

Additionally, the Department assumes that various types of
personnel will perform the tasks associated with information collection
requests at an hourly wage rate of $63.45 for clerical personnel,
$128.11 for a top executive, $133.05 for a computer programmer, $158.94
for an insurance sales agent, $159.34 for a legal professional, $190.63
for a financial manager, and $219.23 for a financial adviser.\611\
---------------------------------------------------------------------------

\611\ Internal Department calculation based on 2023 labor cost
data. For a description of the Department's methodology for
calculating wage rates. See Employee Benefits Security
Administration, Labor Cost Inputs Used in the Employee Benefits
Security Administration, Office of Policy and Research's Regulatory
Impact Analyses and Paperwork Reduction Act Burden Calculations,
Employee Benefits Security Administration, https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf.
---------------------------------------------------------------------------

Cost Associated With PTE 2020-02
Summary of Affected Entities
As discussed in the Affected Entities section of the Regulatory
Flexibility Analysis, the Department estimates that 18,721 small
financial institutions would be affected by the proposal, comprised of
1,835 broker-dealers, 15,775 registered investment advisers, 10 robo-
advisers, 151 insurance companies, 20 investment company principal
underwriters, and 930 pension consultants.\612\
---------------------------------------------------------------------------

\612\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section of the
Regulatory Flexibility Act analysis.
---------------------------------------------------------------------------

Cost To Review the Rule
The Department estimates that all 18,721 of the small financial
institutions affected would each need to review the rule, as it applies
to their business. The Department estimates that such a review will
take a legal professional, on average, nine hours to review the rule,
resulting in a total cost of $26.9 million.\613\
---------------------------------------------------------------------------

\613\ The burden is estimated as: (18,721 entities x 9 hours) =
168,489 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (18,721 entities x 9 hours) x $159.34 = $26,847,037.

---------------------------------------------------------------------------

[[Page 75969]]

Cost Associated With Disclosures
The proposed amendments would require small entities to modify
existing general disclosures and develop additional general disclosures
to those required under the existing exemption. For more information on
the changed requirements for each disclosure, refer to the descriptions
in the preamble and RIA of this document. The Department estimates the
marginal cost for each of the disclosure requirements as:
Drafting or updating a written acknowledgement that the
financial institution and its investment professional are fiduciaries
is estimated to result in an aggregate cost of approximately
$123,647.\614\
---------------------------------------------------------------------------

\614\ The number of financial entities needing to update their
written acknowledgement is estimated as: (1,835 broker-dealers x
10%) + (15,775 registered investment advisers x 10%) + (151 insurers
x 10%) = 1,776 financial institutions updating existing disclosures.
The number of financial entities needing to draft their written
acknowledgement is estimated as: (10 robo-advisers + 930 pension
consultants + 20 investment company underwriters) = 960 financial
institutions drafting new disclosures. The burden is estimated as:
(1,776 financial institutions x (10 minutes / 60 minutes)) + (960
financial institutions x (30 minutes / 60 minutes)) = 776 hours. A
labor rate of $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: [(1,776 financial
institutions x (10 minutes / 60 minutes)) + (960 financial
institutions x (30 minutes / 60 minutes)] x $159.34 = $123,647. For
more information on the assumptions included in this calculation,
refer to the RIA of this document.
---------------------------------------------------------------------------

Drafting or updating a written description of service
provided is estimated to result in an aggregate cost of $1.6 million in
the first year.\615\
---------------------------------------------------------------------------

\615\ The number of financial entities needing to update their
written description of services is estimated as: (1,835 broker-
dealers + 15,775 registered investment advisers + 151 insurers) =
17,761 financial institutions updating existing disclosures. The
number of financial entities needing to draft their written
description of services is estimated as: (10 robo-advisers + 930
pension consultants + 20 investment company underwriters) = 960
financial institutions drafting new descriptions. The burden is
estimated as: (17,761 financial institutions x (30 minutes / 60
minutes)) + (960 financial institutions x 1 hour) = 9,841 hours. A
labor rate of $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: [(17,761 financial
institutions x (30 minutes / 60 minutes)) + (960 financial
institutions x 1 hour)] x $159.34 = $1,567,985. For more information
on the assumptions included in this calculation, refer to the RIA of
this document.
---------------------------------------------------------------------------

Drafting the written statement of the Best Interest
standard of care owed is estimated to result in an aggregate cost of
$1.6 million in the first year.\616\
---------------------------------------------------------------------------

\616\ The burden is estimated as: [(1,835 broker-dealers +
15,775 registered investment advisers) x (30 minutes / 60 minutes)]
+ [(151 insurers + 10 robo-advisers + 930 pension consultants + 20
investment company underwriters) x 1 hour] = 9,896 hours. A labor
rate of $159.34 is used for a legal professional. The labor rate is
applied in the following calculation: [(1,835 broker-dealers +
15,775 registered investment advisers) x (30 minutes / 60 minutes)]
+ [(151 insurers + 10 robo-advisers + 930 pension consultants, and
20 investment company underwriters) x 1 hour] x $159.34 =
$1,576,828. For more information on the assumptions included in this
calculation, refer to the RIA of this document.
---------------------------------------------------------------------------

Drafting a written statement informing the investor of
their right to obtain a written description of the financial
institution's policies and procedures and information regarding costs,
fees, and compensation is estimated to result in an aggregate cost of
$1.6 million in the first year.\617\
---------------------------------------------------------------------------

\617\ The burden is estimated as: [(1,835 broker-dealers +
15,775 registered investment advisers) x (30 minutes / 60 minutes)]
+ [(151 insurers + 10 robo-advisers + 930 pension consultants + 20
investment company underwriters) x 1 hour] = 9,916 hours. A labor
rate of $159.34 is used for a legal professional. The labor rate is
applied in the following calculation: [(1,835 broker-dealers +
15,775 registered investment advisers) x (30 minutes / 60 minutes)]
+ [(151 insurers + 10 robo-advisers + 930 pension consultants, and
20 investment company underwriters) x 1 hour] x $159.34 =
$1,580,015. For more information on the assumptions included in this
calculation, refer to the RIA of this document.
---------------------------------------------------------------------------

Preparing and sending the general disclosures described
above is estimated to result in a de minimis marginal cost.\618\
---------------------------------------------------------------------------

\618\ Based on FOCUS data, the SEC reported that in 2018, there
were 143,333,278 cumulative customer broker-dealer accounts. Of
these accounts, the SEC estimates that the 287 small retail broker-
dealers held 5,281 customer accounts. The Department used this to
estimate that small broker-dealers hold 0.004 percent of the total
customer accounts. The Department assumes that the market for other
types of financial institutions matches the broker-dealer market and
applied this percentage to all other accounts. Accordingly, the
burden is estimated as: [(3,183,503 paper disclosures x 0.004%) x 2
pages] x $0.05 = $0.74. The Department considers this to be a de
minimis cost.
---------------------------------------------------------------------------

Preparing and sending requested written descriptions of
policies and procedures and information regarding costs, fees, and
compensation is estimated to result in an annual cost of $1.0
million.\619\
---------------------------------------------------------------------------

\619\ The burden is estimated as: (18,721 financial institutions
x 10 disclosures) x (5 minutes / 60 minutes) = 15,601 hours. A labor
rate of $63.45 is used for a clerical worker. The labor rate is
applied in the following calculation: [(18,721 financial
institutions x 10 disclosures) x (5 minutes / 60 minutes)] x $63.45
= $989,873. The material cost is estimated as: (18,721 financial
institutions x 10 disclosures x 2 pages x $0.05) + (18,721 financial
institutions x 10 disclosures x $0.66)) x (5.8%) = $8,252. The total
cost is estimated as: $989,873 + $8,252 = $998,125. For more
information on the assumptions included in this calculation, refer
to the RIA of this document.
---------------------------------------------------------------------------

Preparing disclosures for PEPs detailing any amounts the
financial institution pays to or receives from the PPP or its
affiliates, in addition to any conflicts of interest that arise in
connection with the investment advice it provides to a PEP is estimated
to result in an annual cost of approximately $118,230 in the first
year.\620\ The Department estimates that this would result in 928
disclosures sent to employers of PEPs.\621\ This results in an annual
cost of approximately $981.\622\
---------------------------------------------------------------------------

