Retirement Security Rule: Definition of an Investment Advice Fiduciary, 32122-32258 [2024-08065]
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Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations
Hotline, at 1–866–444–EBSA (3272) or
visit the Department of Labor’s website
(https://www.dol.gov/agencies/ebsa).
SUPPLEMENTARY INFORMATION:
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: Final rule
AGENCY:
The Department of Labor
(Department) is adopting a final rule
defining when a person renders
‘‘investment advice for a fee or other
compensation, direct or indirect’’ with
respect to any moneys or other property
of an employee benefit plan, for
purposes of the definition of a
‘‘fiduciary’’ in the Employee Retirement
Income Security Act of 1974 (Title I of
ERISA or the Act). The final rule also
applies for purposes of Title II of ERISA
to the definition of a fiduciary of a plan
defined in Internal Revenue Code
(Code), including an individual
retirement account or other plan
identified in the Code. The Department
also is publishing elsewhere in this
issue of the Federal Register
amendments to Prohibited Transaction
Exemption 2020–02 (Improving
Investment Advice for Workers &
Retirees) and to several other existing
administrative exemptions from the
prohibited transaction rules applicable
to fiduciaries under Title I and Title II
of ERISA.
DATES: This regulation is effective
September 23, 2024.
FOR FURTHER INFORMATION CONTACT:
• For questions regarding the rule:
contact Luisa Grillo-Chope, Office of
Regulations and Interpretations,
Employee Benefits Security
Administration (EBSA), 202–693–8510.
(Not a toll-free number).
• For questions regarding the
prohibited transaction exemptions:
contact Susan Wilker, Office of
Exemption Determinations, EBSA, 202–
693–8540. (Not a toll-free number).
• For questions regarding the
Regulatory Impact Analysis: contact
James Butikofer, Office of Research and
Analysis, EBSA, 202–693–8434. (Not a
toll-free number).
Customer Service Information:
Individuals interested in obtaining
information from the Department of
Labor concerning Title I of ERISA and
employee benefit plans may call the
Employee Benefits Security
Administration (EBSA) Toll-Free
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SUMMARY:
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A. Executive Summary
The Department is issuing a final rule
defining an investment advice fiduciary
for purposes of Title I and Title II of
ERISA. The final rule defines when a
person is a fiduciary in connection with
providing advice to an investor saving
for retirement through a workplace
retirement plan or other type of
retirement plan such as an IRA. Such
retirement investors include
participants and beneficiaries in
workplace retirement plans, IRA owners
and beneficiaries, as well as plan and
IRA fiduciaries with authority or control
with respect to the plan or IRA.
Under the final rule, a person is an
investment advice fiduciary if they
provide a recommendation in one of the
following contexts:
• The person either directly or
indirectly (e.g., through or together with
any affiliate) makes professional
investment recommendations to
investors on a regular basis as part of
their business and the recommendation
is made under circumstances that would
indicate to a reasonable investor in like
circumstances that the recommendation:
Æ is based on review of the retirement
investor’s particular needs or individual
circumstances,
Æ reflects the application of
professional or expert judgment to the
retirement investor’s particular needs or
individual circumstances, and
Æ may be relied upon by the
retirement investor as intended to
advance the retirement investor’s best
interest; or
• The person represents or
acknowledges that they are acting as a
fiduciary under Title I of ERISA, Title
II of ERISA, or both with respect to the
recommendation.
The recommendation also must be
provided ‘‘for a fee or other
compensation, direct or indirect’’ as
defined in the final rule.
As compared to the previous
regulatory definition, which was
finalized in 1975, the final rule better
reflects the text and the purposes of
ERISA and better protects the interests
of retirement investors, consistent with
the Department’s mission to ensure the
security of the retirement, health, and
other workplace-related benefits of
America’s workers and their families.
The final rule is designed to ensure
that retirement investors’ reasonable
expectations are honored when they
receive advice from financial
professionals who hold themselves out
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as trusted advice providers. The
Department’s regulation fills an
important gap in those advice
relationships where advice is not
currently treated as fiduciary advice
under the 1975 regulation’s approach to
ERISA’s functional fiduciary definition.
This may be the case even though the
financial professional holds themselves
out as providing recommendations that
are based on review of the retirement
investor’s needs or circumstances and
the application of professional or expert
judgment to the retirement investor’s
needs or circumstances, and that can be
relied upon to advance the retirement
investor’s best interest.
Together with amendments to
administrative exemptions (PTEs) from
the prohibited transaction rules
applicable to fiduciaries under Title I
and Title II of ERISA published
elsewhere in this issue of the Federal
Register, the final rule is intended to
protect the interests of retirement
investors by requiring persons who are
defined in the final rule as investment
advice fiduciaries to adhere to stringent
conduct standards and mitigate their
conflicts of interest. The amended PTEs’
compliance obligations are generally
consistent with the best interest
obligations set forth in the Securities
and Exchange Commission’s (SEC)
Regulation Best Interest and its
Commission Interpretation Regarding
Standard of Conduct for Investment
Advisers (SEC Investment Adviser
Interpretation), each released in 2019.
The Department anticipates that the
most significant benefits of the final rule
and amended PTEs will stem from the
application of ERISA’s fiduciary
protections under Title I and Title II and
PTE conditions to all covered
investment advice provided to
retirement investors. Under the final
rule and amended PTEs, advice
providers that satisfy the definition of
an investment advice fiduciary will be
required to adhere to the prudence
standard of care, reduce retirement
investor exposure to conflicted advice
that may erode investment returns, and
adopt protective conflict-mitigation
requirements.1
Requiring advice providers to operate
in compliance with ERISA fiduciary
protections will be especially beneficial
with respect to those transactions that
currently are not uniformly covered by
fiduciary protections consistent with
ERISA’s high standards. Those
transactions include recommendations
to roll over assets from a workplace
1 The references in this document to a ‘‘fiduciary’’
are intended to mean an ERISA Title I and Title II
fiduciary unless otherwise stated.
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retirement plan to an IRA in those cases
in which the advice provider is not
subject to Federal securities law
standards and, as is often the case, has
not previously advised the customer
about plan or IRA assets on a regular
basis. Other examples include
investment recommendations with
respect to many commonly purchased
retirement annuities, such as fixed
indexed annuities; recommendations of
other investments that may not be
subject to the SEC’s Regulation Best
Interest, such as real estate, certain
certificates of deposit, and other bank
products; and investment
recommendations to plan fiduciaries
with authority or control with respect to
the plan.
A proposed rule and proposed
amendments to the PTEs were released
by the Department on October 31, 2023
for notice and public comment, and
public hearings on the proposals were
held on December 12 and 13, 2023. The
Department has made certain changes
and clarifications in the final rule in
response to public comments on the
proposal and the testimony presented at
the public hearings. The final rule
narrows the contexts in which a covered
recommendation will constitute ERISA
fiduciary investment advice and makes
clear that the test for fiduciary status is
objective. Similarly, a new paragraph in
the regulatory text confirms that sales
recommendations that do not satisfy the
objective test will not be treated as
fiduciary advice, and that the mere
provision of investment information or
education, without an investment
recommendation, is not advice within
the meaning of the rule. Additionally,
the final rule makes clear that the rule
is focused on communications with
persons with authority over plan
investment decisions (including
selecting investment options for
participant-directed plans), rather than
communications with financial services
providers who do not have such
authority. Accordingly, the rule
excludes plan and IRA investment
advice fiduciaries from the definition of
a retirement investor. As a result, an
asset manager does not render fiduciary
advice simply by making
recommendations to a financial
professional or firm that, in turn, will
render advice to retirement investors in
a fiduciary capacity. The Department
believes the final rule, with these
revisions, appropriately defines an
investment advice fiduciary to comport
with reasonable investor expectations of
trust and confidence.
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B. Background
1. Title I and Title II of ERISA and the
1975 Rule
Title I of ERISA imposes duties and
restrictions on persons who are
‘‘fiduciaries’’ with respect to employee
benefit plans. In particular, fiduciaries
to Title I plans must adhere to duties of
prudence and loyalty. ERISA section
404 provides that Title I plan fiduciaries
must act with the ‘‘care, skill, prudence,
and diligence under the circumstances
then prevailing that a prudent [person]
acting in a like capacity and familiar
with such matters would use in the
conduct of an enterprise of a like
character and with like aims,’’ and that
they also must discharge their duties
with respect to a plan ‘‘solely in the
interest of the participants and
beneficiaries.’’ 2
These fiduciary duties, which are
rooted in the common law of trusts, are
reinforced by prohibitions against
transactions involving conflicts of
interest because of the dangers such
transactions pose to plans and their
participants. The prohibited transaction
provisions of ERISA, including Title II
of ERISA which is codified in the
Internal Revenue Code (Code),
‘‘categorically bar[ ]’’ plan fiduciaries
from engaging in transactions deemed
‘‘likely to injure the pension plan’’ 3
absent compliance with a prohibited
transaction exemption. The provisions
include prohibitions on a fiduciary’s
‘‘deal[ing] with the assets of the plan in
his own interest or for his own
account,’’ and ‘‘receiv[ing] any
consideration for his own personal
account from any party dealing with
such plan in connection with a
transaction involving the assets of the
plan.’’ 4 Thus, ERISA requires
fiduciaries who have conflicts of
interest, including from financial
incentives, to comply with protective
conditions in a prohibited transaction
exemption. Congress included some
statutory prohibited transaction
exemptions in ERISA and also
authorized the Department to grant
conditional administrative exemptions
from the prohibited transaction
provisions, but only if the Department
finds that the exemption is (1)
administratively feasible for the
Department, (2) in the interests of the
plan and of its participants and
beneficiaries, and (3) protective of the
2 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).
4 ERISA section 406(b)(1), (3), 29 U.S.C.
1106(b)(1), (3).
3 Harris
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rights of participants and beneficiaries
of such plan.5
Title II of ERISA, codified in the
Code,6 governs the conduct of
fiduciaries to plans defined in Code
section 4975(e)(1), which includes
IRAs.7 Some plans defined in Code
section 4975(e)(1) are also covered by
Title I of ERISA, but the definitions of
such plans are not identical. Although
Title II, as codified in the Code, does not
directly impose specific duties of
prudence and loyalty on fiduciaries as
in ERISA section 404(a), it prohibits
fiduciaries from engaging in conflicted
transactions on many of the same terms
as Title I.8 Under the Reorganization
Plan No. 4 of 1978, which Congress
subsequently ratified in 1984,9 Congress
generally granted the Department
authority to interpret the fiduciary
definition and issue administrative
exemptions from the prohibited
transaction provisions in Code section
4975.10
Many of the protections, duties, and
liabilities in both Title I and Title II of
ERISA hinge on fiduciary status. ERISA
includes a statutory definition of a
5 ERISA
section 408(a), 29 U.S.C. 1108(a).
preamble discussion includes some
references to the Code in the context of discussions
of Title II of ERISA involving specific provisions
codified in the Code. The Department understands
that references to the Code are useful but
emphasizes that both Title I and Title II are covered
by the same general definition of fiduciary and the
same general framework of prohibited transactions,
and that, under both Title I and Title II, fiduciaries
must comply with the conditions of an available
prohibited transaction exemption in order to engage
in an otherwise prohibited transaction.
7 For purposes of the final rule, the term ‘‘IRA’’
is defined as any account or annuity described in
Code section 4975(e)(1)(B)–(F), and includes
individual retirement accounts, individual
retirement annuities, health savings accounts, and
certain other tax-advantaged trusts and plans.
However, for purposes of any rollover of assets
between a Title I plan and an IRA described in this
preamble, the term ‘‘IRA’’ includes only an account
or annuity described in Code section 4975(e)(1)(B)
or (C). Additionally, while the Department uses the
term ‘‘retirement investor’’ throughout this
document to describe advice recipients, that is not
intended to suggest that the fiduciary definition
applies only with respect to employee pension
benefit plans and IRAs that are retirement savings
vehicles. As discussed herein, the final rule applies
with respect to plans as defined in Title I and Title
II of ERISA that make investments. In this regard,
see also paragraph (f)(12) that provides that the term
‘‘investment property’’ ‘‘does not include health
insurance policies, disability insurance policies,
term life insurance policies, or other property to the
extent the policies or property do not contain an
investment component.’’
8 26 U.S.C. 4975(c)(1); cf. id. at 4975(f)(5), which
defines ‘‘correction’’ with respect to prohibited
transactions as placing a plan or an IRA in a
financial position not worse than it would have
been in if the person had acted ‘‘under the highest
fiduciary standards.’’
9 Sec. 1, Public Law 98–532, 98 Stat. 2705 (Oct.
19, 1984).
10 5 U.S.C. App. 752 (2018).
6 This
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fiduciary at section 3(21)(A), which
provides that a person is a fiduciary
with respect to a plan to the extent the
person (i) exercises any discretionary
authority or discretionary control
respecting management of such plan or
exercises any authority or control
respecting management or disposition of
its assets, (ii) renders investment advice
for a fee or other compensation, direct
or indirect, with respect to any moneys
or other property of such plan, or has
any authority or responsibility to do so,
or (iii) has any discretionary authority
or discretionary responsibility in the
administration of such plan.11 The same
definition of a fiduciary is in Code
section 4975(e)(3).12
These statutory definitions broadly
assign fiduciary status for purposes of
Title I and Title II of ERISA. Thus, ‘‘any
authority or control’’ over plan assets is
sufficient to confer fiduciary status, and
any person who renders ‘‘investment
advice for a fee or other compensation,
direct or indirect’’ is an investment
advice fiduciary, regardless of whether
they have direct control over the plan’s
assets, and regardless of their status
under another statutory or regulatory
regime. In the absence of fiduciary
status, persons who provide investment
advice to retirement investors would
neither be subject to Title I of ERISA’s
fundamental fiduciary standards, nor
responsible under Title I and Title II of
ERISA for avoiding prohibited
transactions. The broad statutory
definition, the prohibitions on conflicts
of interest, and the core fiduciary
obligations of prudence and loyalty (as
applicable) all reflect Congress’
recognition in 1974, when it passed
ERISA, of the fundamental importance
of investment advice to protect the
interests of retirement investors.
In 1975, shortly after ERISA was
enacted, the Department issued a
regulation at 29 CFR 2510.3–21(c)(1)
(the 1975 regulation) that defined the
circumstances under which a person
renders ‘‘investment advice’’ to an
employee benefit plan within the
meaning of ERISA section 3(21)(A)(ii),
such that the person would be a
fiduciary under ERISA.13 The 1975
regulation significantly narrowed the
plain and expansive language of ERISA
section 3(21)(A)(ii), creating a five-part
test that must be satisfied in order for a
person to be treated as a fiduciary by
reason of rendering investment advice.
Under the five-part test, a person is a
fiduciary only if they: (1) render advice
as to the value of securities or other
11 ERISA
section 3(21)(A), 29 U.S.C. 1002(21)(A).
U.S.C. 4975(e)(3).
13 40 FR 50842 (Oct. 31, 1975).
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property, or make recommendations as
to the advisability of investing in,
purchasing, or selling securities or other
property (2) on a regular basis (3)
pursuant to a mutual agreement,
arrangement, or understanding with the
plan or a plan fiduciary that (4) the
advice will serve as a primary basis for
investment decisions with respect to
plan assets, and that (5) the advice will
be individualized based on the
particular needs of the plan. At the time
the 1975 regulation was issued, the
Department of the Treasury had sole
regulatory authority over Code section
4975(e)(3), and issued a virtually
identical regulation, 26 CFR 54.4975–
9(c)(1), which applies to plans defined
in Code section 4975.14
Since 1975, the retirement plan
landscape has changed significantly,
with a shift from defined benefit plans
(in which decisions regarding
investment of plan assets are primarily
made by professional asset managers) to
defined contribution/individual account
plans, such as 401(k) plans (in which
decisions regarding investment of plan
assets are often made by plan
participants who lack professional
investment expertise). In 1975,
individual retirement accounts had only
recently been created (by ERISA itself),
and 401(k) plans did not yet exist.15
Retirement assets were principally held
in pension funds controlled by large
employers or other large plan sponsors
and professional money managers. Now,
IRAs and plans providing for
participant-directed investments, such
as 401(k) plans, have become more
common retirement vehicles as opposed
to traditional pension plans, and
rollovers of workplace retirement plan
assets to IRAs are commonplace.
Individuals, regardless of their financial
literacy, have thus become increasingly
responsible for their own retirement
savings, and have increasingly become
direct recipients of investment advice
with respect to those savings.
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
14 40 FR 50840 (Oct. 31, 1975). The issuance of
this 1975 regulation pre-dated The Reorganization
Plan No. 4 of 1978, and thus authority to issue this
regulatory definition under Title II of ERISA was
still with the Department of the Treasury.
15 Section 2002(b) of Title II of ERISA established
individual retirement accounts with the addition of
408(a) to the Code. See Public Law 93–406.
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unable to assess the quality of the
advice they receive and may not be in
a position to learn of and guard against
the investment advice provider’s
conflicts of interest.16 However, as a
result of the five-part test in the 1975
regulation, and its limiting
interpretation of ERISA’s statutory,
functional fiduciary definition, many
financial professionals, consultants, and
financial advisers have no legal
obligation to adhere to the fiduciary
standards in Title I of ERISA or to the
prohibited transaction rules in Title I
and Title II of ERISA, despite the critical
role these professionals, consultants and
advisors play in guiding plan and IRA
investments. In many situations, this
disconnect undermines the reasonable
expectations of retirement investors in
today’s marketplace; a retirement
investor may reasonably expect that the
advice they are receiving from a trusted
adviser is fiduciary advice even when,
under the 1975 regulation’s
interpretation, it is not. If these
investment advice providers are not
fiduciaries under Title I or Title II of
ERISA, they do not have obligations
under Federal pension law to either
avoid prohibited transactions or comply
with the protective conditions in a PTE.