\620\ The Department assumes that the percent of PEPs that are
serviced by small institutions is proportionate the percent of
financial institutions that are estimated to be small. This
percentage is estimated as: (18,721 small financial institutions/
19,290 financial institutions) = 97.1%. The number of PEPs services
by small financial institutions is estimated as: (382 PEPs x 97.1%)
= 371 PEPs. The burden is estimated as: (371 financial institutions
x 2 hours) = 742 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (371 financial institutions x 2 hours) x $159.34 =
$118,230. For more information on the assumptions included in this
calculation, refer to the RIA of this document.
\621\ As discussed in the RIA, according to filings submitted to
the Department by August 22, 2023, there are 955 employers in PEPs.
The Department does not have data on how many of these disclosures
are service by small financial institutions. For the purposes of
this analysis, the Department estimates that the number of employers
in PEPs serviced by small financial institutions is proportionate
the number of PEPs serviced by small financial institutions.
Accordingly, the Department estimates the number of disclosures sent
to employers of PEPs in this context as: 955 PEPs x (371/382) = 928
PEPs.
\622\ The burden is estimated as: (928 PEPs x 1 minute) = 15
hours. A labor rate of $63.45 is used for a clerical worker. The
labor rate is applied in the following calculation: (928 PEPs x 1
minute) x $63.45 = $981. The Department expects that these
disclosures would be sent electronically. For more information on
the assumptions included in this calculation, refer to the RIA of
this document.
---------------------------------------------------------------------------

The Department estimates that the total cost for 18,721 small
financial institutions to update their disclosure materials and
distribute the newly required disclosures is $6.0 million during the
first year and $1.0 million in each subsequent year.
Cost Associated With Rollover Documentation and Disclosure
As discussed in the cost section of the RIA, the Department
estimates that, 3,119,832 rollovers would be affected.\623\ The
Department lacks reliable data on the number of rollovers that would
involve small financial institutions. For the purposes of this
analysis, the Department assumes the percent of rollovers conducted by
small institutions is proportional to the percent of small financial
institutions. Accordingly, the Department estimates that 99 percent of
these rollovers, or 3,088,633 rollovers, would involve small financial
institutions. The Department requests comments on these assumptions.
---------------------------------------------------------------------------

\623\ For more information on how the number of IRA rollovers is
estimated, refer to the Affected Entities section of the RIA.
---------------------------------------------------------------------------

Applying these assumptions to the 18,721 small financial
institutions, using the same methodology described above to calculate
the rollover

[[Page 75970]]

documentation costs for all firms, the Department estimates a total
annual cost of approximately $191.9 million.\624\
---------------------------------------------------------------------------

\624\ The burden is estimated as: (3,088,633 rollovers x 48% x
(30 minutes / 60 minutes)) + (3,088,633 rollovers x 52% x (5 minutes
/ 60 minutes)) = 875,113 hours. A labor rate of $219.23 is used for
a personal financial adviser. The labor rate is applied in the
following calculation: (3,088,633 rollovers x 48% x (30 minutes / 60
minutes)) + (3,088,633 rollovers x 52% x (5 minutes / 60 minutes)) x
$219.23 = $191,850,954. For more information on the assumptions
included in this calculation, refer to the RIA of this document.
---------------------------------------------------------------------------

Costs Associated With Annual Report of Retrospective Review for
Financial Institutions
PTE 2020-02 requires financial institutions to conduct a
retrospective review at least annually that is reasonably designed to
prevent violations of and achieve compliance with the conditions of
this exemption, Impartial Conduct Standards, and the policies and
procedures governing compliance with the exemption. While entities
covered by the existing exemption would not incur additional costs with
this requirement, robo-advisers, pension consultants, and investment
company underwrites, who are not covered under the existing exemption,
would incur costs associated with conducting the annual review. This
requirement is estimated to result in an annual aggregate cost of $0.2
million.\625\
---------------------------------------------------------------------------

\625\ The number of small entities not currently producing audit
reports is estimated as: (10 robo-advisers + 930 pension consultants
+ 20 investment company underwriters) x 10% = 96 small entities. The
number of small entities needing to modify existing audit reports is
estimated as: (10 robo-advisers + 930 pension consultants + 20
investment company underwriters) x 90% = 864 small entities. The
burden is estimated as: (96 financial institutions x 5 hours) + (864
financial institutions x 1 hour) = 1,344 hours. A labor rate of
$159.34 is used for a legal professional. The labor rate is applied
in the following calculation: [(96 financial institutions x 5 hours)
+ 864 financial institutions x 1 hour)] x $159.34 = $214,153. For
more information on the assumptions included in this calculation,
refer to the RIA of this document.
---------------------------------------------------------------------------

Additionally, the Department estimates the cost for a certifying
officer to review the report and certify the exemption would result in
an estimated annual cost burden of approximately $366,000.\626\
---------------------------------------------------------------------------

\626\ The burden is estimated as: (10 robo-advisers + 930
pension consultants + 20 investment company underwriters) x 2 hours
= 1,920 hours. A labor rate of $190.63 is used for a financial
manager. The labor rate is applied in the following calculation: (10
robo-advisers + 930 pension consultants + 20 investment company
underwriters) x 2 hours) x $190.63 = $366,010.
---------------------------------------------------------------------------

Cost Associated With Written Policies and Procedures
Entities that were not previously complying with PTE 2020-02 would
incur the cost to develop policies and procedures in the first year.
The requirements to maintain and review policies and procedures is
estimated to result in an aggregate cost of $2.2 million in the first
year \627\ and $1.5 million in subsequent years.\628\
---------------------------------------------------------------------------

\627\ The burden is estimated as: (17,761 x (30 minutes / 60
minutes)) + (960 x 5 hours) = 13,681 hours. A labor rate of $159.34
is used for a legal professional. The labor rate is applied in the
following calculation: [(17,761 x (30 minutes / 60 minutes)) + (960
x 5 hours)] x $159.34 = $2,179,851. For more information on the
assumptions included in this calculation, refer to the RIA of this
document.
\628\ The burden is estimated as: (18,721 small financial
institutions x (30 minutes / 60 minutes)) = 9,361 hours. A labor
rate of $159.34 is used for a legal professional. The labor rate is
applied in the following calculation: (18,721 small financial
institutions x (30 minutes / 60 minutes)) x $159.34 = $1,491,502.
---------------------------------------------------------------------------

The proposed amendments would also require financial institutions
to provide their complete policies and procedures to the Department
upon request. Based on the number of past cases as well as current open
cases that would merit such a request, the Department estimates that
the Department would request a total of 165 policies and procedures in
the first year and 50 policies and procedures in subsequent years.
Assuming the number of requests from small institutions is
proportionate to the number of small financial institutions, the
Department estimates that it would request 160 policies and procedures
in the first year and 49 in subsequent years.\629\ The Department
estimates that the requirement would result an estimated cost of
approximately $2,538 in the first year \630\ and $777 in subsequent
years.\631\ The cost for a firm receiving the request would be
approximately $80 in years when a request is made and no cost in most
years when no request is made.
---------------------------------------------------------------------------

\629\ The percent of financial institutions that are small is
estimated as: (18,721 small financial institutions/19,290 financial
institutions) = 97.1%. The number of policies and procedures
requested from small financial entities in the first year is
estimated as: (165 x 97.1%) = 160. The number of policies and
procedures requested from small financial entities in the first year
is estimated as: (50 x 97.1%) = 49.
\630\ The burden is estimated as: (160 x (15 minutes / 60
minutes)) = 40 hours. A labor rate of $63.45 is used for a clerical
worker. The labor rate is applied in the following calculation: (160
x (15 minutes / 60 minutes)) x $63.45 = $2,538. For more information
on the assumptions included in this calculation, refer to the RIA of
this document.
\631\ The burden is estimated as: (49 x (15 minutes / 60
minutes)) = 12 hours. A labor rate of $63.45 is used for a clerical
worker. The labor rate is applied in the following calculation: (49
x (15 minutes / 60 minutes)) x $63.45 = $777. For more information
on the assumptions included in this calculation, refer to the RIA of
this document.
---------------------------------------------------------------------------

Summary of Total Cost
The Department estimates that in order to meet the additional
conditions of the amended PTE 2020-02, affected entities would incur a
total cost of $227.5 million in the first year and $194.9 million in
subsequent years. The cost by requirement and entity type is summarized
in the table below.