Recently, other regulators have
recognized the need for change in the
regulation of investment
recommendations and have imposed
enhanced conduct standards on
financial professionals who make
investment recommendations, including
broker-dealers and insurance agents. As
a result, the regulatory landscape today
is very different than it was even five
years ago. In 2019, the SEC adopted
Regulation Best Interest, which
established an enhanced best interest
standard of conduct applicable to
broker-dealers when making a
recommendation of any securities
transaction or investment strategy
involving securities to retail
customers.17 The SEC also issued its
SEC Investment Adviser Interpretation
16 In the securities law context, both SEC
Regulation Best Interest and the Advisers Act
fiduciary duty have specific obligations related to
disclosure and/or mitigation of conflicts of interest.
The SEC also adopted the Form CRS, which is a
brief relationship summary required to be provided
by broker-dealers and investment advisers to retail
investors. The SEC stated that the Form CRS ‘‘is
intended to inform retail investors about: [t]he types
of client and customer relationships and services
the firm offers; the fees, costs, conflicts of interest,
and required standard of conduct associated with
those relationships and services; whether the firm
and its financial professionals currently have
reportable legal or disciplinary history; and how to
obtain additional information about the firm.’’ 84
FR 33492 (July 12, 2019).
17 Regulation Best Interest: The Broker-Dealer
Standard of Conduct, 84 FR 33318 (July 12, 2019)
(Regulation Best Interest release).
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in 2019, which addressed the conduct
standards applicable to investment
advisers under the Investment Advisers
Act of 1940 (Advisers Act).18 Describing
these actions, the SEC has said, ‘‘key
elements of the standard of conduct that
applies to broker-dealers under
Regulation Best Interest will be
substantially similar to key elements of
the standard of conduct that applies to
investment advisers pursuant to their
fiduciary duty under the Advisers
Act.’’ 19 In this connection, the SEC has
also stressed that Regulation Best
Interest ‘‘aligns the standard of conduct
with retail customers’ reasonable
expectations.’’ 20
In 2020, the National Association of
Insurance Commissioners (NAIC) also
revised its Suitability In Annuity
Transactions Model Regulation to
provide that insurance agents must act
in the consumer’s best interest, as
defined by the Model Regulation, when
making a recommendation of an
annuity. Under the NAIC Model
Regulation, insurers would also be
expected to establish and maintain a
system to supervise recommendations
so that the insurance needs and
financial objectives of consumers at the
time of the transaction are effectively
addressed.21 The stated goal of the NAIC
working group related to the NAIC
Model Regulation was ‘‘to seek clear,
enhanced standards for annuity sales so
consumers understand the products
they purchase, are made aware of any
material conflicts of interest, and are
assured those selling the products do
not place their financial interests above
consumers’ interests.’’ 22 According to
the NAIC, as of March 11, 2024, 45
jurisdictions have implemented the
revisions to the NAIC Model
Regulation.23
These regulatory efforts reflect the
widespread understanding that brokerdealers and insurance agents commonly
18 84
FR 33669 (July 12, 2019).
Best Interest release, 84 FR 33318,
33330 (July 12, 2019); see also Staff Bulletin:
Standards of Conduct for Broker-Dealers and
Investment Advisers Care Obligation, (‘‘[b]oth
[Regulation Best Interest] for broker-dealers and the
[Advisers Act] fiduciary standard for investment
advisers are drawn from key fiduciary principles
that include an obligation to act in the retail
investor’s best interest and not to place their own
interests ahead of the investor’s interest.’’), https://
www.sec.gov/tm/standards-conduct-broker-dealersand-investment-advisers.
20 Regulation Best Interest release, 84 FR 33318
(July 12, 2019).
21 Available at www.naic.org/store/free/MDL275.pdf.
22 See https://content.naic.org/cipr-topics/
annuity-suitability-best-interest-standard.
23 See https://content.naic.org/sites/default/files/
inline-files/275%20Final%20Map_
2020%20Changes_March%2011%202024.pdf.
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make recommendations to their
customers for which they are
compensated as a regular part of their
business; that investors rely upon these
recommendations; and that regulatory
protections are important to ensure that
the recommendations are in the best
interest of the retail customer (in the
case of broker-dealers) or consumers (in
the case of insurance agents).24 After
careful review of the existing regulatory
landscape, the Department has
concluded that the 1975 regulation
should also be revised to reflect current
realities in light of the text and purposes
of Title I and Title II of ERISA.
In the current landscape, the 1975
regulation narrows the broad statutory
definition in ways that no longer serve
the purposes of Title I and Title II of
ERISA to protect the interests of
retirement investors. This is especially
the case given the growth of participantdirected investment arrangements and
IRAs, the conflicts of interest associated
with investment recommendations, and
the pressing need for plan participants,
IRA owners, and their beneficiaries to
receive sound advice from professional
financial advisers when making critical
investment decisions in an increasingly
complex financial marketplace. As the
SEC and NAIC recognized, many
different types of financial
professionals, including insurance
agents, broker-dealers, investment
advisers subject to the Advisers Act, and
others, make recommendations to
investors for which they are
compensated, and investors rightly rely
upon these recommendations with an
expectation that they are receiving
advice that is in their best interest. Like
these other regulators, the Department
has concluded that it is appropriate to
update the existing regulatory structure
to ensure that it properly protects the
financial interests of retirement
investors as Congress intended. As
reflected in this regulatory package,
24 The SEC stated in the Regulation Best Interest
release that ‘‘there is broad acknowledgment of the
benefits of, and support for, the continuing
existence of the broker-dealer business model,
including a commission or other transaction-based
compensation structure, as an option for retail
customers seeking investment recommendations.’’
84 FR 33318, 33319 (July 12, 2019). The NAIC
Model Regulation section 5.M. defines a
recommendation as ‘‘advice provided by a producer
to an individual consumer that was intended to
result or does result in a purchase, an exchange or
a replacement of an annuity in accordance with that
advice.’’ Section 5.B. defines ‘‘cash compensation’’
as ‘‘any discount, concession, fee, service fee,
commission, sales charge, loan, override, or cash
benefit received by a producer in connection with
the recommendation or sale of an annuity from an
insurer, intermediary, or directly from the
consumer.’’ (Emphasis added), https://content.
naic.org/sites/default/files/inline-files/MDL275.pdf.
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32125
after evaluation of the types of
investment advisory relationships that
should give rise to ERISA fiduciary
status, the Department has concluded
that it is appropriate to revise the
regulatory definition of an investment
advice fiduciary under Title I and Title
II of ERISA in the manner set forth
herein.
2. Prior Rulemakings
The Department began the process of
reexamining the regulatory definition of
an investment advice fiduciary under
Title I and Title II of ERISA in 2010.
After issuing two notices of proposed
rulemaking, conducting multiple days
of public hearings, and over six years of
deliberations, on April 8, 2016, the
Department replaced the 1975
regulation with a new regulatory
definition of a fiduciary under ERISA
(the 2016 Final Rule) which applied
under Title I and Title II of ERISA.25 In
the preamble to the 2016 Final Rule, the
Department noted that the 1975
regulation’s five-part test had been
created in a very different context and
investment advice marketplace.26 The
Department expressed concern that
specific elements of the five-part test—
which are not found in the text of Title
I or Title II of ERISA—worked to defeat
retirement investors’ legitimate
expectations when they received
investment advice from trusted advice
providers in the modern marketplace for
financial advice.27
The Department identified the
‘‘regular basis’’ element 28 in the fivepart test as a particularly important
example of the 1975 regulation’s
shortcomings.29 The Department stated
that the requirement that advice be
provided on a ‘‘regular basis’’ had failed
to draw a sensible line between
fiduciary and non-fiduciary conduct
and had undermined ERISA’s protective
purpose.30 The Department pointed to
examples of transactions in which a
25 See Definition of the Term ‘‘Fiduciary,’’ 75 FR
65263 (Oct. 22, 2010) (proposed rule); Definition of
the Tern ‘‘Fiduciary’’; Conflict of Interest Rule—
Retirement Investment Advice, 80 FR 21928 (Apr.
20, 2015) (proposed rule); Definition of the Term
‘‘Fiduciary’’; Conflict of Interest Rule—Retirement
Investment Advice, 81 FR 20946 (Apr. 8, 2016)
(final rule).
26 Definition of the Term ‘‘Fiduciary’’; Conflict of
Interest Rule—Retirement Investment Advice, 81
FR at 20946.
27 Id. at 20955.
28 This refers to the requirement in the 1975
regulation that, in order for fiduciary status to
attach, investment advice must be provided by the
person ‘‘on a regular basis.’’ See 40 FR 50842 (Oct.
31, 1975).
29 Definition of the Term ‘‘Fiduciary’’; Conflict of
Interest Rule—Retirement Investment Advice, 81
FR at 20955.
30 Id.
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discrete instance of advice can be of
critical importance to the plan, such as
a one-time purchase of a group annuity
to cover all of the benefits promised to
substantially all of a plan’s participants
for the rest of their lives when a defined
benefit plan terminates, or a plan’s
expenditure of hundreds of millions of
dollars on a single real estate transaction
based on the recommendation of a
financial adviser hired for purposes of
that one transaction.31
The Department likewise expressed
concern that the requirements in the
1975 regulation of a ‘‘mutual agreement,
arrangement, or understanding’’ that
advice would serve as ‘‘a primary basis
for investment decisions’’ had
encouraged investment advice providers
in the current marketplace to use fine
print disclaimers as potential means of
avoiding ERISA fiduciary status, even as
they marketed themselves as providing
tailored or individualized advice based
on the retirement investor’s best
interest.32 Additionally, the Department
noted that the ‘‘primary basis’’ element
of the five-part test appeared in tension
with the statutory text and purposes of
Title I and Title II of ERISA.33 If, for
example, a prudent plan fiduciary hires
multiple specialized advisers for an
especially complex transaction, it
should be able to rely upon any or all
of the consultants that it hired to render
advice, regardless of arguments about
whether one could characterize the
advice, in some sense, as primary,
secondary, or tertiary.34
The 2016 Final Rule defined an
investment advice fiduciary for
purposes of Title I and Title II of ERISA
in a way that would apply fiduciary
status in a wider array of advice
relationships than the five-part test in
the 1975 regulation.35 The 2016 Final
Rule generally covered: (1)
recommendations by a person who
represents or acknowledges that they are
acting as a fiduciary within the meaning
of ERISA; (2) advice rendered pursuant
to a written or verbal agreement,
arrangement or understanding that the
advice is based on the particular
investment needs of the retirement
investor; and, most expansively, (3)
recommendations directed to a specific
retirement investor or investors
regarding the advisability of a particular
investment or management decision
with respect to securities or other
31 Id.
32 Id.
33 Id.
34 Id.
35 Id.
at 20955–56.
at 20946.
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investment property of the plan or
IRA.36
The 2016 Final Rule also specifically
superseded a 2005 Advisory Opinion,
2005–23A (commonly known as the
Deseret Letter) which had opined that it
is not fiduciary investment advice under
Title I of ERISA to make a
recommendation as to distribution
options from an employee benefit plan,
even if accompanied by a
recommendation as to where the
distribution would be invested.37
On the same date it published the
2016 Final Rule, the Department also
published two new administrative class
exemptions from the prohibited
transaction provisions of Title I and
Title II of ERISA: the Best Interest
Contract Exemption (BIC Exemption) 38
and the Class Exemption for Principal
Transactions in Certain Assets Between
Investment Advice Fiduciaries and
Employee Benefit Plans and IRAs
(Principal Transactions Exemption).39
The Department granted the new
exemptions with the objective of
promoting the provision of investment
advice that is in the best interest of
retail investors such as plan participants
and beneficiaries, IRA owners and
beneficiaries, and certain plan
fiduciaries, including small plan
sponsors.40
The new exemptions included
conditions designed to protect the
interests of the retirement investors
receiving advice.41 The exemptions
required investment advice fiduciaries
to adhere to the following ‘‘Impartial
Conduct Standards’’: providing advice
in retirement investors’ best interest;
charging no more than reasonable
compensation; and making no
misleading statements about investment
transactions and other important
matters.42 In the case of IRAs and 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.43 The exemption further
provided that parties could not rely on
the exemption if they included
provisions in their contracts disclaiming
liability for compensatory remedies or
waiving or qualifying retirement
36 Id.
at 20997.
at 20949.
38 81 FR 21002 (Apr. 8, 2016).
39 81 FR 21089 (Apr. 8, 2016).
40 81 FR 21002 (April 8, 2016).
41 Best Interest Contract Exemption, 81 FR 21002;
see also ERISA section 408(a); Code section
4975(c)(2).
42 Best Interest Contract Exemption, 81 FR at
21077.
43 Id. at 21076.
37 Id.
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investors’ right to pursue a class action
or other representative action in court.44
In conjunction with the new
exemptions, the Department also made
amendments to pre-existing exemptions,
namely PTEs 75–1, 77–4, 80–83, 83–1,
84–24 and 86–128, to require
compliance with the Impartial Conduct
Standards and to make certain other
changes.45
3. Litigation Over the 2016 Rulemaking
The 2016 Final Rule and related new
and amended exemptions (collectively,
the 2016 Rulemaking) was challenged in
multiple lawsuits. In National
Association for Fixed Annuities v.
Perez, a district court in the District of
Columbia upheld the 2016 Rulemaking
in the context of a broad challenge on
multiple grounds.46 Among other
things, the court found that the 2016
Final Rule comports with both the text
and the purpose of ERISA, and it noted
‘‘if anything, it is the five-part test—and
not the current rule—that is difficult to
reconcile with the statutory text.
Nothing in the phrase ‘renders
investment advice’ suggests that the
statute applies only to advice provided
‘on a regular basis.’ ’’ 47 Relatedly, in
Market Synergy v. United States
Department of Labor, the U.S. Court of
Appeals for the Tenth Circuit affirmed
a district court’s decision similarly
upholding the 2016 Rulemaking as it
applied to fixed indexed annuities.48
On March 15, 2018, however, the U.S.
Court of Appeals for the Fifth Circuit
(Fifth Circuit) overturned a district
court’s decision upholding the validity
of the 2016 Final Rule 49 and vacated the
entire 2016 Rulemaking, in Chamber of
Commerce v. United States Department
44 Id.
at 21078–9.
FR 21139 (Apr. 8, 2016); 81 FR 21147 (Apr.
8, 2016); 81 FR 21181 (Apr. 8, 2016); 81 FR 21208
(Apr. 8, 2016).
46 Nat’l Assoc. for Fixed Annuities v. Perez, 217
F.Supp.3d 1 (D.D.C. 2016) [hereinafter NAFA]. On
December 15, 2016, the U.S. Court of Appeals for
the District of Columbia denied an emergency
request to stay application of the definition or the
exemptions pending an appeal of the district court’s
ruling. Nat’l Assoc. for Fixed Annuities v. Perez,
No. 16–5345, 2016 BL 452075 (D.C. Cir. 2016).
47 NAFA, 217 F. Supp. 3d at 23, 27–28.
48 885 F.3d 676 (10th Cir. 2018); see Thrivent
Financial for Lutherans v. Acosta, No. 16–CV–
03289, 2017 WL 5135552 (D. Minn. Nov. 3, 2017)
(granting the Department’s motion for a stay and the
plaintiff’s motion for a preliminary injunction, with
respect to Thrivent’s suit challenging the BIC
Exemption’s bar on class action waivers as
exceeding the Department’s authority and as
unenforceable under the Federal Arbitration Act).
49 Chamber of Commerce v. Hugler, 231 F. Supp.
3d 152 (N.D. Tex. Feb. 8, 2017) (finding, among
other things, that in the 2016 Final Rule, the
Department reasonably removed the ‘‘regular basis’’
requirement; and noting, ‘‘if anything, however, the
five-part test is the more difficult interpretation to
reconcile with who is a fiduciary under ERISA.’’).
45 81
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of Labor (Chamber).50 The Fifth Circuit
held that the 2016 Final Rule conflicted
with ERISA section 3(21)(A)(ii) and
Code section 4975(e)(3)(B). Specifically,
the Fifth Circuit found that the 2016
Final Rule swept too broadly and
extended to relationships that lacked
‘‘trust and confidence,’’ which the court
stated were hallmarks of the commonlaw fiduciary relationship that Congress
intended to incorporate into the
statutory definitions. The court
concluded that ‘‘all relevant sources
indicate that Congress codified the
touchstone of common-law fiduciary
status—the parties’ underlying
relationship of trust and confidence—
and nothing in the statute ‘requires’
departing from the touchstone.’’ 51
In addition to holding that the 2016
Final Rule conflicted with the statutory
definitions in Title I and Title II of
ERISA, the Fifth Circuit in Chamber
also determined that the 2016
Rulemaking failed to honor the
difference in the Department’s authority
over employee benefit plans under Title
I of ERISA and IRAs under Title II, by
imposing ‘‘novel and extensive duties
and liabilities on parties otherwise
subject only to the prohibited
transactions penalties.’’ 52 These
included the conditions of the BIC
Exemption and Principal Transactions
Exemption that required financial
institutions and individual fiduciary
advisers to enter into contracts with
their customers with specific duties,
warranties, and disclosures, and forbade
damages limitations and class action
waivers. Under the Code, IRA investors
do not have a private right of action.