Table 7--Three-Year Average Cost by Type of Entity and Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
SEC State-
registered registered Insurance Pension Investment
Broker-dealer investment investment company Robo-adviser consultant company
adviser adviser underwriter
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rule Review:
Total............................... $877,167 $3,571,765 $3,969,000 $72,181 $4,780 $444,559 $9,560
Per-Entity.......................... 478 478 478 478 478 478 478
Disclosure:
Total............................... 249,624 1,016,368 1,129,414 28,559 2,414 224,469 4,827
Per-Entity.......................... 136 136 136 189 241 241 241
Rollover Disclosure:
Total............................... 18,804,898 76,572,316 85,088,322 1,547,433 102,479 9,530,548 204,958
Per-Entity.......................... 2 2 2 2 2 2 2
Policies and Procedures:
Total............................... 146,328 595,837 662,103 12,041 3,453 321,138 6,906
Per-Entity.......................... 80 80 80 80 345 345 345
Retrospective Review:
Total............................... .............. .............. .............. .............. 6,043 562,032 12,087
Per-Entity.......................... .............. .............. .............. .............. 604 604 604
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 75971]]

Total:
Total............................... 20,078,016 81,756,286 90,848,839 1,660,214 119,169 11,082,746 238,339
Per-Entity.......................... 696 696 696 749 1,671 1,671 1,671
--------------------------------------------------------------------------------------------------------------------------------------------------------
SBA:
Threshold (in millions)............. 47.0 47.0 47.0 47.0 47.0 45.5 47.0
Per-Entity Cost as a Percentage of SBA
Threshold:
0.001% 0.001% 0.001% 0.002% 0.004% 0.004% 0.004%
--------------------------------------------------------------------------------------------------------------------------------------------------------

Cost Associated With PTE 84-24
Summary of Affected Entities
As discussed in the Affected Entities section of the Regulatory
Flexibility Analysis, the Department expects that 5,087 small financial
entities would be affected by the proposed amendments, including 930
pension consultants, 20 investment company principal underwriters,
3,960 independent producers, and 177 insurance companies.\632\
---------------------------------------------------------------------------

\632\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

Cost To Review the Rule
The Department estimates that all 5,087 of the small financial
institutions affected would each need to review the rule, as it applies
to their business. The Department estimates that such a review will
take a legal professional, on average, two hours to review the rule,
resulting in a total cost of $1.6 million in the first year.\633\
---------------------------------------------------------------------------

\633\ The burden is estimated as: (5,087 entities x 2 hours) =
10,174 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (5,087 entities x 2 hours) x $159.34 = $1,621,125.
---------------------------------------------------------------------------

Costs Associated With Disclosures
The proposed amendment would require small independent producers to
provide disclosures to retirement investors before engaging in a
transaction covered by this exemption. For more information on the
changed requirements for each disclosure, refer to the descriptions in
the preamble and RIA of this document. The Department estimates the
marginal cost for each of the disclosure requirements as:
Drafting or updating a written acknowledgement that the
financial institution and its investment professional are fiduciaries
is estimated to result in an aggregate cost of approximately
$10,000.\634\
---------------------------------------------------------------------------

\634\ The burden is estimated as: [177 financial institutions +
(3,960 independent producers x 5%)] x (10 minutes / 60 minutes) = 63
hours. A labor rate of approximately $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: [(177 financial institutions + 3,960 independent
producers x 5%) x (10 minutes / 60 minutes)] x $159.34 = $9,959. For
more information on the assumptions included in this calculation,
refer to the RIA of this document.
---------------------------------------------------------------------------

Drafting the written statement of the Best Interest
standard of care owed is estimated to result in an aggregate cost
$29,900.\635\
---------------------------------------------------------------------------

\635\ The burden is estimated as: [177 financial institutions +
(3,960 independent producers x 5%)] x (30 minutes / 60 minutes) =
188 hours. A labor rate of approximately $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: [(177 financial institutions + 3,960 independent
producers x 5%) x (30 minutes / 60 minutes)] x $159.34 = $29,876.
For more information on the assumptions included in this
calculation, refer to the RIA of this document.
---------------------------------------------------------------------------

Drafting or updating a written description of service
provided is estimated to result in an aggregate cost of $0.3
million.\636\
---------------------------------------------------------------------------

\636\ The burden is estimated as: (3,960 independent producers x
(30 minutes / 60 minutes)) = 1,980 hours. A labor rate of
approximately $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: (3,960 independent
producers x (30 minutes / 60 minutes)) x $159.34 = $315,493. For
more information on the assumptions included in this calculation,
refer to the RIA of this document.
---------------------------------------------------------------------------

Drafting a written statement of the independent producer's
material conflicts of interest and the amount of insurance commission
paid in connection with the purchase by a retirement investor of the
recommended annuity is estimated to result in an aggregate cost of $0.6
million. \637\
---------------------------------------------------------------------------

\637\ The burden is estimated as: (3,960 independent producers x
1 hour) = 3,960 hours. A labor rate of approximately $159.34 is used
for a legal professional. The labor rate is applied in the following
calculation: (3,960 independent producers x 1 hour) x $159.34 =
$630,986. For more information on the assumptions included in this
calculation, refer to the RIA of this document.
---------------------------------------------------------------------------

For small entities, the Department estimates that developing the
disclosures described above would result in a total cost of $1.0
million the first year.
Cost Associated With Rollover Documentation and Disclosure
The proposed amendment would require an independent producer to
provide a rollover disclosure that is similar to the disclosure
required in the proposed amendment to PTE 2020-02. As discussed in the
RIA, the Department assumes that such disclosures would be prepared by
the independent producer. The Department requests comment on whether
this would be true for small independent producers.
In the RIA, the Department estimates that 52,449 retirement
investors would receive documentation on whether the recommended
annuity is in their best interest each year.\638\ The Department does
not have data on what proportion of rollovers would be produced by
small independent producers. For the purposes of this analysis, the
Department assumes that the proportion of rollovers advised by small
independent producers is equal to the proportion of independent
producers that are small. The Department estimates that 99 percent of
rollovers would be produced by small independent producers.\639\ The
Department estimates small independent producers would need to provide
51,925 rollover disclosures annually. This results in an estimated cost
of approximately $8.3 million annually.\640\ These costs likely reflect
an

[[Page 75972]]

overestimate of the total cost, as it assumes that small independent
producers would make the same number of recommended rollovers as the
average independent producer. The Department requests comment on how
many rollover recommendations a small independent producer is likely to
make in a given year, on average.
---------------------------------------------------------------------------

\638\ For information on this estimate, refer to the estimate of
IRAs affected by the proposed amendments to PTE 84-24 in the
Affected Entities section of the RIA.
\639\ This is estimated on the percent of entities with annual
receipts less than $15.0 million for the industry Insurance Agencies
and Brokerages, NAICS 524210. See NAICS Association, Count by NAICS
Industry Sectors, NAICS Association, https://www.naics.com/business-lists/counts-by-naics-code/.; Small Business Administration, Table
of Size Standards, Small Business Administration, (December 2022),
https://www.sba.gov/document/support--table-size-standards.
\640\ The burden is estimated as: (51,925 rollovers x 1 hour) =
51,925 hours. A labor rate of approximately $158.94 is used for an
independent producer. The labor rate is applied in the following
calculation: (51,925 rollovers x 1 hour) x $158.94 = $8,252,960. For
more information on the assumptions included in this calculation,
refer to the RIA of this document.
---------------------------------------------------------------------------

Costs Associated With the Provision of Disclosures to Retirement
Investors
The Department estimates that the number of disclosures that would
need to be provided to retirement investors is equal to the number of
rollover disclosures, or 51,925 disclosures. Preparing and sending the
general disclosures described above is estimated to result in an
estimated cost of approximately $18,968.\641\
---------------------------------------------------------------------------

\641\ The labor cost is estimated as: (51,925 disclosures x 5.8%
sent by mail x (5 minutes / 60 minutes)) = 251 hours. A labor rate
of $63.45 is used for a clerical worker. The labor rate is applied
in the following calculation: (51,925 disclosures x 5.8% sent by
mail x (5 minutes / 60 minutes)) x $63.45 = $15,926. The material
cost is estimated as: 3,012 rollovers resulting in a paper
disclosure x [$0.66 postage + ($0.05 per page x 7 pages)] = $3,042.
The total cost is estimated as: $15,926 + $3,042 = $18,968. For more
information on the assumptions included in this calculation, refer
to the RIA of this document.
---------------------------------------------------------------------------

Additionally, independent producers would be required to send the
documentation to the insurance company. The Department expects that
such documentation would be sent electronically and result in a de
minimis burden. The Department requests comment on this assumption.
Costs Associated With the Retrospective Review
The proposed amendment would require small insurance companies to
conduct a retrospective review at least annually. The review would be
required to be reasonably designed to prevent violations of and achieve
compliance with (1) the Impartial Conduct Standards, (2) the terms of
this exemption, and (3) the policies and procedures governing
compliance with the exemption. The review would be required to evaluate
the effectiveness of the supervision system, any noncompliance
discovered in connection with the review, and corrective actions taken
or recommended, if any. Insurance companies would be required to
annually provide a written report that details the review to a senior
executive officer for certification. Insurance companies would also be
required to provide the independent producer with the underlying
methodology and results of the retrospective review.
As discussed in the RIA, the Department estimates that insurance
companies would need to prepare a total of 12,000 retrospective
reviews.\642\ The Department does not have data on the proportion of
retrospective reviews that would be prepared by small insurance
companies. For the purpose of this analysis, the Department assumes
that the number of retrospective reviews prepared by small insurance
companies is proportionate to the number of small insurance companies.
This results in an estimate of 9,879 retrospective reviews.\643\
---------------------------------------------------------------------------

\642\ For more information on this estimate, refer to the RIA.
\643\ The number of retrospective reviews prepared by small
insurance companies is estimated as: [12,000 x (177/215)] = 9,879
retrospective reviews.
---------------------------------------------------------------------------

The Department estimates that conducting and drafting the
retrospective review would result in an estimated annual cost of $1.6
million.\644\ Additionally, the Department estimates the cost for a
certifying officer to review the report and certify the exemption would
result in an estimated cost burden of $0.3 million.\645\ Finally, the
Department estimates that the requirement to provide the methodology
and results to each independent producer would result in an annual cost
of approximately $52,200.\646\
---------------------------------------------------------------------------

\644\ This is estimated as: (9,879 retrospective reviews x 1
hour) = 9,879 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (9,879 retrospective reviews x 1 hour) x $159.34 =
$1,574,120. For more information on the assumptions included in this
calculation, refer to the RIA of this document.
\645\ The burden is estimated as: (9,879 retrospective reviews x
(15 minutes / 60 minutes)) = 2,470 hours. A labor rate of $128.11 is
used for a top executive. The labor rate is applied in the following
calculation: (9,879 retrospective reviews x (15 minutes / 60
minutes)) x $128.11 = $316,400. For more information on the
assumptions included in this calculation, refer to the RIA of this
document.
\646\ This is estimated as: (9,879 retrospective reviews x (5
minutes / 60 minutes)) = 823 hours. A labor rate of $63.45 is used
for a clerical worker. The labor rate is applied in the following
calculation: (9,879 retrospective reviews x (5 minutes / 60
minutes)) x $63.45 = $52,235. For more information on the
assumptions included in this calculation, refer to the RIA of this
document.
---------------------------------------------------------------------------

Costs Associated With Policies and Procedures
The proposed amendment would require insurance companies to
establish, maintain, and enforce written policies and procedures for
the review of each independent producer's recommendation before an
annuity is issued to a retirement investor. The insurance company's
policies and procedures must mitigate conflicts of interest to the
extent that a reasonable person reviewing the policies and procedures
and incentive practices as a whole would conclude that they do not
create an incentive for the independent producer to place its
interests, or those of the insurance, or any affiliate or related
entity, ahead of the interests of the retirement investor. Insurance
companies' policies and procedures include a prudent process for
determining whether to authorize an independent producer to sell the
insurance company's annuity contracts to retirement investors, and for
taking action to protect retirement investors from independent
producers who have failed or are likely to fail to adhere to the
impartial conduct standards, or who lack the necessary education,
training, or skill. Finally, insurance companies must provide their
complete policies and procedures to the Department within 10 days upon
request. Finally, insurance companies must provide their complete
policies and procedures to the Department within 10 days upon request.
The Department estimates that drafting or modifying the policies
and procedures and procedures would result in an estimated cost of
approximately $0.1 million in the first year.\647\ The requirement to
review policies and procedures annually would result in an estimated
cost of approximately $56,400 in subsequent years.\648\ Providing
policies and procedures to the Department upon request is estimated to
result in a de minimis annual cost.\649\
---------------------------------------------------------------------------

\647\ This is estimated as: (177 small insurance companies x 5
hours) = 885 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (177 small insurance companies x 5 hours) x $159.34 =
$141,016. For more information on the assumptions included in this
calculation, refer to the RIA of this document.
\648\ This is estimated as: (177 insurance companies x 2 hours)
= 354 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (177 insurance companies x 2 hours) x $159.34 =
$56,406. For more information on the assumptions included in this
calculation, refer to the RIA of this document.
\649\ The number of requests in the first year is estimated as
177 small insurance companies x (39 requests in PTE 2020-02/4,430
small financial institutions in PTE 2020-02) = 2 requests. The
number of requests in subsequent years is estimated as: 177
insurance companies x (12 requests in PTE 2020-02/4,430 small
financial institutions in PTE 2020-02) = 1 request. The burden is
estimated as: ((2 x 15 minutes) / 60 minutes) = 0.50 hours. A labor
rate of $63.45 is used for a clerical worker. The labor rate is
applied in the following calculation: ((2 x 15 minutes) / 60
minutes) x $63.45 = $31.73.

---------------------------------------------------------------------------

[[Page 75973]]

Costs Associated With the Recordkeeping
The proposed amendment would amend the current recordkeeping
requirements to incorporate new provisions that are similar to the
recordkeeping provision in PTE 2020-02 for all entities relying on the
exemption. The Department estimates that the additional time needed to
maintain records for the financial institutions to be consistent with
the exemption would require an insurance company and independent
producer two hours annually, resulting in an estimated annual cost of
$1.3 million.\650\ Additionally, the Department estimates that the
requirement to distribute records upon request would result in an
estimated annual cost of $3.1 million.\651\
---------------------------------------------------------------------------

\650\ This is estimated as: (3,960 independent producers + 177
insurance companies) x 2 hours = 8,274 hours. A labor rate of
$158.94 is used for an independent producer. A labor rate of $159.34
is used for a legal professional. The labor rate is applied in the
following calculation: [(3,960 independent producers x 2 hours x
$158.94) + (177 insurance companies x 2 hours x $159.34)] =
$1,315,211.
\651\ The burden is estimated as: (3,960 independent producers x
10 requests) x (30 minutes / 60 minutes) = 19,800 hours. A labor
rate of $158.94 is used for an independent producer. A labor rate of
$159.34 is used for a legal professional. The labor rate is applied
in the following calculation: [(3,960 independent producers x 10
requests) x (30 minutes / 60 minutes)] x $158.94 = $3,147,012.
---------------------------------------------------------------------------

Summary of Total Cost
The Department estimates that in order to meet the additional
conditions of the amended PTE 84-24, affected entities would incur a
total cost of $17.4 million in the first year and $14.7 million in
subsequent years. The per-entity cost by type of entity is broken down
in the table below.

Table 8--Cost by Type of Entity and Requirement, First Year
----------------------------------------------------------------------------------------------------------------
Insurance Financial
Independent agents and institutions/ Mutual fund
producer pension insurance underwriters
consultants companies
----------------------------------------------------------------------------------------------------------------
Rule Review:
Total....................................... $1,261,973 $296,372 $56,406 $6,374
Per-Entity.................................. 319 319 319 319
Disclosure:
Total:...................................... 9,239,440 .............. 18,802 ..............
Per-Entity.................................. 2,434 .............. 106 ..............
Policies and Procedures:
Total....................................... .............. .............. 141,048 ..............
Per-Entity.................................. .............. .............. 1,115 ..............
Retrospective Review:
Total....................................... .............. .............. 1,942,755 ..............
Per-Entity.................................. .............. .............. 10,976 ..............
Recordkeeping:
Total....................................... 4,405,817 .............. 56,406 ..............
Per-Entity.................................. 397 .............. 319 ..............
----------------------------------------------------------------------------------------------------------------
Total
Total Cost.................................. 14,907,230 296,372 2,215,417 6,374
Per-Entity Cost............................. 3,960 319 12,835 319
----------------------------------------------------------------------------------------------------------------
SBA:
Threshold (in millions)..................... 15.0 45.5 47.0 47.0
Per-Entity Cost as a Percentage of SBA 0.021% 0.001% 0.027% 0.001%
Threshold..................................
----------------------------------------------------------------------------------------------------------------