Instead, the primary remedy for a
violation of the prohibited transaction
provisions under the Code is the
assessment of an excise tax.53 In the
Fifth Circuit’s view, the Department had
effectively exceeded its authority by
giving IRA investors the ability to bring
a private cause of action that Congress
had not authorized.54
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
50 885 F.3d 360 (5th Cir. 2018); but see id. at 391
(‘‘Nothing in the phrase ‘renders investment advice
for a fee or other compensation’ suggests that the
statute applies only in the limited context accepted
by the panel majority.’’) (Stewart, C.J., dissenting).
51 Id. at 369; but see Mertens v. Hewitt Associates,
508 U.S. 248, 262 (1993) (finding that Congress
intentionally departed from the common law of
trusts by defining an ERISA ‘‘ ‘fiduciary’ not in
terms of formal trusteeship, but in functional terms
. . . thus expanding the universe of persons subject
to fiduciary duties’’) (citations omitted).
52 Chamber, 885 F.3d at 384.
53 Code section 4975(a), (b).
54 Chamber, 885 F.3d at 384.
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Enforcement Policy on Prohibited
Transactions Rules Applicable to
Investment Advice Fiduciaries (FAB
2018–02).55 FAB 2018–02 announced
that, pending further guidance, the
Department would not pursue
prohibited transaction claims against
fiduciaries who were working diligently
and in good faith to comply with the
Impartial Conduct Standards for
transactions that would have been
exempted in the BIC Exemption and
Principal Transactions Exemption, or
treat such fiduciaries as violating the
applicable prohibited transaction rules.
4. Subsequent Actions by the
Department
In 2020, the Department issued a
technical amendment to the Code of
Federal Regulations (CFR) reinserting
the 1975 regulation, reflecting the Fifth
Circuit’s vacatur of the 2016 Final
Rule.56 The technical amendment also
reinserted into the CFR Interpretive
Bulletin 96–1 (IB 96–1) relating to
participant investment education,
which had been removed and largely
incorporated into the text of the 2016
Final Rule. Additionally, the
Department updated its website to
reflect the fact that the pre-existing
prohibited transaction exemptions that
had been amended in the 2016
Rulemaking had been restored to their
pre-amendment form, and also to reflect
that the Department had withdrawn the
Deseret Letter.
The Department also adopted a new
PTE, Improving Investment Advice for
Workers & Retirees, also known as PTE
2020–02.57 The exemption provides
relief that is similar in scope to the BIC
Exemption and the Principal
Transactions Exemption, but it does not
include contract or warranty provisions.
The preamble to PTE 2020–02 also
included the Department’s
interpretation of when advice to roll
over assets from a workplace retirement
plan to an IRA would constitute
fiduciary investment advice under the
1975 regulation’s five-part test.58 The
preamble interpretation confirmed the
Department’s continued view that the
Deseret Letter was incorrect, and that a
recommendation to roll assets out of a
Title I plan is advice with respect to
moneys or other property of the plan
and, if provided by a person who
satisfies all of the requirements of the
1975 regulatory test, constitutes
55 Available at https://www.dol.gov/agencies/
ebsa/employers-and-advisers/guidance/fieldassistance-bulletins/2018-02.
56 85 FR 40589 (July 7, 2020).
57 85 FR 82798 (Dec. 18, 2020).
58 Id. at 82802–9.
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fiduciary investment advice.59 The
preamble interpretation also discussed
when a recommendation to roll over
assets from an employee benefit plan to
an IRA would satisfy the ‘‘regular basis’’
requirement.60 Additionally, the
preamble set forth the Department’s
interpretation of the 1975 regulation’s
requirement of ‘‘a mutual agreement,
arrangement, or understanding’’ that the
investment advice will serve as ‘‘a
primary basis for investment
decisions.’’ 61 In April 2021, the
Department issued Frequently Asked
Questions (FAQs) that, among other
things, summarized aspects of the
preamble interpretation.62
The Department’s preamble
interpretation and certain FAQs were
challenged as inconsistent with the
1975 regulation in two lawsuits filed
after the issuance of PTE 2020–02.63 On
February 13, 2023, the U.S. District
Court for the Middle District of Florida
issued an opinion vacating the policy
referenced in FAQ 7 (entitled ‘‘When is
advice to roll over assets from an
employee benefit plan to an IRA
considered to be on a ‘regular basis’ ? ’’)
and remanded it to the Department for
further proceedings.64 On June 30, 2023,
a magistrate judge in the Northern
District of Texas filed a report with the
judge’s findings, conclusions, and
recommendations, including a
recommendation that the court should
vacate portions of PTE 2020–02 that
permit consideration of actual or
expected Title II investment advice
relationships when determining Title I
fiduciary status, as inconsistent with the
1975 regulation.65
59 Id.
60 Id.
61 Id.
62 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.
63 Compl., Am. Sec. Ass’n. v. U.S. Dep’t of Labor,
No. 8:22–CV–330VMC–CPT, 2023 WL 1967573
(M.D. Fla. Feb. 13, 2023); Compl., Fed’n of Ams. for
Consumer Choice v. U.S. Dep’t of Labor, No. 3:22–
CV–00243–K–BT (N.D. Tex. Feb. 2, 2022).
64 Am. Sec. Ass’n. v. U.S. Dep’t of Labor, 2023 WL
1967573, at *22–23.
65 See Findings, Conclusions, and
Recommendations of the United States Magistrate
Judge, Fed’n of Ams. for Consumer Choice v. U.S.
Dep’t of Labor, No. 3:22–CV–00243–K–BT, 2023 WL
5682411, at *27–29 (N.D. Tex. June 30, 2023)
[hereinafter FACC]. As of the date of this final rule,
the district court judge has not yet taken action
regarding the magistrate judge’s report and
recommendations.
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5. Other Regulatory Developments
U.S. Securities and Exchange
Commission
Since the vacatur of the Department’s
2016 Rulemaking, other regulators have
considered and adopted enhanced
standards of conduct for financial
professionals as a method of addressing,
among other things, conflicts of interest.
At the Federal level, on June 5, 2019,
the SEC finalized a regulatory package
relating to conduct standards for brokerdealers and investment advisers. The
package included Regulation Best
Interest, which established an enhanced
best interest standard of conduct
applicable to broker-dealers when
making a recommendation of any
securities transaction or investment
strategy involving securities to retail
customers.66
The SEC’s Regulation Best Interest
enhanced the broker-dealer standard of
conduct ‘‘beyond existing suitability
obligations.’’ 67 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.68
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Regulation Best Interest’s ‘‘best
interest obligation’’ includes a
Disclosure Obligation, a Care
Obligation, a Conflict of Interest
Obligation, and a Compliance
Obligation. The Care Obligation requires
broker-dealers, in making
recommendations, to exercise
‘‘reasonable diligence, care, and skill’’
to:
(A) Understand the potential risks,
rewards, and costs associated with the
recommendation, and have a reasonable basis
to believe that the recommendation could be
in the best interest of at least some retail
customers;
(B) Have a reasonable basis to believe that
the recommendation is in the best interest of
a particular retail customer based on that
retail customer’s investment profile and the
potential risks, rewards, and costs associated
with the recommendation and does not place
66 See Regulation Best Interest release, 84 FR
33318 (July 12, 2019).
67 Id.
68 Id.
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the financial or other interest of the broker,
dealer, or such natural person ahead of the
interest of the retail customer; [and]
(C) Have a reasonable basis to believe that
a series of recommended transactions, even
if in the retail customer’s best interest when
viewed in isolation, is not excessive and is
in the retail customer’s best interest when
taken together in light of the retail customer’s
investment profile and does not place the
financial or other interest of the broker,
dealer, or such natural person making the
series of recommendations ahead of the
interest of the retail customer.69
In guidance on the care obligations
applicable to both broker-dealers and
investment advisers, the SEC staff
explained,
In the context of providing investment
advice and recommendations to retail
investors, the care obligations generally
include three overarching and intersecting
components. . . . [T]hese components are:
Understanding the potential risks, rewards,
and costs associated with a product,
investment strategy, account type, or series of
transactions (the ‘‘investment or investment
strategy’’);
Having a reasonable understanding of the
specific retail investor’s investment profile,
which generally includes the retail investor’s
financial situation (including current
income) and needs; investments; assets and
debts; marital status; tax status; age;
investment time horizon; liquidity needs;
risk tolerance; investment experience;
investment objectives and financial goals;
and any other information the retail investor
may disclose in connection with the
recommendation or advice; and
Based on the understanding of the first two
elements, as well as, in the staff’s view, a
consideration of reasonably available
alternatives, having a reasonable basis to
conclude that the recommendation or advice
provided is in the retail investor’s best
interest.70
The Conflict of Interest Obligation
requires the broker-dealer to establish,
maintain, and enforce written policies
and procedures reasonably designed to:
(A) Identify and at a minimum disclose, [in
accordance with Regulation Best Interest], or
eliminate, all conflicts of interest associated
with such recommendations;
(B) Identify and mitigate any conflicts of
interest associated with such
recommendations that create an incentive for
a natural person who is an associated person
of a broker or dealer to place the interest of
the broker, dealer, or such natural person
ahead of the interest of the retail customer;
(C) Identify and disclose any material
limitations placed on the securities or
investment strategies involving securities
that may be recommended to a retail
customer and any conflicts of interest
associated with such limitations, and prevent
such limitations and associated conflicts of
interest from causing the broker, dealer, or a
natural person who is an associated person
of the broker or dealer to make
recommendations that place the interest of
the broker, dealer, or such natural person
ahead of the interest of the retail customer [in
accordance with Regulation Best Interest];
and
(D) Identify and eliminate any sales
contests, sales quotas, bonuses, and non-cash
compensation that are based on the sales of
specific securities or specific types of
securities within a limited period of time.71
A conflict of interest is defined as ‘‘an
interest that might incline a broker,
dealer, or a natural person who is an
associated person of a broker or dealer—
consciously or unconsciously—to make
a recommendation that is not
disinterested.’’ 72
In guidance on conflicts of interest
applicable to both broker-dealers and
investment advisers, the SEC staff has
stated,
All broker-dealers, investment advisers,
and financial professionals have at least some
conflicts of interest with their retail
investors. Specifically, they have an
economic incentive to recommend products,
services, or account types that provide more
revenue or other benefits for the firm or its
financial professionals, even if such
recommendations or advice are not in the
best interest of the retail investor. . . .
Consistent with their obligation to act in a
retail investor’s best interest, firms must
address conflicts in a way that will prevent
the firm or its financial professionals from
providing recommendations or advice that
places their interests ahead of the interests of
the retail investor.73
In the Regulation Best Interest
Release, the SEC stated that ‘‘[t]he
Commission has crafted Regulation Best
Interest to draw on key principles
underlying fiduciary obligations,
including those that apply to investment
advisers under the Advisers Act, while
providing specific requirements to
address certain aspects of the
relationships between broker-dealers
and their retail customers.’’ 74 The SEC
emphasized that, ‘‘[i]mportantly,
regardless of whether a retail investor
chooses a broker-dealer or an
investment adviser (or both), the retail
investor will be entitled to a
recommendation (from a broker-dealer)
or advice (from an investment adviser)
that is in the best interest of the retail
investor and that does not place the
interests of the firm or the financial
71 17
69 17
CFR 240.15l–1(a)(2)(ii).
70 Staff Bulletin: Standards of Conduct for BrokerDealers and Investment Advisers Care Obligations
(footnotes omitted), https://www.sec.gov/tm/
standards-conduct-broker-dealers-and-investmentadvisers.
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CFR 240.15l–1(a)(2)(iii).
at (b)(3).
73 Staff Bulletin: Standards of Conduct for BrokerDealers and Investment Advisers Conflict of
Interest, https://www.sec.gov/tm/iabd-staff-bulletinconflicts-interest.
74 84 FR 33318, 33320 (July 12, 2019).
72 Id.
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professional ahead of the interests of the
retail investor.’’ 75 The SEC also noted
that the standard of conduct established
by Regulation Best Interest cannot be
satisfied through disclosure alone.76
The SEC’s Regulation Best Interest
applies to broker-dealers and their
associated persons when they make a
recommendation to a retail customer of
any ‘‘securities transaction or
investment strategy involving securities
(including account
recommendations).’’ 77According to the
SEC, this language encompasses
recommendations to roll over or transfer
assets in a workplace retirement plan
account to an IRA, and
recommendations to take a plan
distribution.78 However, the SEC also
stated that while Regulation Best
Interest applies to advice regarding a
person’s own retirement account such
as a 401(k) account or IRA, it does not
cover advice to workplace retirement
plans themselves or to their legal
representatives when they are receiving
advice on the plan’s behalf.79
The SEC Investment Adviser
Interpretation, published
simultaneously with Regulation Best
Interest, reaffirmed and in some cases
clarified aspects of the fiduciary duty of
an investment adviser under the
Advisers Act.80 The SEC stated that ‘‘an
investment adviser’s fiduciary duty
under the Investment Advisers Act
comprises both a duty of care and a duty
of loyalty.’’ 81 According to the SEC,
‘‘[t]his fiduciary duty is based on
equitable common law principles and is
fundamental to advisers’ relationships
with their clients under the Advisers
Act.’’ 82 The fiduciary duty under the
Federal securities laws requires an
adviser ‘‘to adopt the principal’s goals,
objectives, or ends.’’ 83 The SEC stated:
This means the adviser must, at all times,
serve the best interest of its client and not
subordinate its client’s interest to its own. In
other words, the investment adviser cannot
place its own interests ahead of the interests
of its client. This combination of care and
loyalty obligations has been characterized as
requiring the investment adviser to act in the
‘‘best interest’’ of its client at all times.84
The SEC further stated, ‘‘[t]he
investment adviser’s fiduciary duty is
broad and applies to the entire adviser75 Id.
at 33321.
at 33390.
77 17 CFR 240.15l–1(a)(1).
78 Regulation Best Interest Release, 84 FR 33318,
33337 (July 12, 2019).
79 Id. at 33343–44.
80 84 FR 33669 (July 12, 2019).
81 Id. at 33671 (footnote omitted).
82 Id. at 33670.
83 Id. at 33671.
84 Id. (footnote omitted).
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client relationship.’’ 85 An investment
adviser’s fiduciary duty under the
Advisers Act applies to advice about
whether to rollover assets from one
account to another, including rolling
over from retirement accounts into an
account that will be managed by the
investment adviser or an affiliate.86
State Legislative and Regulatory
Developments
Since the vacatur of the Department’s
2016 Rulemaking, there have also been
legislative and regulatory developments
at the State level involving conduct
standards. For instance, the
Massachusetts Securities Division
amended its regulations to apply a
fiduciary conduct standard under which
broker-dealers and their agents must
‘‘[m]ake recommendations and provide
investment advice without regard to the
financial or any other interest of any
party other than the customer.’’ 87
Additionally, the NAIC Model
Regulation, updated in 2020, provides
that insurance agents must act in the
consumer’s ‘‘best interest,’’ as defined
by the Model Regulation, when making
a recommendation of an annuity, and
insurers must establish and maintain a
system to supervise recommendations
so that the insurance needs and
financial objectives of consumers at the
time of the transaction are effectively
addressed.88 The NAIC Model
Regulation also provides that it does not
apply to transactions involving
contracts used to fund an employee
pension or welfare plan covered by
ERISA.89 According to the NAIC, as of
March 11, 2024, 45 jurisdictions have
implemented the revisions to the model
regulation.90
The NAIC Model Regulation includes
a best interest obligation comprised of a
care obligation, a disclosure obligation,
a conflict of interest obligation, and a
85 Id at 33670. See also id. fn. 17 (citing
authorities where the Commission previously
recognized the broad scope of section 206 of the
Advisers Act in a variety of contexts).
86 Id. at 33674.
87 950 Mass. Code Regs. 12.204 & 12.207 as
amended effective March 6, 2020; see Consent
Order, In the Matter of Scottrade, Inc., No. E–2017–
0045 (June 30, 2020); see also Enf’t Section of
Massachusetts Sec. Div. of Office of Sec’y of
Commonwealth v. Scottrade, Inc., 327 F. Supp. 3d
345, 352 (D. Mass. 2018) (discussing enforcement
actions under Massachusetts securities and other
consumer protection laws). A challenge to the
regulation was rejected by the Massachusetts
Supreme Judicial Court. See Robinhood Fin. LLC v.
Sec’y of Commonwealth of Mass, No. SJC–13381,
2023 WL 5490571 (Mass. Aug. 25, 2023).
88 Available at www.naic.org/store/free/MDL275.pdf.
89 NAIC Model Regulation at section 4.B.(1).
90 See https://content.naic.org/sites/default/files/
inline-files/275%20Final%20Map_
2020%20Changes_March%2011%202024.pdf.
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documentation obligation, applicable to
an insurance producer.91 If these
specific obligations are met, the
producer is treated as satisfying the
overarching best interest standard as
expressed in the NAIC Model
Regulation. The care obligation states
that the producer, in making a
recommendation, must exercise
‘‘reasonable diligence, care and skill’’ to:
(i) Know the consumer’s financial
situation, insurance needs and financial
objectives;
(ii) Understand the available
recommendation options after making a
reasonable inquiry into options available to
the producer;
(iii) Have a reasonable basis to believe the
recommended option effectively addresses
the consumer’s financial situation, insurance
needs and financial objectives over the life of
the product, as evaluated in light of the
consumer profile information; and
(iv) Communicate the basis or bases of the
recommendation.92
The NAIC conflict of interest
obligation requires the producer to
‘‘identify and avoid or reasonably
manage and disclose material conflicts
of interest, including material conflicts
of interest related to an ownership
interest.’’ 93 Further, under the NAIC
Model Regulation, insurers are required
to ‘‘establish and maintain reasonable
procedures to identify and eliminate
any sales contests, sales quotas,
bonuses, and non-cash compensation
that are based on the sales of specific
annuities within a limited period of
time.’’ 94
The NAIC Model Regulation’s
requirements regarding mitigation of
material conflicts of interest are not as
stringent as either the Department’s
approach under ERISA or the SEC’s
approach. This is made clear in the
NAIC Model Regulation’s definition of a
‘‘material conflict of interest’’ which
expressly carves out all ‘‘cash
compensation or non-cash
compensation’’ from treatment as
sources of conflicts of interest.95 ‘‘Cash
compensation’’ that is excluded from
the definition of a material conflict of
interest is broadly defined to include
‘‘any discount, concession, fee, service
fee, commission, sales charge, loan,
override, or cash benefit received by a
producer in connection with the
91 A producer is defined in section 5.L. of the
NAIC Model Regulation as ‘‘a person or entity
required to be licensed under the laws of this state
to sell, solicit or negotiate insurance, including
annuities.’’ Section 5.L. further provides that the
term producer includes an insurer where no
producer is involved.
92 NAIC Model Regulation at section 6.A.(1)(a).
93 Id. at section 6.A.(3).
94 Id. at section 6.C.(2)(h).
95 Id. at section 5.I.
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recommendation or sale of an annuity
from an insurer, intermediary, or
directly from the consumer,’’ and ‘‘noncash compensation’’ is also broadly
defined to include ‘‘any form of
compensation that is not cash
compensation, including, but not
limited to, health insurance, office rent,
office support and retirement
benefits.’’ 96
Recent guidance from the SEC staff on
broker-dealer and investment adviser
conflicts of interest, on the other hand,
makes clear that conduct standards in
the securities market require a ‘‘robust,
ongoing process that is tailored to each
conflict.’’ 97 The SEC staff guidance
provides a detailed list of types of
compensation that the SEC staff believes
are examples of common sources of
conflicts of interest, as follows:
compensation, revenue or other benefits
(financial or otherwise) to the firm or its
affiliates, including fees and other charges for
the services provided to retail investors (for
example, compensation based on assets
gathered and/or products sold, including but
not limited to receipt of assets under
management (‘‘AUM’’) or engagement fees,
commissions, markups, payment for order
flow, cash sweep programs, or other sales
charges) or payments from third parties
whether or not related to sales or distribution
(for example, sub-accounting or
administrative services fees paid by a fund or
revenue sharing);
compensation, revenue or other benefits
(financial or otherwise) to financial
professionals from their firm or its affiliates
(for example, compensation or other rewards
associated with quotas, bonuses, sales
contests, special awards; differential or
variable compensation based on the product
sold, accounts recommended, AUM, or
services provided; incentives tied to
appraisals or performance reviews; forgivable
loans based upon the achievement of
specified performance goals related to asset
accumulation, revenue benchmarks, client
transfer, or client retention);
compensation, revenue or other benefits
(financial or otherwise) (including, but not
limited to, gifts, entertainment, meals, travel,
and related benefits, including in connection
with the financial professional’s attendance
at third-party sponsored trainings and
conferences) to the financial professionals
resulting from other business or personal
relationships the financial professional may
have, relationships with third parties that
may relate to the financial professional’s
association or affiliation with the firm or
with another firm (whether affiliated or
unaffiliated), or other relationships within
the firm; an
compensation, revenue or other benefits
(financial or otherwise) to the firm or its
96 Id.
at section 5.B. and J.
97 Staff
Bulletin: Standards of Conduct for BrokerDealers and Investment Advisers Conflict of
Interest, https://www.sec.gov/tm/iabd-staff-bulletinconflicts-interest.
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affiliates resulting from the firm’s or its
financial professionals’ sales or offer of
proprietary products or services, or products
or services of affiliates.98
The NAIC expressly disclaimed that
its standard creates fiduciary
obligations, and the obligations in its
Model Regulation differ in significant
respects from those applicable to brokerdealers in the SEC’s Regulation Best
Interest or to investment advisers
pursuant to the Advisers Act’s fiduciary
duty.99 In addition to disregarding all
forms of compensation as a source of
material conflicts of interest, as
discussed above, the NAIC Model
Regulation’s ‘‘best interest’’ standard is
satisfied by the four component
obligations—the care, disclosure,
conflict of interest, and documentation
obligations—but these components do
not expressly incorporate the best
interest obligation not to put the
producer’s or insurer’s interests before
the customer’s interests, even though
compliance with the component
obligations’ terms is treated as meeting
the NAIC Model Regulation’s ‘‘best
interest’’ standard. Similarly, the NAIC
Model Regulation’s care obligation does
not repeat the ‘‘best interest’’
requirement but instead includes a
requirement to ‘‘have a reasonable basis
to believe the recommended option
effectively addresses the consumer’s
financial situation, insurance needs and
financial objectives . . . .’’ 100
Additionally, the obligation to comply
with the ‘‘best interest’’ standard is
limited to the individual producer, as
opposed to the insurer responsible for
supervising the producer.
The State of New York took a different
approach than the NAIC Model
Regulation in its NY Insurance
Regulation 187, effective February 1,
2020. Under the New York regulation,
an insurance producer acts in the best
interest of the consumer when, among
other things,
98 Id.
99 Section 6.A.(1)(d) of the NAIC Model
Regulation provides, ‘‘[t]he requirements under this
subsection do not create a fiduciary obligation or
relationship and only create a regulatory obligation
as established in this regulation.’’ In recent
insurance industry litigation against the
Department, plaintiff Federation of Americans for
Consumer Choice, Inc., stated that ‘‘[t]here is a
world of difference’’ between the NAIC Model
Regulation and ERISA’s fiduciary regime. See Pls.’
(1) Br. In Opp’n to Defs.’ Cross-Motion to Dismiss
for Lack of Jurisdiction or, in the Alternative, for
Summ. J., and (2) Reply Br. in Supp. of Pls. Mot.
for Summ. J, 40, Fed’n of Ams. for Consumer Choice
v. U.S. Dep’t of Labor, No. 3:22–CV–00243–K–BT
(Nov. 7, 2022) (comparing ERISA’s best interest
requirement to NAIC Model Regulation 275,
sections 2.B and 6.A.(1)(d)).
100 NAIC Model Regulation at section
6.A.(1)(a)(iii).
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the producer’s . . . recommendation to the
consumer is based on an evaluation of the
relevant suitability information of the
consumer and reflects the care, skill,
prudence, and diligence that a prudent
person acting in a like capacity and familiar
with such matters would use under the
circumstances then prevailing. Only the
interests of the consumer shall be considered
in making the recommendation. The
producer’s receipt of compensation or other
incentives permitted by the Insurance Law
and the Insurance Regulations is permitted
by this requirement provided that the amount
of the compensation or the receipt of an
incentive does not influence the
recommendation.
Thus, under New York law, insurance
producers must act prudently in making
a recommendation and must not allow
compensation or other incentives to
influence their recommendations.
According to the American Council of
Life Insurers, out of 713 life insurers in
the United States, 81 were domiciled in
New York in 2022, and annuity direct
premium receipts in New York in 2022
totaled $31.4 billion.101
The regulatory changes described
above cover many, but not all, of the
assets held by ERISA retirement plans
and IRAs. Further, the SEC’s Regulation
Best Interest and the NAIC Model
Regulation are each limited in important
ways in terms of their application to
advice provided to ERISA plan
fiduciaries.102 For example, Regulation
Best Interest does not cover advice to
workplace retirement plans or their
representatives (such as an employee of
a small business who is a fiduciary of
the business’s 401(k) plan).103 The NAIC
Model Regulation specifically states that
it does not apply to transactions
involving contracts used to fund an
employee pension or welfare plan
covered by ERISA.104 And there remain
investments held by retirement
investors in retirement accounts that are
not covered by securities laws or
insurance laws, including real estate,
certain certificates of deposit and other
banking products, commodities, and
precious metals. The Department
believes that retirement investors and
the regulated community are best served
by ERISA fiduciary protections in Title
I and Title II that apply to all
101 ACLI 2023 Life Insurers Fact Book, https://
www.acli.com/-/media/public/pdf/news-andanalysis/publications-and-research/2023-fact-bookchapters/2023aclifactbook.pdf.
102 The fiduciary obligations of investment
advisers under the Advisers Act are not limited in
this way, however.
103 Regulation Best Interest release, 84 FR 33318,
33343–44 (July 12, 2019). Regulation Best Interest
would apply, however, to retail customers receiving
recommendations for their own retirement
accounts. Id.
104 NAIC Model Regulation at section 4.B.(1).
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investments that retirement investors
may make with respect to their
retirement accounts when they receive
recommendations from trusted advice
providers. Amendments to the ERISA
regulation are necessary to achieve that
result.
6. Coordination With Other Agencies
Under Title I and Title II of ERISA,
the Department has primary
responsibility for the regulation of
ERISA fiduciaries’ advice to retirement
investors. Because of the fundamental
importance of retirement investments to
workers’ financial security and the taxpreferred status of plans and IRAs,
Congress defined the scope of ERISA
fiduciary coverage broadly and imposed
stringent obligations on ERISA
fiduciaries, including prohibitions on
conflicted transactions that do not have
direct analogues under the securities
and insurance laws. The fiduciary
protections and prohibited transaction
rules set forth in Title I and Title II of
ERISA, as applicable, broadly apply to
covered fiduciaries, irrespective of the
particular investment product they
recommend or their status as investment
advisers under the Advisers Act, brokerdealers, insurance agents, bankers, or
other status. This final rule is designed
to ensure that the standards and rules
applicable under Title I and Title II of
ERISA are broadly uniform as applied to
retirement investors receiving advice
from a trusted advisor across different
categories of investment advice
providers and advisory relationships.
At the same time, many commenters
stressed the need to harmonize the
Department’s efforts with rulemaking
activities by other regulators, including
the SEC’s standards of care for
providing investment advice and the
Commodity Futures Trading
Commission’s (CFTC) business conduct
standards for swap dealers (and
comparable SEC standards for securitybased swap dealers). In addition, some
commenters have urged coordination
with other agencies regarding IRA
products and services.
As the SEC has adopted regulatory
standards for broker-dealers that are
based on fiduciary principles of care
and loyalty also applicable to
investment advisers under the Advisers
Act, and the NAIC has issued a model
law that includes a best interest
standard, the Department believes that it
is possible to hew to the unique
regulatory structure imposed by the law
governing tax-preferred retirement
investments, adopt a regulatory
approach that provides a broadly
uniform standard for all retirement
investors when they receive advice from
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a trusted advisor, as contemplated by
Title I and Title II of ERISA, and avoid
the imposition of obligations that
conflict with financial professionals’
obligations under other applicable
Federal and State laws. In particular, in
the Department’s view, PTE 2020–02, as
amended and published elsewhere in
today’s Federal Register, is consistent
with the requirements of the SEC’s
Regulation Best Interest and the
fiduciary obligations of investment
advisers under the Advisers Act.
Therefore, broker-dealers and
investment advisers that have already
adopted meaningful compliance
mechanisms for Regulation Best Interest
and the Advisers Act fiduciary duty,
respectively, should be able to adapt
easily to comply with the amended PTE.
Nevertheless, to better understand
whether the proposed rule and
proposed amendments to the PTEs
would have subjected investment advice
providers to requirements that conflict
with or add to their obligations under
other Federal laws, the Department has
reached out to and consulted with the
staff of the SEC; other securities,
banking, and insurance regulators; 105
the Department of the Treasury,
including the Federal Insurance Office;
and the Financial Industry Regulatory
Authority (FINRA), a self-regulatory
organization that oversees brokerdealers.
The Department has also consulted
and coordinated with the Department of
the Treasury and the Internal Revenue
Service (IRS), particularly on the subject
of IRAs, and will continue to do so.
Although the Department of Labor has
responsibility for issuing regulations
and prohibited transaction exemptions
under section 4975 of the Code, which
applies to IRAs, the IRS maintains
general responsibility for enforcing the
excise tax applicable to prohibited
transactions. The IRS’ responsibilities
extend to the imposition of excise taxes
on fiduciaries who participate in
prohibited transactions. As a result, the
Department and the IRS share
105 The Department acknowledges the comments
from the NAIC expressing disappointment that the
Department coordinated with the NAIC staff rather
than with the NAIC members prior to the proposed
rule’s publication and that the Department did not
share its intended approach in advance of public
release of the proposal. As the NAIC’s comment
acknowledged, however, the staff level discussions
focused on aspects of the NAIC Model Regulation.
Further, immediately after the release of the
proposed rule, the Department met with NAIC
members and repeatedly offered additional
meetings before the rule was finalized. The NAIC
also offered substantive comments to the proposed
rule after its release, which the Department has
carefully considered along with other commenters,
including the comments of many others in the
insurance industry.
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responsibility for addressing selfdealing by investment advice fiduciaries
to tax-qualified plans and IRAs.
7. Proposed Retirement Security Rule
On October 31, 2023, the Department
released the proposed Retirement
Security Rule: Definition of an
Investment Advice Fiduciary, along
with proposed amendments to PTE
2020–02 and proposed amendments to
other administrative prohibited
transaction exemptions available to
investment advice fiduciaries.106 The
proposed rule was designed to ensure
that protections established by Titles I
and II of ERISA would apply to all
advice that retirement investors receive
from trusted advice providers
concerning investment of their
retirement assets in a way that ensures
that retirement investors’ reasonable
expectations are honored.107
Under the proposal, a person would
be an investment advice fiduciary under
Title I and Title II of ERISA if they
provide investment advice or make an
investment recommendation to a
retirement investor (i.e., a plan, plan
fiduciary, plan participant or
beneficiary, IRA, IRA owner or
beneficiary or IRA fiduciary); the advice
or recommendation is provided ‘‘for a
fee or other compensation, direct or
indirect,’’ as defined in the proposed
rule; and the person makes the
recommendation in one of the following
contexts:
• The person either directly or
indirectly (e.g., through or together with
any affiliate) has discretionary authority
or control, whether or not pursuant to
an agreement, arrangement, or
understanding, with respect to
purchasing or selling securities or other
investment property for the retirement
investor;
• The person either directly or
indirectly (e.g., through or together with
any affiliate) makes investment
recommendations to investors on a
regular basis as part of their business
and the recommendation is provided
under circumstances indicating that the
recommendation is based on the
particular needs or individual
circumstances of the retirement investor
and may be relied upon by the
retirement investor as a basis for
investment decisions that are in the
retirement investor’s best interest; or
106 The proposals were released on the
Department’s website on October 31, 2023. They
were published in the Federal Register on
November 3, 2023, at 88 FR 75890, 88 FR 75979,
88 FR 76004, and 88 FR 76032.
107 Proposed Retirement Security Rule, 88 FR
75890 (Nov. 3, 2023).
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• The person making the
recommendation represents or
acknowledges that they are acting as a
fiduciary when making investment
recommendations.108
The proposal’s preamble highlighted
developments in retirement savings
vehicles and in the investment advice
marketplace since the 1975 regulation
was adopted that have altered the way
retirement investors interact with
investment advice providers.109 As
noted previously, in 1975, retirement
plans were primarily defined benefit
plans, which were typically managed by
sophisticated financial professionals.
IRAs were not major market participants
and 401(k) plans were not yet in
existence. Today, however, plan
participants, IRA owners, and their
beneficiaries exercise direct authority
over their investments, and depend
upon a wide range of financial
professionals, including broker-dealers,
investment advisers subject to the
Advisers Act, insurance agents, and
others on how to make complex
decisions about the management of
retirement assets.
The Department expressed the view
in the proposal that when a financial
professional satisfies all five parts of the
1975 regulation with respect to a given
instance of advice, the professional is
properly treated as an investment advice
fiduciary in accordance with the parties’
reasonable understanding of the nature
of their relationship.110 However, the
1975 regulation, as applied to the
current marketplace, is underinclusive
in assigning fiduciary status because it
fails to capture many circumstances in
which an investor would reasonably
expect that they can place their trust
and confidence in the advice provider
as acting in their best interest. The
Department’s experience in the current
marketplace is that the five-part test—in
particular, the ‘‘regular basis’’
requirement and the requirement of ‘‘a
mutual agreement, arrangement or
understanding’’ that the investment
advice will serve as ‘‘a primary basis for
investment decisions’’—too often works
to defeat legitimate retirement investor
expectations of impartial advice and
allows investment advice providers to
hold themselves out as offering
individualized advice that is intended
to promote the best interest of the
customer, when they, in fact, have no
such obligation under the 1975
regulation’s implementation of Title I or
Title II of ERISA.