Costs Associated With the Mass Amendments
Cost Associated With PTE 75-1
Summary of Affected Entities
The amendment to PTE 75-1 would affect banks, reporting dealers,
and broker-dealers registered under the Security Exchange Act of 1934.
As discussed in the Affected Entities section above, the Department
estimates that 3,403 financial institutions, comprised of 1,835 broker-
dealers and 1,568 banks, would use PTE 75-1.\652\
---------------------------------------------------------------------------

\652\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities sections of the
RIA and the Regulatory Flexibility Analysis.
---------------------------------------------------------------------------

\653\ For more information on these conditions, refer to the
Preamble and RIA of this document.
---------------------------------------------------------------------------

Costs Associated With Recordkeeping in Parts II and V
Additionally, the Department proposes to amend Parts II and V to
adjust the recordkeeping requirement to shift the burden from plans and
IRAs to financial institutions. The amended class exemption requires
financial institutions engaging in the exempted transactions (rather
than the plans or IRAs) to maintain all records pertaining to such
transactions for six years and provide access to the records upon
request to the specified parties. The Department estimates that the
total cost for small financial institutions to maintain recordkeeping
and provide access to records upon request is approximately $2.6
million annually

[[Page 75974]]

and the per-firm cost is approximately $763 annually.\654\
---------------------------------------------------------------------------

\654\ The burden is estimated as: (3,403 small financial
institutions x 4 hours) = 13,612 hours. A labor rate of $190.63 is
used for a financial manager. The labor rate is applied in the
following calculation: (3,403 small financial institutions x 4
hours) x $190.63 = $2,594,856.
---------------------------------------------------------------------------

Costs Associated With Removing Fiduciary Investment Advice From Parts
III and IV
Finally, the Department is proposing to amend Parts III and IV,
which currently provide relief for investment advice fiduciaries, by
removing fiduciary investment advice from the covered transactions.
Investment advice providers would instead have to rely on the amended
PTE 2020-02 for exemptive relief covering investment advice
transactions. The Department believes that since investment advice
providers were already required to provide records and documentation
under PTE 2020-02, this amendment would not result in additional costs.
Summary of Total Cost
The Department estimates that in order to meet the additional
conditions of the amended PTE 75-1, affected entities would annually
incur a total cost of approximately $2.6 million and a per-firm cost of
approximately $763. The per-entity cost by type of entity is broken
down in the table below.

Table 9--Cost by Type of Entity and Requirement
------------------------------------------------------------------------
Broker-dealers Commercial banks
------------------------------------------------------------------------
Recordkeeping:
Total........................... $1,399,224 $1,195,631
Per-Entity...................... 763 763
------------------------------------------------------------------------
Total:
Total........................... 1,399,224 1,195,631
Per-Entity...................... 763 763
------------------------------------------------------------------------
SBA
Threshold (in millions)......... 47.0 850
Per-Entity Cost as a Percentage 0.0016% 0.0001%
of SBA Threshold...............
------------------------------------------------------------------------

Cost Associated With PTE 77-4, PTE 80-83, and PTE 83-1
Summary of Affected Entities
The amendment to PTE 77-4 would affect mutual fund companies. As
discussed in the Affected Entities section, the Department estimates
that 812 mutual fund companies would be affected by the amended PTE 77-
4.\655\
---------------------------------------------------------------------------

\655\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

PTE 80-83 allows banks to purchase, on behalf of employee benefit
plans, securities issued by a corporation indebted to the bank that is
a party in interest to the plan. The Department estimates that 19 small
fiduciary-banks with public offering services would be affected by the
amended PTE 80-83.\656\
---------------------------------------------------------------------------

\656\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
---------------------------------------------------------------------------

PTE 83-1 provides relief for the sale of certificates in an initial
issuance of certificates by the sponsor of a mortgage pool to a plan or
IRA when the sponsor, trustee, or insurer of the mortgage pool is a
fiduciary with respect to the plan or IRA assets invested in such
certificates.
Summary of Total Cost
The Department is proposing to amend PTE 77-4, PTE 80-83, and PTE
83-1 by removing fiduciary investment advice from the covered
transactions. Investment advice providers would instead have to rely on
the amended PTE 2020-02 for exemptive relief covering investment advice
transactions. The Department believes that since investment advice
providers were already required to provide such documentation under
these exemptions, these amendments would result in a de minimis change
for investment advice providers. Thus, these amendments would not
result in measurable additional costs.
Cost Associated With PTE 86-128
Summary of Affected Entities
The amendment to PTE 86-128 would affect fiduciaries of employee
benefit plans that affect or execute securities transactions and
independent plan fiduciaries that authorize the plan or IRA. As
discussed in the Affected Entities section, the Department estimates
that 1,835 investment advice providers would be affected by the
proposed amendments to PTE 86-128.
As discussed in the RIA, the Department estimates that 10,000 IRAs,
will engage in transactions covered under this class exemption, of
which 210 are new IRAs.\657\ The Department estimates that 96.9 percent
of these IRAs would be overseen by a small investment advice
provider.\658\ As such, the Department estimates that, each year, there
are 9,690 IRAs, of which 203 are new IRAs that would be overseen by a
small investment advice provider.\659\
---------------------------------------------------------------------------

\657\ For more information on how the number of each type of
entity is estimated, refer to the Affected Entities section.
\658\ Based on data from the NAICS Association for NAICS code
523120, the Departments estimate the percent of businesses within
the industry of Securities Brokerage with less than $47 million in
annual sales. (See NAICS Association. ``Market Analysis Profile:
NAICS Code Annual Sales.'' https://www.naics.com/business-lists/counts-by-naics-code/.)
\659\ The number of IRAs overseen by a small investment provider
is estimated as: 10,000 IRAs x 96.9% = 9,690 IRAs. The number of new
IRAs overseen by a small investment provider is estimated as: 210
IRAs x 96.9% = 203 IRAs.
---------------------------------------------------------------------------

Costs Associated With Recordkeeping
The Department is proposing to amend Section VI of PTE 86-128 to
require financial institutions to maintain for six years the records
necessary for the Department, IRS, plan fiduciary, contributing
employer or employee organization whose members are covered by the
plan, participants and beneficiaries and IRA owners to determine
whether conditions of this exemption have been met. As discussed above,
the Department estimates that 395 small-business investment advice
providers will be affected by this recordkeeping requirement. Applying
this assumption to the cost calculations described above, the
Department estimates that the total cost for small-business investment
advice providers to maintain recordkeeping is $204,011

[[Page 75975]]

annually \660\ and the per-firm cost is $111 annually.
---------------------------------------------------------------------------

\660\ The burden is estimated as: 1,835 broker-dealers x ((30
minutes + 15 minutes) / 60 minutes) = 1,376 hours. The labor rates
of $190.63 and $63.45 are used for a financial manager and a
clerical worker, respectively. The labor rate is applied in the
following calculation: (1,835 broker-dealers x (30 minutes / 60
minutes) x $190.63 per hour) + (1,835 broker-dealers x (15 minutes /
60 minutes) x $63.45) = $204,011. For more information on the
assumptions included in this calculation, refer to the RIA of this
document.
---------------------------------------------------------------------------

Cost Associated With the Written Authorization From the Authorizing
Fiduciary to the Broker-Dealer
Authorizing fiduciaries of IRAs entering into a relationship with
an investment advice provider are required to provide the investment
advice provider with advance written authorization to perform
transactions for the IRA. As discussed in the Summary of Affected
Entities section for this exemption in this analysis, the Department
estimates that approximately 44 authorizing fiduciaries are expected to
send an advance written authorization. Applying this assumption to the
cost calculations described above, the Department estimates that the
total cost to send an advance written authorization is approximately
$9,169 annually.\661\ The per-transaction cost is $45 annually, and the
per-firm cost is $5 annually.
---------------------------------------------------------------------------