The proposal noted that these
components of the five-part test are not
found in the statute’s text, and in
today’s marketplace, undermine
legitimate investor understandings of a
professional relationship centered
around the investor’s best interest.111 In
other words, there are currently many
situations where the retirement investor
reasonably expects that their
relationship with the advice provider is
one in which the investor can (and
should) place trust and confidence in
the recommendation, yet which are not
covered by the 1975 regulation. The
proposal was designed to reconcile the
regulatory text with both today’s
retirement investors’ reasonable
expectations, along with the statutory
text and purpose of ERISA.112
The Department stated in the proposal
that an important premise of Title I and
Title II of ERISA is that fiduciaries’
conflicts of interest should not be left
unchecked, but rather should be
carefully regulated through rules
requiring adherence to basic fiduciary
norms and avoidance of prohibited
transactions.113 The specific duties to
avoid conflicts of interest or comply
with a prohibited transaction exemption
applicable to fiduciaries under Title I
and Title II of ERISA stem from
Congress’ judgment regarding the best
way to protect the public interest in taxadvantaged benefit arrangements that
are critical to workers’ financial and
physical health. In contrast to the
Federal laws and other regulatory
regimes which can permit certain
conflicts if prescribed disclosure
obligations are met, the statutory
prohibited transaction provisions in
Title I and Title II of ERISA contemplate
a more stringent approach for the
protection of these tax-advantaged
retirement savings. In this context, an
appropriately constructed regulatory
definition of an investment advice
fiduciary under Title I and Title II of
ERISA is essential.
C. Overview of the Comments Received
on the Proposal
The Department received over 400
individual comments and just under
20,000 petition submissions as part of
14 separate petitions on the proposal.
These comments and petitions came
from consumer groups, financial
services companies, academics, trade
and industry associations, and others,
both in support of, and in opposition to,
108 Id.
111 Id.
109 Id.
112 Id.
at 75892–3, 75899–900.
110 Id. at 75899.
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the proposed rule and proposed
amendments to the PTEs.114
Commenters on the proposal
generally agreed that as a result of the
shift from defined benefit plans to
401(k)-type individual account
retirement plans, retirement investors
today face increased responsibility for
ensuring their own secure retirement.115
Commenters cited studies indicating
that many Americans are concerned that
they will not have saved enough money
to achieve that goal.116 Many
commenters discussed the related
importance of retirement investors’
access to professional investment
advice. In connection with these points,
some commenters said the proposed
update to the investment advice
fiduciary definition would provide
important protections that would
support retirement investors’ access to
investment advice intended to advance
their interests. Other commenters said
the proposed update to the investment
advice fiduciary definition was not
necessary and that the scope of the
proposed definition exceeded the
Department’s jurisdiction and could
reduce access to advice. These
comments and the Department’s
responses are discussed in this
preamble Section C. Comments on
specific provisions of the proposal are
discussed in preamble Section D.
1. Comments Supporting the Proposal
Commenters supporting the proposal
echoed many of the concerns expressed
by the Department in the proposal’s
preamble. These commenters
emphasized the need to update the 1975
regulation to better align with
retirement investor expectations in
today’s retirement investment
marketplace and to fill important gaps
in advice relationships where advice is
not currently required to be provided in
the retirement investor’s best interest
114 The 2023 proposed rule and proposed
amendments to the PTEs provided for a 60-day
comment period which ended on January 2, 2024.
The Department held a virtual public hearing on
December 12–13, 2023, at which over 40 witnesses
testified. The Department posted a video recording
of the virtual public hearing on its website on
December 19, 2023, an unofficial hearing transcript
on December 22, 2023, and the official hearing
transcript on January 10, 2024.
115 References to ‘‘comments’’ and ‘‘commenters’’
in this preamble generally include written
comments, petitions, and hearing testimony.
116 See, e.g., Board of Governors of the Federal
Reserve System, ‘‘Economic Well-Being of U.S.
Households in 2022’’ 67 May 2023, available at
https://www.federalreserve.gov/publications/files/
2022-report-economic-well-being-us-households202305.pdf, (‘‘While most non-retired adults had
some type of retirement savings, only 31 percent of
non-retirees thought their retirement saving was on
track, down from 40 percent in 2021.’’)
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and the investor may not be aware of
that fact.
Some commenters expressed specific
support for applying ERISA fiduciary
protections to recommendations to roll
over assets from a workplace retirement
plan to an IRA, in light of the significant
consequences of that decision. They
also expressed support for applying
ERISA fiduciary protections to
recommendations to plan fiduciaries
where, currently, advice regarding plan
investment options may not be
considered to occur on a regular basis,
and therefore would not be considered
ERISA fiduciary advice. Commenters
said many employers, even larger
employers, are not necessarily
knowledgeable about selecting prudent
investment options for the plans they
sponsor.
Commenters also said an updated
regulatory definition of an investment
advice fiduciary would protect
retirement investors from harm caused
by conflicts of interest. They said
conflicts of interest can expose savers to
higher costs, lower returns, and greater
risk. Some commenters emphasized that
retirement investors with modest
balances are more vulnerable to harm
from conflicted investment advice, as
the high fees would disproportionately
diminish their savings. One commenter,
a State securities regulator, identified
multiple examples of abusive sales
tactics impacting retirement investors
and said more protections are needed.
In this regard, Morningstar submitted
a comment that quantified potential
benefits of the proposal in two areas.
First, as a result of the proposal’s
coverage of recommendations to plan
fiduciaries about the fund lineups in
defined contribution plans, participants
in workplace retirement plans would
save over $55 billion in the first 10 years
and over $130 billion in the subsequent
10 years, in undiscounted and nominal
dollars, due to reductions in costs
associated with investing through their
plans. Second, retirement investors
rolling over retirement funds into fixed
indexed annuities would save over
$32.5 billion in the first 10 years and
over $32.5 billion in the subsequent 10
years, in undiscounted and nominal
dollars, also due to decreased pricing
spreads.117
117 Available at https://www.dol.gov/sites/dolgov/
files/ebsa/laws-and-regulations/rules-andregulations/public-comments/1210-AC02/
00290.pdf. Morningstar also suggested that the
Department should revise its Form 5500 to reduce
gaps in the disclosures that would provide
additional transparency on fees and compensation.
Another commenter suggested that the Department
should require plans to provide a 404a–5
participant fee disclosure with cost details, as with
their annual reports on Form 5500. The Department
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Commenters supporting the proposal
discussed the need for application of
ERISA fiduciary protections even in
light of other regulators’ conduct
standards. Some commenters said SEC
Regulation Best Interest had only
limited reach in that it applies only to
investments that are securities and some
commenters also said it had only
limited requirements for conflict
mitigation at the financial institution
level. A commenter also said there are
disparities in the degree to which firms
are implementing SEC Regulation Best
Interest’s requirements. Commenters
referenced a 2023 report by the North
American Securities Administrators
Association on SEC Regulation Best
Interest implementation that found that
even as firms have updated their
investor profile forms and policies and
procedures to focus on Regulation Best
Interest obligations, many brokerdealers continue to recommend
complex products and rely on financial
incentives instead of lower cost, lower
risk products.118 One commenter said
alternative assets, which they said
included for example, precious metals,
real estate, private equity, and debt, may
not be subject to standards set by the
SEC and that state laws vary and leave
gaps in protections for investors in these
type of investments.
With respect to the insurance
marketplace, several commenters
described significant conflicts of interest
associated with large commissions on
some annuity sales, as well as abusive
sales practices. Commenters also noted
that the terms of annuity contracts,
including surrender charges, may often
be detrimental to retirement investors
but may not be well understood. One
commenter said recommendations of
annuities for purchase inside retirement
accounts deserve special scrutiny
because the annuities are often
marketed based on purported tax
deferral advantages that would not be
realized inside an already tax-preferred
retirement account.
Some commenters said these issues
are not addressed by the NAIC Model
Regulation, which some described as
providing a best interest standard in
name only, when in substance it
remains a suitability standard. One
commenter presented a guide developed
by the Certified Financial Planner (CFP)
Board comparing the CFP Board’s Code
acknowledges these comments but notes they are
outside the scope of this project.
118 NASAA, Report and Findings of NASAA’s
Broker-Dealer Section Committee: National
Examination Initiative Phase II(B) (Sept. 2023) at 2–
3, https://www.nasaa.org/wp-content/uploads/
2023/08/Reg-BI-Phase-II-B-Report-Formatted8.29.23.pdf.
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and Standards to the NAIC Model
Regulation, which states, among other
things, that the NAIC Model Regulation
appears to provide a care obligation that
does not rise to the level of a ‘‘prudent
professional standard.’’ The guide
further states that the NAIC Model
Regulation does not effectively require
the client’s interests to come first.119
Even though the NAIC Model
Regulation’s best interest obligation
includes the requirement that the
producer shall not place the producer’s
or the insurer’s financial interest ahead
of the consumer’s interest, several
commenters observed that none of the
component obligations include a
specific requirement for the producer to
act in the best interest of the consumer.
In other words, the NAIC Model
Regulation treats the best interest
obligation as satisfied if the producer
meets specified component obligations,
none of which require the producer to
put the client’s interests first.
Commenters also said the NAIC
Model Regulation does not sufficiently
address compensation-related conflicts
of interest, noting that it does not
include cash and non-cash
compensation within the definition of a
material conflict of interest. As
discussed above, ‘‘cash compensation’’
that is excluded from the definition of
a material conflict of interest is broadly
defined to include ‘‘any discount,
concession, fee, service fee,
commission, sales charge, loan,
override, or cash benefit received by a
producer in connection with the
recommendation or sale of an annuity
from an insurer, intermediary, or
directly from the consumer,’’ and ‘‘noncash compensation’’ is also broadly
defined to include ‘‘any form of
compensation that is not cash
compensation, including, but not
limited to, health insurance, office rent,
office support and retirement
benefits.’’ 120 One commenter expressed
the view that an annuity producer that
recommends an annuity because that
particular annuity pays a larger
commission or will help the producer
meet a sales goal or ensure the producer
wins an expensive trip will meet the
best interest standard in the NAIC
Model Regulation so long as the annuity
is ‘‘suitable’’ for the retirement saver.
Another commenter noted that there
are abuses in life insurance
recommendations as well, and that the
NAIC has not addressed investmentoriented life insurance policies even
119 Available at https://www.cfp.net/-/media/
files/cfp-board/standards-and-ethics/complianceresources/naic-comparison-guide.pdf.
120 NAIC Model Regulation at section 5.B. and J.
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though regulators receive many
thousands of customer complaints about
the policies.
Several commenters responded to
arguments that disclosures are sufficient
for financial professionals to avoid
conflicts of interest. The commenters
stated that, while disclosures are
important components of financial
regulation and provide transparency,
they are ineffective in protecting
investors. The commenters noted that
the disclosures are often long and full of
technical language. The commenters
stated that studies showed that
disclosures cause investors to trust and
increasingly rely on financial
professionals, enhancing the ability of
financial professionals to provide
information not in the investors’ best
interest.
Overall, these commenters suggested
that the proposal would benefit
retirement investors by ensuring that
investment advice they receive from
trusted advice providers is consistent
with ERISA’s fiduciary protections
under Title I and Title II.
2. Comments Opposing the Proposal
Some other commenters said the
Department should retain the 1975
regulation as the applicable regulatory
definition of an investment advice
fiduciary. They said the five parts of the
1975 regulation are needed to describe
a relationship of trust and confidence,
consistent with the Fifth Circuit’s
Chamber opinion. Some of the
commenters further said that the
Department had not provided sufficient
evidence of existing problems that
would be solved by the updated
investment advice fiduciary definition.
Commenters also said the proposed
rule exceeded the Department’s
jurisdiction, for a variety of reasons,
including in covering advice to roll over
from a workplace retirement plan to an
IRA as advice under Title I of ERISA.
Many commenters said that the
proposal suffered the same legal flaws
as the 2016 Final Rule and would be
legally vulnerable under the Chamber
opinion. One commenter said that the
statutory language in ERISA section
3(21)(A) and Code section 4975(e)(3)
provides that a person is a fiduciary
only ‘‘to the extent’’ they ‘‘provide
investment advice for a fee or other
compensation, direct or indirect,’’
which indicated there were limits on
the breadth of what is considered ERISA
fiduciary investment advice.
Some commenters also said that
financial professionals paid by
commission cannot satisfy the ERISA
fiduciary duties under Title I which
require, among other things, fiduciaries
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to discharge their duties with respect to
the plan ‘‘solely in the interests of the
participants and beneficiaries.’’ 121
These commenters said they understood
this standard to require a complete
disregard of any financial interest,
which they said is incompatible with
the business of broker-dealers and
insurance agents. Some commenters
also said the Department did not have
jurisdiction to create a ‘‘best interest’’
standard, which they said has no basis
in ERISA. Commenters also said the
Department should not rely on ‘‘best
interest’’ standards of other regulators to
demonstrate trust and confidence
required for ERISA fiduciary status.
Some commenters said the SEC in
Regulation Best Interest and the NAIC in
its Model Regulation intentionally
created standards that were not
fiduciary standards, and the Department
should not override those decisions.
Many of these commenters also said
an updated definition of an investment
advice fiduciary is unnecessary in light
of the conduct standards in SEC
Regulation Best Interest and the
adoption by many States of the NAIC
Model Regulation. Commenters
described these regulatory actions as
establishing robust, effective, and
workable best interest standards while
preserving the ability of retirement
investors to work with the financial
professional of their choosing and to
retain choice as to how they pay for
financial services and products.
Some commenters said the proposal’s
preamble discussion of the NAIC Model
Regulation reflected misunderstanding
by the Department. They said the NAIC
Model Regulation sets forth a clear best
interest standard despite not restating
the ‘‘best interest’’ requirement in the
component obligations. They also said
that the NAIC Model Regulation did
require mitigation of compensationrelated conflicts of interest in the area
of sales contests, sales quotas, bonuses,
and non-cash compensation that are
based on the sales of specific annuities
within a limited period of time, and the
decision to exclude compensation from
the definition of material conflicts of
interest demonstrated a conscious
choice that the best way to address
conflicts is through disclosure.122
Commenters also identified other types
of State insurance laws that provide
protection to retirement savers, such as
regulations governing insurance
advertising. An insurance commissioner
commenter said the Department’s
proposal would displace the
121 See
ERISA section 404, 29 U.S.C. 1104.
NAIC Model Regulation at section
6.C.(2)(h).
122 See
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requirements of the NAIC Model
Regulation as adopted by the States.
In sum, these commenters generally
urged the Department to withdraw the
proposal and focus its resources on
other priorities.
3. Comments About Preserving Access
to Investment Advice and Products in
the Retail Market
Many commenters addressed the
impact of the proposal on access to
investment advice and products in the
retail market. Some commenters
believed that the rule would lead to
advice providers imposing account
minimums or raising their fees.
Commenters also said that imposing
ERISA fiduciary protections on advice
and recommendations to retirement
investors would lead to a decrease in
commission-based arrangements and
related access to certain investment
products. They said this would be the
case because status as an investment
advice fiduciary would expose financial
services providers to additional
compliance costs and litigation risk.
Commenters further said that the
proposal was insufficiently specific
about when ERISA fiduciary status
would apply, and uncertainty would
result in some providers taking a
conservative approach and
discontinuing serving retirement
investors. Commenters said
commission-based arrangements
provide a valuable source for
investment advice and information, and
that a reduction in such arrangements
would negatively impact retirement
investors who may not be best suited for
a fee-based investment advice
arrangement.
A number of commenters said the
proposal would have a negative impact
on access to annuities, which are
generally sold on commission. These
commenters described annuities as an
important option for retirement
investors seeking a guaranteed lifetime
income stream as part of their
retirement plan. Some of these
commenters said the Department’s
proposal failed to recognize the value of
these products and was inconsistent
with congressional intent to promote
lifetime income options, as evidenced
by recent pension legislation in the
SECURE Act 123 and the SECURE 2.0
Act.124 Commenters specifically
mentioned such features as protection
123 The Setting Every Community Up for
Retirement Enhancement (SECURE) Act of 2019,
Public Law 116–94, Dec.20, 2019, Division O.
124 SECURE 2.0 Act of 2022, Public Law 117–328,
Dec. 29, 2022, Division T.
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against volatility, longevity and
inflation risk through guarantees.
In this regard, some commenters said
the Department’s proposal would
impose ERISA fiduciary duties on
financial professionals who are
traditionally considered salespeople.
The commenters said that when the
financial professional is paid on
commission it should be clear to the
retirement investor that the professional
is engaging in sales activity, as opposed
to providing advice. Commenters said
that under the Fifth Circuit’s Chamber
opinion, salespersons are generally not
considered to have a relationship of
trust and confidence with their
customers. One commenter said: ‘‘the
fact that a broker-dealer or insurance
agent acts in a manner that is
trustworthy and provides guidance and
recommendations in the investor’s best
interest does not alter the sales
relationship and does not implicate or
confer fiduciary status.’’
Another commenter discussed the
proposal in the context of alternative
investments, where the commenter said
commissions are relatively large. The
commenter said applying ERISA’s
reasonable compensation standard and
the PTEs’ conduct standards in this
context would likely chill willingness to
recommend investment products with
higher-than-average commissions,
including alternative investments that
the commenter said provide
diversification, income, and other
important portfolio elements. They said
that although the SEC in Regulation Best
Interest does require a focus on costs
associated with an investment, it does
not employ a distinct inquiry into the
broker-dealer’s compensation analogous
to ERISA’s reasonable compensation
standard. Therefore, they did not
believe that the Department’s proposal
was consistent with the SEC’s approach
in Regulation Best Interest or workable
for broker-dealers.
Other commenters generally urged the
Department to be skeptical of industry
predictions of loss of access to advice
and services. They believed providers
would remain available to serve
retirement investors irrespective of
account balance size. They also said
they were not aware of any decrease in
access to advice and products following
the recent adoption of other conduct
standards including Regulation Best
Interest. Rather, they said, the
experience with Regulation Best Interest
shows that financial professionals paid
on commission can comply with an
explicit best interest standard that
requires conflict mitigation. A
commenter also pointed to the fact that
financial professionals paid on
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commission are among the CFP
professionals who have adopted the CFP
Board fiduciary duty.