\661\ The burden for a legal professional to prepare the
authorization form is estimated as: 203 IRAs x (15 minutes / 60
minutes) per IRA = 51 hours. A labor rate of $159.34 is used for a
legal professional. The labor rate is applied in the following
calculation: 203 IRA x (15 minutes / 60 minutes) per IRA x $159.34
per hour = $8,087. The burden of clerical staff to send the
authorization is estimated as: 203 IRA x (5 minutes / 60 minutes)
per IRA = 16 hours. A labor rate of $63.45 is used for a clerical
worker. The labor rate is applied in the following calculation: 203
IRA x (5 minutes / 60 minutes) per IRA x $63.45 = $1,073. The
material cost and postage cost associated with the authorization is
estimated as: 203 authorizations for IRAs x 5.8% paper x $0.76 = $9.
Therefore, the total cost to send an advance written authorization
is estimated as: $8,087 + $1,073 + $9 = $9,169. For more information
on the assumptions included in this calculation, refer to the RIA of
this document.
---------------------------------------------------------------------------

Cost Associated With the Provision of Materials for Evaluation of
Authorization of Transaction
Prior to a written authorization being made, the financial
institution must provide the authorizing fiduciary with a copy of the
exemption, a form for termination of authorization, a description of
placement practices, and any other reasonably available information.
This information is assumed to be readily available. As described
above, the Department assumes this information will be sent to the 203
IRAs that enter into an agreement with a financial institution.
Applying this assumption to the cost calculations described above,
Department estimates that the total cost to send the materials is
$1,085 annually.\662\ The per-transaction cost is $5 annually, and the
per-firm cost is $0.59 annually.
---------------------------------------------------------------------------

\662\ The burden for a clerical worker to prepare the
information is estimated as: 203 IRAs x (5 minutes / 60 minutes) per
IRA = 17 hours. A labor rate of $63.45 is used for a clerical
worker. The labor rate is applied in the following calculation: 203
IRAs x (5 minutes / 60 minutes) per IRA x $63.45 per hour = $1,073.
The material and postage cost are estimated as: 203 IRAs x 5.8%
paper x (7 pages x $0.05 per page + $0.66 for postage) = $12.
Therefore, the total cost to send the materials is estimated as:
$1,073 + $12 = $1,085. For more information on the assumptions
included in this calculation, refer to the RIA of this document.
---------------------------------------------------------------------------

Cost Associated With the Provision of an Annual Termination Form
Financial institutions must annually supply each authorizing
fiduciary with a form expressly providing an election to terminate the
written authorization. The Department estimates that 395 investment
advice providers would prepare the termination form, and 9,690 IRAs
would receive the form. Applying these assumptions to the cost
calculations described above, Department estimates that the total cost
to prepare and send the annual termination form is approximately
$197,857 annually.\663\ The per-transaction cost is $20 annually, and
the per-firm cost is $108 annually.
---------------------------------------------------------------------------

\663\ The burden for a legal professional to prepare the forms
is estimated as: 1,835 broker-dealers x (30 minutes / 60 minutes) =
918 hours. A labor rate of $159.34 is used for a legal professional.
The labor rate is applied in the following calculation: 1,835
broker-dealers x (30 minutes / 60 minutes) x 159.34 = $146,194. The
burden for a clerical worker to prepare and send the forms is
estimated as: 9,900 IRAs x (5 minutes / 60 minutes) = 808 hours. A
labor rate of $63.45 is used for a clerical worker. The labor rate
is applied in the following calculation: 9,690 IRAs x (5 minutes /
60 minutes) x $63.45 = $51,236. The material and postage cost
associated with the forms is estimated as: 9,690 IRAs x 5.8% paper x
(2 pages x $0.05 per page + $0.66 for postage) = $427. Therefore,
total cost to prepare and send the annual termination form is
estimated as: $146,194 + $51,236 + $427 = $197,857. For more
information on the assumptions included in this calculation, refer
to the RIA of this document.
---------------------------------------------------------------------------

Transaction Reporting
The investment advice provider engaging in a covered transaction
must give the authorizing fiduciary either a confirmation slips for
each securities transaction or a quarterly report containing specified
information. As discussed above, the provision of the confirmation is
already required under SEC regulations. Therefore, if the transaction
reporting requirement is satisfied by sending confirmation slips, no
additional hour and cost burden will occur.
Annual Statement
Broker-dealers are required to send an annual report to each
authorizing fiduciary containing the same information as the quarterly
report and all security transaction-related charges, the brokerage
placement practices, and a portfolio turnover ratio. The Department
assumes this information could be sent together. Therefore, the
clerical staff hours required to prepare and distribute the report has
been included with the provision of annual termination form
requirement, and no additional burden has been reported.
However, collecting and generating the information required for the
annual report is reported as a burden. As discussed above, the
Department estimates that 2,100 IRAs will receive an annual report.
Applying these assumptions to the cost calculations described above,
the Department estimates that the total cost to collect and generate
information for the annual report is $141 annually.\664\ The per-
account cost is $0.01 annually, and the per-firm cost is $0.08
annually.
---------------------------------------------------------------------------

\664\ The mailing cost is estimated as: 5 pages x $0.05 per page
= $0.25. The mailing rate is applied in the following calculation:
9,690 IRAs x 5.8% paper x $0.25 = $141. For more information on the
assumptions included in this calculation, refer to the RIA of this
document.
---------------------------------------------------------------------------

Report of Commissions Paid
A discretionary trustee must provide each authorizing fiduciary
with an annual report that separately shows the commissions paid to
affiliated brokers and non-affiliated brokers on both a total dollar
basis and a cents-per-share basis. The burden to prepare and distribute
the report is included with the provision of annual termination form
requirement, because both items are required to be sent annually.
However, the collection and generation of the information for the
quarterly report is reported as a burden. As described above, the
Department estimates that 2,100 IRAs will receive a report of the
commissions paid. Applying this assumption to the cost calculations
described above, the Department estimates that the total cost to
collect and generate information for the report of commission paid is
$56 annually.\665\ The per-account cost is

[[Page 75976]]

$0.01 annually, and the per-firm cost is less than $0.03 annually.
---------------------------------------------------------------------------

\665\ The mailing cost is estimated as: 2 pages x $0.05 per page
= $0.10. The mailing cost is applied in the following calculation:
9,690 IRAs x 5.8% x $0.10 = $56. For more information on the
assumptions included in this calculation, refer to the RIA of this
document.
---------------------------------------------------------------------------

Financial institutions are also required to report total of all
transaction-related charges incurred by the plan in connection with
covered transactions, the allocation of such charges among various
persons, as well as a conspicuous statement about the negotiability of
brokerage commissions and an estimate of future commission rates to the
plan fiduciaries. The information must be tracked, assigned to specific
plans, and reported. As described above, the Department estimates that
9,690 IRAs will be affected by this requirement. Applying this
assumption to the cost calculations described above, the Department
estimates that the total cost to report this information is $31,977
annually.\666\ The per-account cost is $3.30 annually, and the per-firm
cost is $17 annually.
---------------------------------------------------------------------------

\666\ This burden is estimated as: 9,690 IRAs x $3.30 = $31,977.
For more information on the assumptions included in this
calculation, refer to the RIA of this document.
---------------------------------------------------------------------------

This results in a total annual cost of $32,033.\667\
---------------------------------------------------------------------------

\667\ This burden is estimated as: $56 + $31,977 = $32,033.
---------------------------------------------------------------------------

Summary of Total Cost
The Department estimates that in order to meet the additional
conditions of the amended PTE 86-128, affected entities would annually
incur a total cost of $444,296 and a per-firm cost of $242. The per-
entity cost is broken down in the table below.

Table 10--Cost by Type of Entity and Requirement
------------------------------------------------------------------------
Total cost Per-entity cost
------------------------------------------------------------------------
Recordkeeping....................... $204,011 $111
Written Authorization from the 9,169 5
Authorizing Fiduciary to the Broker-
Dealer.............................
Provision of Materials for 1,085 0.59
Evaluation of Authorization of
Transaction........................
Annual Termination Form............. 197,857 108
Annual Statement.................... 141 0.08
Report of Commissions Paid.......... 32,033 17
-----------------------------------
Total........................... 444,296 242
------------------------------------------------------------------------
SBA Threshold (in millions)........................... 47.0
Per-Entity Cost as a Percentage of SBA Threshold...... 0.0005%
------------------------------------------------------------------------

4. Duplicate, Overlapping, or Relevant Federal Rules

The rules in ERISA and the Code that govern advice on the
investment of retirement assets overlap with SEC rules that govern the
conduct of investment advisers and broker-dealers that advise retail
investors. The Department considered conduct standards set by other
regulators, such as SEC, NAIC, and FINRA, in developing the proposal,
with the goal of avoiding overlapping or duplicative requirements. If
the requirements overlap, compliance with the other disclosure or
recordkeeping requirements can be used to satisfy the exemption, as
long as the conditions are satisfied.

5. Description of Alternatives Considered

Section 604 of the RFA requires the Department to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant adverse impact on small entities. The
Department tried to align the requirements in this proposal with the
requirements set by other regulators to minimize regulatory burden.
The Department considered not amending PTE 2020-02 and leaving the
exemption in its present form. The Department supports the existing PTE
2020-02 and has retained its core components in the amendment,
including the Impartial Conduct Standards and the requirement for
strong policies and procedures. However, the Department believes that
additional protections are necessary to ensure that fiduciary
investment advice providers adhere to the stringent standards outlined
in PTE 2020-02. Therefore, the proposed amendments clarify and tighten
the existing text of PTE 2020-02 to enhance the disclosure requirements
and strengthen the disqualification provisions.
The Department has considered requiring financial institutions to
disclosure the sources of third-party compensation received in
connection with recommended investment products on a public web page in
PTE 2020-02. When considering this requirement, the Department
discussed exempting small financial institutions from this disclosure.
The Department estimates that such a disclosure would cost small
entities $4.8 million \668\ with an average per-entity cost of $1,064.
The Department requests comment on whether small financial institutions
current provide website disclosures or have the technological
infrastructure to do so.
---------------------------------------------------------------------------

\668\ This estimate is based on the assumption that satisfying
this requirement would require a computer programmer to spend, on
average, 8 hours. A labor rate of $133.05 is used for a computer
programmer professional. The cost is estimated as: (4,512 small
financial institutions x 8 hours) x $133.05 = $4,802,573.
---------------------------------------------------------------------------

I. Unfunded Mandate Reform Act

Title II of the Unfunded Mandates Reform Act of 1995 \669\ requires
each federal agency to prepare a written statement assessing the
effects of any federal mandate in a proposed or final rule that may
result in an expenditure of $100 million or more (adjusted annually for
inflation with the base year 1995) in any one year by state, local, and
tribal governments, in the aggregate, or by the private sector. That
threshold is approximately $177 million in 2023.
---------------------------------------------------------------------------

\669\ Unfunded Mandates Reform Act of 1995, Public Law 104-4,
109 Stat. 48, (1995).
---------------------------------------------------------------------------

For purposes of the Unfunded Mandates Reform Act, this proposal is
expected to have an impact on the private sector. For the purposes of
the proposal, the RIA shall meet the UMRA obligations.

J. Federalism Statement

Executive Order 13132 outlines the fundamental principles of
federalism. It also requires federal agencies to adhere to specific
criteria in formulating and implementing policies that have
``substantial direct effects'' on the states, the relationship between
the national government and states, or on the distribution of power and
responsibilities among the various levels of government. Federal
agencies promulgating regulations that have these federalism
implications must

[[Page 75977]]

consult with state and local officials throughout the process of
developing the proposed regulation.
As discussed throughout this analysis, this proposed regulatory
action would affect the insurance industry pertaining to annuities.
These entities are also regulated by states, many of whom, as discussed
in the discussion of the regulatory baseline, have taken regulatory or
legislative actions. The Department has carefully considered the
regulatory landscape in the states and worked to ensure that its
proposed regulations would not impose obligations on advisers that are
inconsistent with their responsibilities under state law, including the
obligations imposed in states that based their laws on the NAIC Model
Regulation. Nor would these proposed regulations impose obligations or
costs on the state regulators. As discussed above, however, the
Department has increased the protections afforded by many of these
laws, consistent with its own responsibilities under ERISA, and has
endeavored to lend greater uniformity on the provision of advice to
retirement investors, so that advisers covered by the rule must all
abide by a uniform fiduciary standard. The Department has had
discussions with state insurance regulators and state-regulated parties
about these issues including the need to ensure that retirement
investors have sufficient protection when receiving investment advice.
The Department expects to continue discussions with state insurance
regulators to ensure that this proposed regulation complements the
protections provided by the NAIC Model Rule. The Department also
expects to continue its discussion with state securities regulators.

Authority

This regulation is proposed pursuant to the authority in section
505 of ERISA (Pub. L. 93-406, 88 Stat. 894 (Sept. 2, 1974); 29 U.S.C.
1135) and section 102 of Reorganization Plan No. 4 of 1978 (43 FR 47713
(Oct. 17, 1978)), 3 CFR, 1978 Comp. 332, effective December 31, 1978
(44 FR 1065 (Jan. 3, 1979)), 3 CFR, 1978 Comp. 332, 5 U.S.C. App. 237,
and under Secretary of Labor's Order No. 1-2011, 77 FR 1088 (Jan. 9,
2012).

List of Subjects in 29 CFR Part 2510

Employee benefit plans, Employee Retirement Income Security Act,
Pensions, Plan assets.

For the reasons set forth in the preamble, the Department is
proposing to amend part 2510 of subchapter B of Chapter XXV of Title 29
of the Code of Federal Regulations as follows:

PART 2510--DEFINITIONS OF TERMS USED IN SUBCHAPTERS C, D, E, F, AND
G OF THIS CHAPTER

0
1. The authority citation for part 2510 is revised to read as follows:

Authority: 29 U.S.C. 1002(1)-(8), 1002(13)-(16), 1002(20),
1002(21), 1002(34), 1002(37), 1002(38), 1002(40)-(44), 1031, and
1135; Div. O, Title I, Sec. 101, Pub. L. 116-94, 133 Stat. 2534
(Dec. 20, 2019); Div. T, Title I, Sec. 105, Pub. L. 117-328, 136
Stat. 4459 (Dec. 29, 2022); Secretary of Labor's Order 1-2011, 77 FR
1088 (Jan. 9, 2012); Secs. 2510.3-21, 2510.3-101 and 2510.3-102 also
issued under Sec. 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C.
App. 237 (E.O. 12108, 44 FR 1065 (Jan. 3, 1979)), and 29 U.S.C. 1135
note. Section 2510.3-38 also issued under Sec. 1(b) Pub. L. 105-72,
111 Stat. 1457 (Nov. 10, 1997).

0
2. Revise Sec. 2510.3-21 to read as follows:

Sec. 2510.3-21 Definition of ``Fiduciary.''

(a)-(b) [Reserved]
(c) Investment advice. (1) For purposes of section 3(21)(A)(ii) of
the Employee Retirement Income Security Act of 1974 (the Act), section
4975(e)(3)(B) of the Internal Revenue Code (Code), and this paragraph,
a person renders ``investment advice'' with respect to moneys or other
property of a plan or IRA if the person makes a recommendation of any
securities transaction or other investment transaction or any
investment strategy involving securities or other investment property
(as defined in paragraph (f)(10) of this section) to the plan, plan
fiduciary, plan participant or beneficiary, IRA, IRA owner or
beneficiary or IRA fiduciary (retirement investor), and the person
satisfies paragraphs (c)(1)(i), (ii), or (iii) of this section:
(i) 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;
(ii) 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
(iii) The person making the recommendation represents or
acknowledges that they are acting as a fiduciary when making investment
recommendations.
(iv) For purposes of this paragraph, when advice is directed to a
plan or IRA fiduciary, the relevant retirement investor is both the
plan or IRA and the fiduciary.
(v) Written statements by a person disclaiming status as a
fiduciary under the Act, the Code, or this section, or disclaiming the
conditions set forth in paragraph (c)(1)(ii) of this section, will not
control to the extent they are inconsistent with the person's oral
communications, marketing materials, applicable State or Federal law,
or other interactions with the retirement investor.
(2) A person who is a fiduciary with respect to a plan or IRA by
reason of rendering investment advice (as defined in paragraph (c)(1)
of this section) for a fee or other compensation, direct or indirect,
with respect to any moneys or other property of such plan or IRA, or
having any authority or responsibility to do so, shall not be deemed to
be a fiduciary regarding any assets of the plan or IRA with respect to
which such person does not have any discretionary authority,
discretionary control, or discretionary responsibility, does not
exercise any authority or control, does not render investment advice
(as defined in paragraph (c)(1) of this section) for a fee or other
compensation, and does not have any authority or responsibility to
render such investment advice, provided that nothing in this paragraph
shall be deemed to:
(i) Exempt such person from the provisions of section 405(a) of the
Act concerning liability for fiduciary breaches by other fiduciaries
with respect to any assets of the plan; or
(ii) Exclude such person from the definition of the term ``party in
interest'' (as set forth in section 3(14)(B) of the Act) or
``disqualified person'' (as set forth in section 4975(e)(2) of the
Code) with respect to any assets of the plan or IRA.
(d) Execution of securities transactions. (1) A person who is a
broker or dealer registered under the Securities Exchange Act of 1934,
a reporting dealer who makes primary markets in securities of the
United States Government or of an agency of the United States
Government and reports daily to the Federal Reserve Bank of New York
its positions with respect to such securities and borrowings thereon,
or a bank supervised by the United States or a State, shall not be
deemed to be a