These commenters disagreed that
retirement investors are well aware
when they are receiving a sales pitch.
They said retirement investors generally
do not understand how financial
professionals are paid or the differences
in the regulatory requirements
applicable to broker-dealers, investment
advisers, and insurance agents.
A number of these commenters also
said commission-based financial
professionals commonly hold
themselves out as trusted advice
providers. Commenters said that
marketing slogans and titles such as
‘‘financial advisor,’’ ‘‘financial
consultant,’’ and ‘‘wealth manager’’ are
commonly and deliberately used to
establish a sense of trust and
confidence. One commenter cited
several examples of marketing strategies
employed in the insurance industry.
One such example described a ‘‘Trusted
Advisor Success Training Workshop’’
showing insurance agents how they
‘‘can have endless streams of new,
repeat, and referral business’’ by
‘‘mak[ing] the move from a salesperson
to a ‘Trusted Advisor!’’’
One commenter described a study
that found that 25 of the largest
insurance companies and broker-dealers
substantively market themselves as
offering advice services and using
advice titles, even as they continued to
rely on the regulatory standards that
apply to salespersons.125 Another
commenter provided examples, such as
the following statement they said was
on the annuities page of an insurance
company: ‘‘by working with a trusted
financial professional, you can discuss
your unique circumstances and how
best to prepare for the challenges that
may lie ahead.’’ These commenters did
not agree that commission-based
financial professionals should
categorically be excluded as investment
advice fiduciaries or that such a
categorical exclusion was compelled by
the Fifth Circuit’s Chamber decision.
A number of comments from financial
professionals paid on commission also
indicated they did not think of
themselves as salespeople. One
financial services provider who testified
at the Department’s public hearing on
125 The commenter cited the following press
release relating to the study: ‘‘Review of 25 Major
Brokerage Firms & Insurance Companies Find All
Posing as Fiduciaries, Misleading Consumers,’’
Consumer Federation of America press release, Jan.
18, 2017, https://consumerfed.org/press_release/
review-25-major-brokerage-firms-insurancecompanies-find-posing-fiduciaries-misleadingconsumers.
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32135
the proposal and said that most of his
customers pay by commission, stated he
was not a salesperson and agreed that he
did have a relationship of trust and
confidence with his customers.126 He
described himself as ‘‘[a]n advisor and
somebody who helps and serves my
clients, that’s my highest ethic and
creed. . . . I believe those individuals
who are called to serve others gravitate
towards professions like ours.’’ 127
The witness represented the National
Association of Insurance and Financial
Advisors (NAIFA), a large association
representing the interests of insurance
professionals, and said ‘‘NAIFA
members are Main Street advisors who
primarily serve and maintain
longstanding relationships with
individuals, families and small
businesses in their communities.’’ 128 In
describing the process for deciding
whether to recommend an annuity to
someone and determine what the right
annuity is, the witness said: ‘‘basically
we have a long-term relationship where
I get to know the client, get to know
their needs, their objectives, their risk
tolerance and try to figure out what the
best products and services are to meet
those needs.’’ 129 Other comments
similarly indicated that some financial
professionals paid on commission
nevertheless view themselves as trusted
advisers.130
Other commenters said that the
Department’s proposal would lead to a
reduction in sales recommendations in
the institutional market and also in the
provision of educational information.
These comments are discussed in
Section E of the preamble. Access to
advice in the retail market is further
126 Testimony of Bryon Holz, National
Association of Insurance and Financial Advisors,
Transcript of the Public Hearing on the Retirement
Security Rule: Definition of an Investment Advice
Fiduciary, December 12, 2023, at 176, 180, available
at https://www.dol.gov/sites/dolgov/files/EBSA/
laws-and-regulations/rules-and-regulations/publiccomments/1210-AC02/hearing-transcript-day-1.pdf.
127 Id.
128 Id.
129 Id. at 174.
130 See e.g., petition 4, with 3059 submitters
(‘‘Having a relationship with a trusted financial
advisor helps people save more for retirement. I
provide my clients with comprehensive financial
advice and as an independent financial advisor, I
can recommend products that are in their best
interest. Currently, clients can choose how to pay
for financial advice by working with financial
advisors whose business model aligns with their
goals. . . . [C]ommissions are an important way
that advisors are able to serve those who may not
otherwise be able to afford to work with an advisor
because they have less investable assets or because
a specific investment strategy with commissions is
the most economically available option.’’), https://
www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/publiccomments/1210-AC02/petition-004.pdf.
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discussed in section 7 of the Regulatory
Impact Analysis.
4. The Department’s Decision to Issue
the Final Rule
After careful consideration of the
comments discussed in this section, the
Department has determined to issue a
final rule updating the regulatory
definition of an investment advice
fiduciary, with changes reflecting input
from the commenters. This decision
reflects the continued view that
applying ERISA fiduciary protections
under Title I and Title II to trusted
advice to retirement investors about
their retirement accounts is necessary
and appropriate to protect the
retirement investors from conflicts of
interest.
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The Department’s Jurisdiction
To begin with, as some commenters
noted, when Congress enacted ERISA, it
chose to impose a uniquely protective
regime on the management and
oversight of plan assets. The law’s aim
was to protect the interests of plan
participants and beneficiaries by
imposing especially high standards on
those who exercise functional authority
over plan investments, including
rendering investment advice for a fee.131
As many courts have noted, ERISA’s
obligations are the ‘‘highest known to
the law.’’ 132 Thus, the Department has
not deferred completely to the Federal
securities laws and State insurance
laws, as some commenters advocated,
because such deference would not be
consistent with congressional intent or
ERISA’s purposes.
Under Title I of ERISA, the
Department has express authority to
issue regulations defining terms in Title
I and to grant administrative exemptions
from the prohibited transactions
131 One commenter provided following statement
by the Chair of the Senate Committee on Labor and
Public Welfare upon introduction of the Conference
Report on ERISA:
Despite the value of full reporting and disclosure,
it has become clear that such provisions are not in
themselves sufficient to safeguard employee benefit
plan assets from such abuses as self-dealing,
imprudent investing, and misappropriation of plan
funds. Neither existing State nor Federal law has
been effective in preventing or correcting many of
these abuses. Accordingly, the legislation imposes
strict fiduciary obligations on those who have
discretion or responsibility respecting the
management, handling, or disposition of pension or
welfare plan assets. The objectives of these
provisions are to . . . establish uniform fiduciary
standards to prevent transactions which dissipate or
endanger plan assets. . . .
Statement by Hon. Harrison A. Williams, Jr.,
Chairman, Senate Committee on Labor and Public
Welfare, 120 Congressional Record S 15737 at 11
(Aug. 22, 1974) (introducing the Conference Report
on H.R. 2).
132 Donovan v. Bierwirth, 680 F.2d 263, 272 n. 8
(2d. Cir. 1982), cert denied, 459 U.S. 1069 (1982).
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provisions. Pursuant to the President’s
Reorganization Plan No. 4 of 1978,133
which Congress ratified in 1984,134 the
Department’s authority was expanded to
include authority to issue regulations,
rulings, and opinions on the definition
of a fiduciary with respect to Title II
plans under the Code (including IRAs)
and to grant administrative prohibited
transaction exemptions applicable to
them.135 Thus, the Department has clear
authority to promulgate the regulatory
definition of a fiduciary under both
Title I and Title II of ERISA, and the
Department has taken care in this final
rule to honor the text and purposes of
Title I and Title II of ERISA.
The final rule is consistent with the
express text of the statutory definition
and will better protect the interests of
retirement investors as compared to the
1975 regulation. It comports with the
broad language and protective purposes
of the statute, while at the same time
limiting the treatment of
recommendations as ERISA fiduciary
advice to those objective circumstances
in which a retirement investor would
reasonably believe that they can rely
upon the advice as rendered by a
financial professional who is acting in
the investor’s best interest and on their
behalf.
In today’s market, the 1975
regulation’s five-part test is
underinclusive in assigning fiduciary
status as it fails to capture many
circumstances in which an investor
would reasonably expect that they can
place their trust and confidence in the
advice provider. As noted above, the
Department has become concerned that
the 1975 regulation’s regular basis test
has served to defeat objective
understandings of the nature of the
professional relationship and the
reliability of the advice as based on the
investor’s best interest. The proposal
noted that even a discrete instance of
advice can be of critical importance to
the plan. As another example, under the
1975 regulation’s ‘‘regular basis’’
requirement, which is not found in the
text of the statute, a financial
professional could provide
recommendations on a regular basis for
many years to an investor regarding the
investor’s non-retirement accounts and
yet still not be considered an investment
advice fiduciary with respect to a
recommendation to roll over all their
retirement savings from the investor’s
workplace retirement plan to an IRA if
133 5
U.S.C. App. 752 (2018).
Sec. 1, Public Law 98–532, 98 Stat. 2705 (Oct.
19, 1984).
135 Sec. 102, 5 U.S.C. App. 752 (2018).
134
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that is the first instance of advice with
respect to that plan account.
Therefore, the Department does not
believe that the 1975 regulation’s fivepart test is the only test that can
properly define an investment advice
fiduciary under the statute, and the
Department does not believe its
authority to revisit the regulatory
definition of an investment advice
fiduciary and depart from the 1975 fivepart test is foreclosed by the Chamber
opinion. The discrete components of the
five-part test are not found in the text of
the statute, and commenters did not
identify—and the Department’s research
did not uncover—any common law
cases predating enactment of ERISA that
limited the application of fiduciary
status and obligations to those persons
that meet all five of the requirements
created and imposed by the 1975
regulation. To the contrary, the
Department notes that multiple cases
discuss how ERISA’s statutory
definition of ‘‘fiduciary’’ is broad,136
with one such case indicating that the
definition of ‘‘fiduciary’’ under ERISA is
broader than the more restrictive
approach the Department articulated
through the 1975 five-part test.137
The Department also does not agree
with a commenter that said that the
proposal would render the ‘‘to the
extent’’ language in the statute a
nullity.138 Under ERISA’s functional
test of fiduciary status, as the courts
have repeatedly recognized, a person is
a fiduciary to the extent the person
engages in specified activities, and only
136 See Eaves v. Penn, 587 F.2d 453, 458 (10th Cir.
1978); Farm King Supply, Inc. Integrated Profit
Sharing Plan & Tr. v. Edward D. Jones & Co., 884
F.2d 288, 293 (7th Cir. 1989); see also Thomas,
Head & Greisen Emps. Tr. v. Buster, 24 F.3d 1114,
1117 (9th Cir. 1994) (‘‘[T]he definition of fiduciary
under ERISA should be liberally construed.’’ (citing
Consolidated Beef Indus. Inc. v. New York Life Ins.
Co., 949 F.2d 960, 964 (8th Cir. 1991), cert. denied,
503 U.S. 985 (1992))); H. Stennis Little, Jr., & Larry
Thrailkill, Fiduciaries Under ERISA: A Narrow Path
to Tread, 30 Vanderbilt L. Rev. 1, 4–5 (1977)
(referring to the ‘‘broadness of the [statutory]
definition’’ of ‘‘fiduciary’’ under ERISA, such that
the definition could cover ‘‘insurance salesmen
who recommend the purchase of certain types of
insurance and receive a commission on the sale of
such insurance’’ and ‘‘stock brokers or dealers who
recommend certain securities and then participate
in the acquisition or disposition of securities and
receive a commission for their services’’).
137 See Farm King, 884 F.2d at 293 (discussing
‘‘evidence of the wide sweep given to the meaning
of ‘fiduciary’ under ERISA’’ in relation to the
narrower definition codified in the 1975 test).
138 ERISA section 3(21)(A)(ii) provides: ‘‘a person
is a fiduciary with respect to a plan to the extent
. . . (ii) [t]he [person] renders investment advice for
a fee or other compensation, direct or indirect, with
respect to any moneys or other property of such
plan, or has any authority or responsibility to do so
. . . .’’
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to that extent.139 Under both the
proposed rule and the final rule,
therefore, a person renders fiduciary
advice only to the extent they meet the
regulatory definition with respect to the
particular communication at issue. A
person may be a fiduciary for purposes
of one advice transaction and not
another, and the person must meet the
specific requirements of the final rule to
be treated as a fiduciary with respect to
any given transaction. To the extent a
person does not meet the final rule’s
requirements (e.g., by not making a
recommendation, receiving a fee,
providing individualized advice, or
purporting to act in the investor’s best
interest), they are not a fiduciary with
respect to that recommendation. The
final rule fully adopts the statute’s
functional and transactional approach to
the determination of fiduciary status.
The final rule also does not base
fiduciary status on firms’ or financial
professionals’ status under other laws,
as some commenters have asserted.
Instead, the final rule is focused on
defining those circumstances in which
the retirement investor has a reasonable
expectation that the recommendation
reflects a professional or expert
judgment offered on their behalf and in
their interest. In the circumstances
specified, a retirement investor would
be entitled to treat their relationship
with the person making the
recommendation as one of trust and
confidence. To the extent that a
financial professional satisfies the
conditions, in part, based on
compliance with other regulators’
conduct standards, that would merely
be a consequence of independent
decisions made by other regulators. The
final rule does not override those
regulators’ decisions as to how to
characterize their conduct standards,
require them to take any particular
approach to oversight of investment
recommendations, or pin fiduciary
status on anything other than a
reasonable understanding of the nature
of the relationship between the persons
giving and receiving the advice. The
Department’s regulation is based on its
unique authority to define a fiduciary
for purposes of Title I and Title II of
ERISA, establish a uniform definition
for all persons giving investment advice
to retirement investors under Title I and
Title II of ERISA, and fulfill the statute’s
investor-protective purposes in
accordance with the text of the statute.
139 See,
e.g., Mertens v. Hewitt Associates, 508
U.S. 248, 264 (1993); John Hancock Mut. Life Ins.
Co. v. Harris Trust & Sav. Bank, 510 U.S. 86, 98
(1993).
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Moreover, commission-based
financial professionals are fully able to
satisfy ERISA’s fiduciary standard of
loyalty in Title I. The Department has
long interpreted the duty of loyalty, as
set forth in section 404(a)(1)(A) of
ERISA (a fiduciary must discharge their
duties with respect to the plan ‘‘solely
in the interests of the participants and
beneficiaries’’) as establishing a
standard that prohibits a fiduciary from
‘‘subordinating the interests of
participants and beneficiaries in their
retirement income to unrelated
objectives.’’ 140 This standard properly
applies section 404(a)(1)(A)’s duty of
loyalty in the context of advice
arrangements. ERISA further permits
fiduciaries to receive reasonable
compensation—including commissionbased compensation—for their
services.141
Indeed, the statute recognizes the
impossibility of avoiding all fiduciary
conflicts of interest by giving the
Department authority to grant
exemptions from the prohibited
transaction rules. The mere existence of
a conflict is insufficient to defeat
fiduciary status or to establish a
violation of the prohibited transaction
rules. Instead, the conflict of interest
must be managed in accordance with a
statutory exemption or administrative
exemption granted by the Department.
This does not prevent commissionbased compensation arrangements, as
some commenters have asserted, so long
as the advice provider does not
subordinate the interests of the
retirement investor to their own
financial interests and does not charge
more than ‘‘reasonable compensation,’’
as expressly authorized by the
statute.142 Indeed, in many instances,
such as those involving advice on ‘‘buy
and hold’’ strategies, a commissionbased model may be more appropriate
for the investor, and a prudent fiduciary
may recommend the use of a
commission-based structure, rather than
advise the investor to enter into an
arrangement that requires the payment
of ongoing fees without a commensurate
need for ongoing advice. Nothing in the
text of the statute, the text of the 1975
regulation, or previous guidance draws
a distinction between commission-based
compensation and other forms of
compensation in determining whether a
person is a fiduciary when making
140 See, e.g., Advisory Opinion 2008–05A (June
27, 2008); Letter to Harold G. Korbee (Apr. 22,
1981).
141 ERISA section 408(c)(2), 29 U.S.C. 1108(2);
Code section 4975(d)(10).
142 ERISA section 408(b)(2); 29 U.S.C. 1108(b)(2);
Code section 4975(d)(2).
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recommendations for direct or indirect
compensation.
One commenter expressed concern
that the rule could reduce access to
advice on alternative investments
because of the relatively large
commissions paid in connection with
alternative investments. The commenter
said the reasonable compensation
requirement did not have an analog in
Regulation Best Interest and also would
be unworkable for broker-dealers.
However, the obligation to pay no more
than reasonable compensation to service
providers has been long recognized
under Title I and Title II of ERISA. The
statutory exemptions in ERISA section
408(b)(2) and Code section 4975(d)(2)
expressly require services arrangements
involving plans and IRAs to result in no
more than reasonable compensation to
the service provider. Financial
institutions and investment
professionals—when acting as service
providers to plans or IRAs—have long
been subject to this requirement,
regardless of their fiduciary status. The
reasonable compensation standard
requires that compensation not be
excessive, as measured by the market
value of the particular services, rights,
and benefits the financial institution
and investment professional are
delivering to the retirement investor.