[[Page 75978]]

fiduciary, within the meaning of section 3(21)(A) of the Act or section
4975(e)(3)(B) of the Code, with respect to a plan or an IRA solely
because such person executes transactions for the purchase or sale of
securities on behalf of such plan or IRA in the ordinary course of its
business as a broker, dealer, or bank, pursuant to instructions of a
fiduciary with respect to such plan or IRA, if:
(i) Neither the fiduciary nor any affiliate of such fiduciary is
such broker, dealer, or bank; and
(ii) The instructions specify
(A) The security to be purchased or sold,
(B) A price range within which such security is to be purchased or
sold, or, if such security is issued by an open-end investment company
registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1,
et seq.), a price which is determined in accordance with Rule 22c-1
under the Investment Company Act of 1940 (17 CFR 270.22c-1),
(C) A time span during which such security may be purchased or sold
(not to exceed five business days), and
(D) The minimum or maximum quantity of such security which may be
purchased or sold within such price range, or, in the case of a
security issued by an open-end investment company registered under the
Investment Company Act of 1940, the minimum or maximum quantity of such
security which may be purchased or sold, or the value of such security
in dollar amount which may be purchased or sold, at the price referred
to in paragraph (d)(1)(ii)(B) of this section.
(2) A person who is a broker-dealer, reporting dealer, or bank
which is a fiduciary with respect to a plan or IRA solely by reason of
the possession or exercise of discretionary authority or discretionary
control in the management of the plan or IRA or the management or
disposition of plan or IRA assets in connection with the execution of a
transaction or transactions for the purchase or sale of securities on
behalf of such plan or IRA which fails to comply with the provisions of
paragraph (d)(1) of this section shall not be deemed to be a fiduciary
regarding any assets of the plan or IRA with respect to which such
broker-dealer, reporting dealer or bank does not have any discretionary
authority, discretionary control, or discretionary responsibility, does
not exercise any authority or control, does not render investment
advice (as defined in paragraph (c)(1) of this section) for a fee or
other compensation, and does not have any authority or responsibility
to render such investment advice, provided that nothing in this
paragraph shall be deemed to:
(i) Exempt such broker-dealer, reporting dealer, or bank from the
provisions of section 405(a) of the Act concerning liability for
fiduciary breaches by other fiduciaries with respect to any assets of
the plan; or
(ii) Exclude such broker-dealer, reporting dealer, or bank from the
definition, of the term ``party in interest'' (as set forth in section
3(14)(B) of the Act) or ``disqualified person'' (as set forth in
section 4975(e)(2) of the Code) with respect to any assets of the plan
or IRA.
(e) For a fee or other compensation, direct or indirect. For
purposes of section 3(21)(A)(ii) of the Act and section 4975(e)(3)(B)
of the Code, a person provides investment advice ``for a fee or other
compensation, direct or indirect,'' if the person (or any affiliate)
receives any explicit fee or compensation, from any source, for the
advice or the person (or any affiliate) receives any other fee or other
compensation, from any source, in connection with or as a result of the
recommended purchase, sale, or holding of a security or other
investment property or the provision of investment advice, including,
though not limited to, commissions, loads, finder's fees, revenue
sharing payments, shareholder servicing fees, marketing or distribution
fees, mark ups or mark downs, underwriting compensation, payments to
brokerage firms in return for shelf space, recruitment compensation
paid in connection with transfers of accounts to a registered
representative's new broker-dealer firm, expense reimbursements, gifts
and gratuities, or other non-cash compensation. A fee or compensation
is paid ``in connection with or as a result of'' such transaction or
service if the fee or compensation would not have been paid but for the
recommended transaction or the provision of advice, including if
eligibility for or the amount of the fee or compensation is based in
whole or in part on the recommended transaction or the provision of
advice.
(f) Definitions. For purposes of this section--
(1) The term ``affiliate'' means any person directly or indirectly,
through one or more intermediaries, controlling, controlled by, or
under common control with such person; any officer, director, partner,
employee, representative, or relative (as defined in paragraph (f)(12)
of this section) of such person; and any corporation or partnership of
which such person is an officer, director, or partner.
(2) The term ``control'' means the power to exercise a controlling
influence over the management or policies of a person other than an
individual.
(3) The term ``IRA'' means any account or annuity described in Code
section 4975(e)(1)(B) through (F), including, for example, an
individual retirement account described in section 408(a) of the Code
and a health savings account described in section 223(d) of the Code.
(4) The term ``IRA owner'' means, with respect to an IRA, either
the person who is the owner of the IRA or the person for whose benefit
the IRA was established.
(5) The term ``IRA fiduciary'' means a person described in section
4975(e)(3) of the Code with respect to an IRA.
(6) The term ``plan'' means any employee benefit plan described in
section 3(3) of the Act and any plan described in section 4975(e)(1)(A)
of the Code.
(7) The term ``plan fiduciary'' means a person described in section
(3)(21)(A) of the Act and/or 4975(e)(3) of the Code with respect to a
plan. For purposes of this section, a participant or beneficiary of the
plan who is receiving advice is not a ``plan fiduciary'' with respect
to the plan.
(8) The term ``plan participant'' or ``participant'' means, for a
plan described in section 3(3) of the Act, a person described in
section 3(7) of the Act.
(9) The term ``beneficiary'' means, for a plan described in section
3(3) of the Act, a person described in section 3(8) of the Act.
(10) The phrase ``recommendation of any securities transaction or
other investment transaction or any investment strategy involving
securities or other investment property'' means recommendations:
(i) As to the advisability of acquiring, holding, disposing of, or
exchanging, securities or other investment property, as to investment
strategy, or as to how securities or other investment property should
be invested after the securities or other investment property are
rolled over, transferred, or distributed from the plan or IRA;
(ii) As to the management of securities or other investment
property, including, among other things, recommendations on investment
policies or strategies, portfolio composition, selection of other
persons to provide investment advice or investment management services,
selection of investment account arrangements (e.g., account types such
as brokerage versus advisory) or voting of proxies appurtenant to
securities; and

[[Page 75979]]

(iii) As to rolling over, transferring, or distributing assets from
a plan or IRA, including recommendations as to whether to engage in the
transaction, the amount, the form, and the destination of such a
rollover, transfer, or distribution.
(11) 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.
(12) The term ``relative'' means a person described in section
3(15) of the Act and section 4975(e)(6) of the Code or a brother, a
sister, or a spouse of a brother or sister.
(g) Applicability. Effective December 31, 1978, section 102 of the
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 237, transferred the
authority of the Secretary of the Treasury to promulgate regulations of
the type published herein to the Secretary of Labor. Accordingly, in
addition to defining a ``fiduciary'' for purposes of section
3(21)(A)(ii) of the Act, this section applies to the parallel provision
in section 4975(e)(3)(B) of the Code, which defines a ``fiduciary'' of
a plan defined in Code section 4975 (including an IRA) for purposes of
the prohibited transaction provisions in the Code. For example, a
person who satisfies paragraphs (c)(1) and (e) of this section in
connection with a recommendation to a retirement investor that is an
employee benefit plan as defined in section 3(3) of the Act, a
fiduciary of such a plan, or a participant or beneficiary of such plan,
including a recommendation concerning the rollover of assets currently
held in a plan to an IRA, is a fiduciary subject to Title I of the Act.
(h) Continued applicability of State law regulating insurance,
banking, or securities. Nothing in this section shall be construed to
affect or modify the provisions of section 514 of Title I of the Act,
including the savings clause in section 514(b)(2)(A) for State laws
that regulate insurance, banking, or securities.

Signed at Washington, DC, this 24th day of October, 2023.
Lisa M. Gomez,
Assistant Secretary, Employee Benefits Security Administration,
Department of Labor.
[FR Doc. 2023-23779 Filed 11-2-23; 8:45 am]
BILLING CODE 4510-29-P

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