To the extent an investment advice
fiduciary’s receipt of compensation
would constitute a self-dealing type
prohibited transaction under ERISA
section 406(b) and Code section
4975(c)(1)(E) or (F), conditional relief
for investment advice fiduciaries to
receive compensation that varies based
on their investment advice is provided
pursuant to amended PTE 2020–02 and
amended PTE 84–24. One such
condition in these PTEs is adherence to
a loyalty obligation that the Department
has stated is consistent with the ‘‘sole
interest’’ standard in ERISA section
404.143 The use of the standard in the
PTEs is an appropriate exercise of the
Department’s exemptive authority under
ERISA section 408(a) and the
Reorganization Plan No. 4 of 1978 to
provide an exemption that is protective
of the interests of retirement investors,
not an improper conflation of the two
standards, as suggested by some
commenters. Based on this discussion,
the Department disagrees with the
commenter who said the proposal
would be unworkable for brokerdealers.144
143 Improving Investment Advice for Workers &
Retirees, 85 FR 82798, 82823 (Dec. 18, 2020).
144 The Department also notes that there are
compensation requirements applicable to broker-
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Some commenters also sought to draw
a bright line distinction between
recommendations made in a sales
capacity and those made in a fiduciary
capacity, asserting that commissionbased recommendations are properly
viewed as mere sales pitches that
should not lead to ERISA fiduciary
status. This approach, however, is
neither supported by the text of the
statute nor the Department’s consistent
views starting in 1975 that advice can be
compensated through commissions.145
The text of the statute does not draw a
distinction between commissions and
other fee-based forms of compensation,
but rather broadly refers to ‘‘advice for
a fee or other compensation, direct or
indirect,’’ which the Department has
consistently recognized includes
commission-based advice. Accordingly,
the final rule properly focuses on the
nature of the relationship between the
parties, rather than the specific mode of
compensation. Whether a firm or
financial professional has held
themselves out as providing the sort of
recommendation that may rightly be
relied upon as a fiduciary
recommendation is a function of the test
set forth in the final rule, which requires
compensation, but does not draw a
bright line between commissions and
fee-based compensation. In those
circumstances where the final rule’s
definition is satisfied, the firm or
investment professional is doing much
more than merely executing a sale. They
are offering a professional
recommendation that is purportedly
based on the investor’s best interest, and
that recommendation is central to the
relationship and a key component of the
services offered to the investor.
In this connection, however, it is
important to note that neither the
proposed rule nor the final rule assigns
fiduciary status to a party who merely
engages in a sales transaction with a
dealers, see e.g., FINRA rule 2121 (fair prices and
commissions).
145 See e.g., U.S. Department of Labor Adv. Op.
83–60A (Nov. 21, 1983) (Rejecting the interpretation
that fiduciary status under ERISA section
3(21)(A)(ii) would not attach to broker-dealers
unless a broker-dealer provides investment advice
for distinct, non-transactional compensation), The
Department stated that ‘‘if . . . the services
provided by the broker-dealer include the provision
of ‘investment advice’, as defined in regulation
2510 .3–21(c), it may be reasonably expected that,
even in the absence of a distinct and identifiable fee
for such advice, a portion of the commissions paid
to the broker-dealer would represent compensation
for the provision of such investment advice.’’ Id.
The statutory language broadly encompasses any
‘‘fee or other compensation,’’ and even under the
five-part test promulgated in 1975, the Department
rejected the position that payment of compensation
through commissions categorically excluded a
broker-dealer from being an investment-advice
fiduciary. See 40 FR 508842 (Oct. 31, 1975).
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retirement investor. Under the express
terms of paragraph (d) of the final rule,
merely executing a sale does not give
rise to fiduciary status. Moreover, even
if one makes a recommendation in
connection with a commission-based
transaction, that recommendation will
not amount to fiduciary advice unless
the recommendation meets the specific
conditions set forth in the final rule, all
of which are aimed at ensuring that the
advice goes beyond a mere ‘‘sales
pitch,’’ and instead reflects the sort of
relationship of trust and confidence that
should be afforded fiduciary status and
protection. To that end, and in response
to comments, the Department narrowed
the contexts that give rise to fiduciary
status, and included a new paragraph
confirming that mere sales
recommendations devoid of the two
covered contexts will not result in
ERISA fiduciary status and that
investment information or education,
without an investment
recommendation, will also not result in
ERISA fiduciary status.
Finally, some commenters said that
the Chamber opinion indicated that the
Department’s authority to regulate
conduct in the financial services
industry has been limited by the DoddFrank Act. The commenters said that
under Dodd-Frank, Congress had
authorized the SEC, and not the
Department, ‘‘to promulgate enhanced,
uniform standards of conduct for
broker-dealers and investment advisers
who render ‘personalized investment
advice about securities to a retail
customer.’ ’’
The Department’s well-settled
authority under ERISA to regulate
investment advice rendered by
fiduciaries to retirement investors in the
context of certain annuity sales was not
impaired by the Dodd-Frank legislation.
Rather, section 913 of the Dodd-Frank
Act directed the SEC to study the
effectiveness of the rules applicable to
investment advice respecting securities
by entities subject to SEC regulation
‘‘and other Federal and State legal or
regulatory standards.’’ The reference to
other standards demonstrates Congress’
clear awareness that there are
overlapping Federal regulatory schemes.
Moreover, this rulemaking is closely
aligned with the SEC’s standards under
both the Advisers Act and under
Regulation Best Interest, which was
adopted subsequent to the Chamber
opinion and is rooted in fiduciary
principles.146
146 See Regulation Best Interest release, 84 FR
33318, 33330 (July 12, 2019) (noting that Regulation
Best Interest ‘‘draws from key fiduciary principles
underlying fiduciary obligations’’ and that the ‘‘key
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In addition, some commenters posited
that section 989J of Dodd-Frank limited
regulation of fixed indexed annuities to
States (provided certain criteria are
met). In making this assertion,
commenters cited language in the
Chamber decision to the effect that
‘‘[s]ection 989J . . . provides that ‘fixed
indexed annuities sold in states that
adopted the [NAIC’s] enhanced model
suitability regulations, or companies
following such regulations, shall be
treated as exempt securities not subject
to federal regulation.’ ’’ 147 The quoted
language, however, was taken from an
appellate brief, not section 989J. The
statutory language simply states that
‘‘[t]he Commission [SEC] shall treat as
exempt’’ such annuities from regulation
as securities. By its express terms,
section 989J restricts regulation only by
the SEC under the securities laws.148 It
does not address or limit the
Department of Labor’s separate
authority under ERISA or its separate
obligations with respect to retirement
plans and IRAs. In accordance with its
authority under ERISA, the Department
has determined that it is appropriate to
include investment advice regarding
plan and IRA investments in fixed
indexed annuities within this scope of
this rule.
Need for an Updated Definition of an
Investment Advice Fiduciary
The 1975 regulation makes it all too
easy for financial professionals and
firms to hold themselves out as trusted
advisers acting in the individual
investor’s best interest and based on
their individual circumstances when, in
fact, they have no obligation to act in
elements of the standard of conduct that applies to
broker-dealers under Regulation Best Interest will
be substantially similar to key elements of the
standard of conduct that applies to investment
advisers pursuant to their fiduciary duty under the
Advisers Act.’’); see also, SEC Staff Bulletin:
Standards of Conduct for Broker-Dealers and
Investment Advisers Care Obligation (‘‘Both
[Regulation Best Interest] for broker-dealers and the
[Advisers Act] fiduciary standard for investment
advisers are drawn from key fiduciary principles
that include an obligation to act in the retail
investor’s best interest and not to place their own
interests ahead of the investor’s interest.’’), https://
www.sec.gov/tm/standards-conduct-broker-dealersand-investment-advisers.
147 885 F.3d at 385 (citation omitted). The
decision incorrectly attributes the internally quoted
language to the text of Dodd-Frank. Id. This
language is actually from an appellate brief by the
Indexed Annuity Leadership Council (IALC), one of
the plaintiffs that challenged the 2016 Rulemaking.
Brief of Plaintiff-Appellant, Chamber of Com. of
United States of Am. v. U.S. Dep’t of Lab., 885 F.3d
360 (5th Cir. 2018) (No. 17–10238), 2018 WL
3301737, at *8. The statutory text itself provides no
basis for the broad conclusion that fixed indexed
annuities sold in a State that follows the NAIC’s
model suitability (or successor) regulations, among
other criteria, are exempt from Federal regulation.
148 15 U.S.C. 77c Note (emphasis added).
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the investor’s best interest or otherwise
adhere to the fiduciary standards under
Title I and Title II of ERISA. While the
actions of other regulators, particularly
the SEC’s adoption of Regulation Best
Interest, have partly addressed this
concern, significant gaps remain, and
the current patchwork regulatory
structure is neither uniform nor
sufficiently protective of retirement
investors. As discussed in greater detail
in the Regulatory Impact Analysis, the
Department has determined that the
final rule will provide additional
benefits and needed protections for
retirement investors, even in light of
other regulators’ recently enhanced
conduct standards.149
For example, commenters did not
dispute the fact that certain
recommendations by broker-dealers to
retirement investors are not covered by
SEC Regulation Best Interest, including
recommendations to plan fiduciaries
such as the fiduciaries of small
employer plans who need assistance in
constructing the lineup on a 401(k) plan
menu.150 Several commenters expressed
strong support for applying ERISA
fiduciary protections in this context,
with Morningstar quantifying potential
benefits of the proposal’s coverage of
recommendations to plan fiduciaries on
the investment options in defined
contribution plans as saving
participants over $55 billion in the next
10 years in costs associated with
investing through their plans. Other
investments that may not be subject to
the Federal securities law include: real
estate, fixed indexed annuities, certain
certificates of deposit and other bank
products, commodities, and precious
metals. Furthermore, there are a number
of persons who provide investment
advice services that are neither subject
to the SEC’s Regulation Best Interest nor
149 One commenter urged the Department to
follow the Statement on Standards in Personal
Financial Planning Services implemented by the
American Institute of CPAs (AICPA). The
commenter described the standards as requiring
CPAs to assess whether there are any conflicts of
interest related to client engagements. If a conflict
of interest exists, the CPA should determine if they
can perform the engagement objectively. If they can,
they must disclose all known conflicts of interest
and obtain written consent. If they cannot, the
engagement must be terminated. The Department
believes in the context of ERISA fiduciary
investment advice to retirement investors, ERISA’s
prohibited transaction rules provide the appropriate
approach by requiring financial professionals to
avoid conflicts of interest or comply with a
prohibited transaction exemption.
150 One commenter noted that other securities law
protections, such as those under FINRA rules,
would be applicable to broker-dealers making
recommendations to plan sponsors. However, the
commenter suggested that the protections lack a
duty of loyalty of comparable rigor to that in PTE
2020–02.
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to the fiduciary obligations in the
Advisers Act. Additionally, some
commenters indicated that are
disparities in the degree to which firms
have implemented Regulation Best
Interest. The Department expects the
addition of ERISA remedies and the
Department’s enforcement resources to
enhance protection of retirement
investors in Title I plans, and to better
ensure that advice providers compete on
a level playing field where
recommendations are made pursuant to
a common best interest standard.
Applying ERISA fiduciary protections
to the recommendations covered by the
rule will also result in increased
protections in the insurance market,
even in those States that have adopted
the 2020 revisions to the NAIC Model
Regulation. For example, commenters
discussed significant conflicts of
interest associated with large
commissions on annuity sales, as well
as abusive sales practices. Conflicted,
imprudent, and disloyal advice with
respect to such annuity sales can result
in large investor losses. The dangers are
compounded by the complexity of the
products, which makes sound advice
critical.
For example, recommendations of
fixed indexed annuities are generally
not covered by Regulation Best Interest,
but typically are complex products that
depend upon careful and expert
assessment of myriad contract and
investment features. Between 2005 and
2022, the number of indexes available in
the market grew from a dozen to at least
150. Many of these indexes are hybrids,
including a mix of one or more indexes,
as well as a cash or bond component.
More than 60 percent of premium
allocations for new fixed indexed
annuity sales in mid-2022 involved
hybrid designs. In addition, the
determination of the right annuity
requires careful consideration of the
method by which the index is credited
to the contract’s value, charges
associated with the contract, potential
surrender charges, and any limiting
factors on the crediting (such as cap
rates, participation rates, or spread).
Given the complexity of the products, it
is very easy for investors to purchase
products that have very different risks
and benefits than they thought they
were purchasing, and that have
considerably more downside than they
expected. For all these reasons, fixed
indexed annuities have been the subject
of various regulatory alerts, warning
investors of the dangers associated with
the products.151 Sound advice is
151 See, e.g., SEC Office of Investor Education and
Advocacy Updated Investor Bulletin: Indexed
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32139
critical. In its comment, Morningstar
estimates that the Department’s
proposal would increase retirement
investors’ savings with respect to fixed
indexed annuities by approximately
$32.5 billion over the next ten years.
The Department agrees with those
commenters who concluded that the
NAIC Model Regulation is not as
protective as Regulation Best Interest
and does not protect retirement
investors to the same degree as the
fiduciary protections in Title I and Title
II of ERISA.152 Although the NAIC
Model Regulation provides that insurers
must ‘‘establish and maintain
reasonable procedures to identify and
eliminate any sales contests, sales
quotas, bonuses, and non-cash
compensation that are based on the
sales of specific annuities within a
limited period of time,’’ 153 the
Department believes that broader
conflict mitigation is needed to protect
the interests of retirement investors. An
important premise of Title I and Title II
of ERISA is that fiduciaries’ conflicts of
interest should not be left unchecked,
but rather should be carefully regulated
through rules requiring adherence to
basic fiduciary norms and avoidance of
prohibited transactions.
In particular, the Department is
concerned about the NAIC Model
Regulation’s definition of ‘‘material
conflicts of interest’’ which must be
identified and avoided or reasonably
managed and disclosed and which
excludes all ‘‘cash compensation’’ and
‘‘non-cash compensation.’’ As a result,
the NAIC Model Regulation excludes
‘‘any discount, concession, fee, service
fee, commission, sales charge, loan,
override, or cash benefit received by a
producer in connection with the
recommendation or sale of an annuity
from an insurer, intermediary, or
Annuities (July 31, 2020), https://www.sec.gov/oiea/
investor-alerts-and-bulletins/ib_indexedannuities;
Iowa Insurance Division, Bulletin 14–02 (September
15, 2014), https://iid.iowa.gov/media/153/
download?inline=.
152 The exclusion of commission payments and
other compensation as well as non-cash
compensation from the definition of a material
conflict of interest is in direct contrast to the SEC’s
approach in Regulation Best Interest. See
Regulation Best Interest release, 84 FR 33318, 33319
(July 12, 2019)(‘‘Like many principal-agent
relationships—including the investment adviserclient relationship—the relationship between a
broker-dealer and a customer has inherent conflicts
of interest, including those resulting from a
transaction-based (e.g., commission) compensation
structure and other broker-dealer compensation.’’)
see also Staff Bulletin: Standards of Conduct for
Broker-Dealers and Investment Advisers Conflicts
of Interest which specifically identifies
commissions as an example of a common source of
a conflict of interest, available at https://
www.sec.gov/tm/iabd-staff-bulletin-conflictsinterest.
153 NAIC Model Regulation at section 6.C.(2)(h).
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directly from the consumer,’’ as well as
‘‘any form of compensation that is not
cash compensation’’ despite their
obvious potential to drive
recommendations that favor the
financial professional’s own financial
interests at the expense of the investor’s
interests. 154
Although some commenters said that
the NAIC’s approach reflected the view
that the best way to address
compensation conflicts is through
disclosure, the Department discusses in
the Regulatory Impact Analysis its view
that disclosure without conflict
mitigation is limited in its effectiveness
at protecting investors from the dangers
posed by conflicts of interest. The
NAIC’s approach also stands in marked
contrast to ERISA’s treatment of such
competing financial incentives as
material conflicts, which give rise to
prohibited transactions that require
protective conditional exemptions. It
also conflicts with the SEC’s approach
with respect to broker-dealers and
investment advisers, in which the SEC
staff provided a detailed list of types of
compensation that they believe are
examples of common sources of
conflicts of interest, as follows:
compensation, revenue or other benefits
(financial or otherwise) to the firm or its
affiliates, including fees and other charges for
the services provided to retail investors (for
example, compensation based on assets
gathered and/or products sold, including but
not limited to receipt of assets under
management (‘‘AUM’’) or engagement fees,
commissions, markups, payment for order
flow, cash sweep programs, or other sales
charges) or payments from third parties
whether or not related to sales or distribution
(for example, sub-accounting or
administrative services fees paid by a fund or
revenue sharing);
compensation, revenue or other benefits
(financial or otherwise) to financial
professionals from their firm or its affiliates
(for example, compensation or other rewards
associated with quotas, bonuses, sales
contests, special awards; differential or
variable compensation based on the product
sold, accounts recommended, AUM, or
services provided; incentives tied to
appraisals or performance reviews; forgivable
loans based upon the achievement of
specified performance goals related to asset
accumulation, revenue benchmarks, client
transfer, or client retention);
compensation, revenue or other benefits
(financial or otherwise) (including, but not
limited to, gifts, entertainment, meals, travel,
and related benefits, including in connection
with the financial professional’s attendance
at third-party sponsored trainings and
conferences) to the financial professionals
resulting from other business or personal
relationships the financial professional may
have, relationships with third parties that
154 NAIC
Model Regulation at section 5.B. and J.
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may relate to the financial professional’s
association or affiliation with the firm or
with another firm (whether affiliated or
unaffiliated), or other relationships within
the firm; and
compensation, revenue or other benefits
(financial or otherwise) to the firm or its
affiliates resulting from the firm’s or its
financial professionals’ sales or offer of
proprietary products or services, or products
or services of affiliates.155
The Department also notes that the
State of New York took a different
approach than the NAIC Model
Regulation in its NY Insurance
Regulation 187. Under the New York
regulation, ‘‘[o]nly the interests of the
consumer shall be considered in making
the recommendation. The producer’s
receipt of compensation or other
incentives permitted by the Insurance
Law and the Insurance Regulations is
permitted by this requirement provided
that the amount of the compensation or
the receipt of an incentive does not
influence the recommendation.’’
(Emphasis added.)
The NAIC Model Regulation also
specifically disclaims creating fiduciary
obligations and differs in significant
respects from the protective standards
applicable to broker-dealers and
investment advisers under Regulation
Best Interest and the Advisers Act,
respectively, and this final rule. For
example, in addition to disregarding
compensation as a source of material
conflicts of interest, the specific care,
disclosure, conflict of interest, and
documentation requirements do not
expressly incorporate the ‘‘best interest’’
obligation not to put the producer’s or
insurer’s interests before the customer’s
interests, even though compliance with
these component obligations is treated
as meeting the best interest standard.
Instead, the core conduct standard of
care includes a requirement to ‘‘have a
reasonable basis to believe the
recommended option effectively
addresses the consumer’s financial
situation, insurance needs, and financial
objectives.’’ Additionally, the obligation
to comply with the ‘‘best interest’’
standard is limited to the individual
producer, as opposed to the insurer
responsible for supervising the
producer. In contrast, the standards in
the amended PTEs mirror ERISA section
404’s standards of prudence and loyalty,
and provide that the advice must:
• reflect the care, skill, prudence, and
diligence under the circumstances then
prevailing that a prudent person acting
in a like capacity and familiar with such
matters would use in the conduct of an
enterprise of a like character and with
like aims, based on the investment
objectives, risk tolerance, financial
circumstances, and needs of the
retirement investor, and
• must not place the financial or
other interests of the investment
professional, financial institution or any
affiliate, related entity, or other party
ahead of the interests of the retirement
investor, or subordinate the retirement
investor’s interests to their own.
The amended PTE standards are
aligned with the SEC’s conduct
standards applicable to broker-dealers
and investment advisers.156 Further, as
noted above, the NY Insurance
Regulation 187 includes a similar
standard of care, providing that ‘‘an
insurance producer acts in the best
interest of the consumer when, among
other things, the producer’s . . .
recommendation to the consumer is
based on an evaluation of the relevant
suitability information of the consumer
and reflects the care, skill, prudence,
and diligence that a prudent person
acting in a like capacity and familiar
with such matters would use under the
circumstances then prevailing.’’
In response to commenters who
expressed concern that the Department’s
rule would improperly displace State
regulation in the annuities market, it
bears repeating that in enacting ERISA,
Congress imposed a uniquely protective
regime on tax-preferred retirement
investments. The Department’s final
rule, which covers compensated
retirement recommendations under
conditions where it is reasonable to
place trust and confidence in the advice,
falls well within ERISA’s broad
fiduciary definition, even if it is more
protective of federally-protected
retirement investments than State
insurance regulations. It is also
important to note the interaction
between the NAIC Model Regulation
and the fiduciary protections under
Title I and Title II of ERISA is explicitly
recognized in the NAIC Model
Regulation’s safe harbor for the
recommendations and sales of annuities
in compliance with comparable
standards, including those applicable to
fiduciaries under Title I and Title II of
ERISA.157
Although some commenters
maintained the Department
misunderstands the NAIC Model
Regulation, the Department’s analysis is
based on the terms of the Model
155 SEC Staff Bulletin: Standards of Conduct for
Broker-Dealers and Investment Advisers Conflicts
of Interest, https://www.sec.gov/tm/iabd-staffbulletin-conflicts-interest.
156 See generally, Regulation Best Interest release,
84 FR 33318 (July 12, 2019); SEC Investment
Adviser Interpretation, 84 FR 33669 (July 12, 2019).
157 NAIC Model Regulation at section 6.E.
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Regulation and is consistent with that of
other commenters, including the CFP
Board in their publication discussed
above. There can be no
misunderstanding with respect to the
fact that the NAIC Model Regulation
clearly and unambiguously excludes
cash and non-cash compensation from
the definition of a material conflict of
interest.158 Because of this exclusion,
the NAIC Model Regulation does not
provide that producers must identify
and avoid or reasonably manage
material conflicts of interest arising
from cash and non-cash compensation.
This leaves disclosure as the sole
method of addressing such conflicts
other than the prohibition of sales
contests, sales quotas, bonuses, and
non-cash compensation that are based
on the sales of specific annuities within
a limited period of time, which are
prohibited. The Department’s PTEs’
more stringent requirements will require
insurance market participants not only
to disclose but also to more broadly
mitigate conflicts of interest associated
with commissions and other cash and
non-cash compensation to insurance
producers providing recommendations
to retirement investors, resulting in
enhanced protections to consumers.159
The Chamber Opinion
Many commenters said the proposed
regulation was essentially a re-proposal
of the 2016 Rulemaking and had the
same legal vulnerabilities. They
generally said that, in Chamber, the
court had approved the 1975
158 NAIC
Model Regulation at section 5.I.(2).
commenter provided a summary of the
differences between the NAIC Model Regulation
and ERISA’s fiduciary responsibilities. These
differences highlight the additional protection
under ERISA in the insurance marketplace. See
Federation of Americans for Consumer Choice 6
(‘‘The differences between NAIC model regulation
best interest and ERISA fiduciary duties include: (i)
ERISA has a duty of loyalty to act solely in the
interest of the client different from the NAIC model
regulation requirement for agents not to put their
interests ahead of client interests, (ii) ERISA
contains a prudence requirement not considered
applicable to insurance producers, (iii) the NAIC
model regulation establishes four specified
obligations deemed to satisfy the best interest
standard consisting of care, disclosure, conflict of
interest, and documentation, all of which comport
with the sales function of an agent, (iv) the NAIC
model regulation requires neither ongoing
monitoring nor diversification of assets which may
need to be considered by ERISA fiduciaries, (v) the
NAIC model regulation does not define conflicts of
interest as broadly as ERISA instead relying on
disclosure befitting insurance sales practices, (vi)
the NAIC model regulation contains no reasonable
compensation restrictions but limits certain forms
of incentive compensation, and (vii) the NAIC
model regulation does not expose agents to
common law fiduciary liabilities, DOL oversight, or
potential private right of action under ERISA.’’),
https://www.dol.gov/sites/dolgov/files/ebsa/lawsand-regulations/rules-and-regulations/publiccomments/1210-AC02/00345.pdf.
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159 One
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regulation’s five-part test as defining a
relationship of trust and confidence and
they objected to any revision of the fivepart test as inconsistent with both the
statutory definition and the Fifth
Circuit’s opinion. The Department
disagrees and notes the various
differences between the 2016
Rulemaking and this final rule. In
writing the proposal and this final rule,
the Department has been careful to craft
a definition that is consistent with both
the statutory text and with the Fifth
Circuit’s focus on relationships of trust
and confidence. The Department’s
authority to revisit the regulatory
definition of an investment advice
fiduciary and depart from the 1975 fivepart test is not foreclosed by the
Chamber opinion. In this regard,
commenters did not identify for the
Department, and the Department’s
research did not uncover, any commonlaw cases predating enactment of ERISA
that limited the application of fiduciary
status and obligations to those persons
that meet all five of the requirements
created and imposed by the 1975
regulation. Other courts that considered
the Department’s 2016 Final Rule noted
that it was the 1975 five-part test that
was difficult to reconcile with the
statute, or that the elements of this test,
such as the ‘‘regular basis’’ prong, do
not appear in the text of ERISA.160 To
that end, the Department notes that
other cases discuss how ERISA’s
statutory definition of ‘‘fiduciary’’ is
broad,161 with one such case indicating
that the definition of ‘‘fiduciary’’ under
ERISA is broader than the more
restrictive approach the Department
160 National Association for Fixed Annuities v.
Perez, 217 F. Supp. 3d. 1, 23, 27 (D.D.C. 2016);
FACC v. U.S. Dep’t of Lab., No. 3:22–CV–00243–K–
BT, 2023 WL 5682411, at *18 (N.D. Tex. June 30,
2023); see Chamber, 885 F.3d at 393 (Stewart, C.J.,
dissenting); see generally also Market Synergy v.
U.S. Dep’t of Lab., 885 F.3d 676 (10th Cir. 2018)
(affirming a district court’s decision in which
several challenges to the 2016 Rulemaking, as it
applied to fixed indexed annuities, were rejected).
161 See Eaves v. Penn, 587 F.2d 453, 458 (10th Cir.
1978); Farm King Supply, Inc. Integrated Profit
Sharing Plan & Tr. v. Edward D. Jones & Co., 884
F.2d 288, 293 (7th Cir. 1989); see also Thomas,
Head & Greisen Emps. Tr. v. Buster, 24 F.3d 1114,
1117 (9th Cir. 1994) (‘‘[T]he definition of fiduciary
under ERISA should be liberally construed.’’ (citing
Consolidated Beef Indus. Inc. v. New York Life Ins.
Co., 949 F.2d 960, 964 (8th Cir. 1991), cert. denied,
503 U.S. 985 (1992))); H. Stennis Little, Jr., & Larry
Thrailkill, Fiduciaries Under ERISA: A Narrow Path
to Tread, 30 Vanderbilt L. Rev. 1, 4–5 (1977)
(referring to the ‘‘broadness of the [statutory]
definition’’ of ‘‘fiduciary’’ under ERISA, such that
the definition could cover ‘‘insurance salesmen
who recommend the purchase of certain types of
insurance and receive a commission on the sale of
such insurance’’ and ‘‘stock brokers or dealers who
recommend certain securities and then participate
in the acquisition or disposition of securities and
receive a commission for their services’’).
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32141
articulated through the 1975 five-part
test.162
The final rule is far narrower than the
previous rulemaking, which treated all
investment recommendations directed
to a specific retirement investor or
investors regarding the advisability of a
particular investment or management
decision as fiduciary in nature, subject
to a few carve-outs. By contrast, this
rule specifically focuses on whether the
investment recommendation can be
appropriately treated as trust and
confidence advice. Accordingly, and in
response to certain comments (which
are discussed in greater detail below),
the final rule covers recommendations
made in the following contexts:
• The person either directly or
indirectly (e.g., through or together with
any affiliate) makes professional
investment recommendations to
investors on a regular basis as part of
their business and the recommendation
is made under circumstances that would
indicate to a reasonable investor in like
circumstances that the recommendation:
Æ is based on review of the retirement
investor’s particular needs or individual
circumstances,
Æ reflects the application of
professional or expert judgment to the
retirement investor’s particular needs or
individual circumstances, and
Æ may be relied upon by the
retirement investor as intended to
advance the retirement investor’s best
interest; or
• The person represents or
acknowledges that they are acting as a
fiduciary under Title I of ERISA, Title
II of ERISA, or both with respect to the
recommendation.
In these circumstances, the failure to
treat the recommendation as fiduciary
advice would dishonor the investor’s
reasonable expectations of professional
advice that is offered to advance their
best interest and can be relied upon as
rendered by a financial professional
who occupied a position of trust and
confidence. When firms and financial
professionals meet the requirements of
this definition, it would defeat ERISA’s
plan-protective purposes and the
investor’s legitimate expectations of
trust and confidence to hold that the
advice was not fiduciary. Accordingly,
this final rule is wholly consistent with
the Fifth Circuit’s Chamber opinion and
the broad language of the statute.
To the extent that the 1975 five-part
test excluded such recommendations, it
would be underinclusive from the
162 See Farm King, 884 F.2d at 293 (discussing
‘‘evidence of the wide sweep given to the meaning
of ‘fiduciary’ under ERISA’’ in relation to the
narrower definition codified in the 1975 test).
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standpoint of trust and confidence, as
discussed above. For example, under
the 1975 rule, a recommendation to a
plan participant to roll over a lifetime of
savings and invest them in a fixed
indexed annuity would not count as
fiduciary advice if the person making
the investment recommendation had not
regularly made recommendations to the
investor about plan assets. This would
be true, even if the advice followed a
series of meetings about the particular
financial circumstances and needs of
the investor; purported expert
recommendations about how to meet
those needs and circumstances based
upon consideration of the investor’s
most intimate financial details; and a
clear understanding that the advice was
being held out as based upon the best
interest of the investor. Moreover, the
five-part test would defeat fiduciary
status even if the investor had relied
upon the financial professional for
advice about all aspects of their
financial life for a period of many years
encompassing many transactions, as
long as that advice did not relate to plan
assets. It is hard to square such a result
with a trust and confidence test, and
impossible to square the result with the
text of the statute, which contains no
such limitation. The final rule avoids
such inequitable results, while limiting
advice to those circumstances in which
the investor reasonably should expect
fiduciary advice.163 In this way, the
Department believes that treating onetime advice as fiduciary investment
advice subject to ERISA is consistent
with a relationship of trust and
confidence, provided that all of the
requirements of the regulatory test are
satisfied.164
163 As also noted by the magistrate judge in
Federation of Americans for Consumer Choice v.
United States Dept. of Labor, the Fifth Circuit’s
opinion ‘‘did not foreclose that Title I duties may
reach those fiduciaries who, as aligned with Title
I’s text, render advice, even for the first time, ‘for
a fee or other compensation.’ ’’ Findings,
Conclusions, and Recommendations of the United
States Magistrate Judge, FACC, No. 3:22–CV–
00243–K–BT, 2023 WL 5682411, at *22 (N.D. Tex.
June 30, 2023) (quoting ERISA section 3(21)(A)(ii),
29 U.S.C. 1002(21)(A)(ii)) (emphasis in original).
164 One commenter cited the Chamber opinion for
the proposition that a relationship of trust and
confidence that involves ‘‘control and authority’’ is
necessary for investment advice fiduciary status.
The Department does not read the Chamber opinion
to state that ‘‘control and authority’’ is required, but
rather that the use of the terms ‘‘control’’ and
‘‘authority’’ in the other parts of the statutory
fiduciary definition (i.e., ERISA section 3(21)(A)(i)
and (iii) and Code section 4975(e)(3)(A) and (C))
indicate that the investment advice part of the
definition also involves a ‘‘special relationship.’’
See 885 F.3d at 376–77. As discussed herein, the
final rule appropriately defines an investment
advice fiduciary to comport with reasonable
investor expectations of trust and confidence which
is the special relationship described in the Chamber
opinion.
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In the final rule, and in response to
public comments, the Department has
also made changes designed to ensure
that it did not capture communications
that were not properly viewed as
fiduciary advice. Thus, for example, the
final rule includes a new paragraph
expressly declining fiduciary treatment
for mere sales pitches that fall short of
meeting the test above. Similarly, the
rule makes clear that mere investment
information or education, without an
investment recommendation, is not
treated as fiduciary advice.
This rule is not only a very different
rule from the one that was before the
Fifth Circuit in Chamber; it also
addresses a very different regulatory
landscape. The regulatory actions taken
by the SEC and NAIC to update conduct
standards reflect the understanding that
broker-dealers and insurance agents
commonly make recommendations to
their customers for which they are
compensated as a regular part of their
business; that investors rely upon these
recommendations; and that regulatory
protections are important to ensure that
the advice is in the best interest of the
retail customer, in the case of brokerdealers, or consumers, in the case of
insurance agents. In this regard, also as
discussed above, commenters informed
the Department that it is common for
broker-dealers and insurance agents to
hold themselves out as trusted advisers
and take deliberate steps to develop
relationships of trust and confidence
with their customers.165 Moreover, as
the SEC has repeatedly noted,
Regulation Best Interest ‘‘draws from
key fiduciary principles underlying
fiduciary obligations, including those
that apply to investment advisers’’
under the Advisers Act.166 As a result,
165 It is also worth noting that in the litigation
surrounding the 2016 Final Rule, there were
affidavits from independent insurance agents
describing ongoing relationships with their
customers in which detailed personal financial
information is shared. One such affidavit filed by
Donald E. Wales in Market Synergy Group, Inc. v.
United States Department of Labor stated, ‘‘I take
great pride and care in developing deep familiarity
with my clients’ individual financial circumstances,
resources, and goals. All my sales of life insurance
and fixed annuities . . . are made following a faceto-face meeting with my clients . . . . I also attempt
to have periodic meetings with my clients . . . to
review their financial state of affairs and
recommend changes . . . to their financial plans. I
proudly use the same financial products that I
recommend to my clients . . . and often share my
own personal results with them.’’ Memorandum of
Plaintiff-Appellant in Support of Motion for
Preliminary Injunction at Exhibit 9, Mkt. Synergy
Grp., Inc. v. United States Dep’t of Lab., No. 5:16–
CV–4083–DDC–KGS, 2017 WL 661592 (D. Kan. Feb.
17, 2017), ECF No. 11–9, aff’d, 885 F.3d 676 (10th
Cir. 2018).
166 Regulation Best Interest release, 84 FR 33318
(July 12, 2019); see also SEC Staff Bulletin:
Standards of Conduct for Broker-Dealers and
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the final rule is far more consistent with
the SEC’s regulation of advice than was
true of the 2016 Rulemaking, which
represented a significant departure from
securities law regulation of brokerdealers at the time.
For all these reasons, both the final
rule and the regulatory context are far
different than the 2016 Final Rule
considered by the Fifth Circuit in the
Chamber opinion. In addition, there are
other important ways in which the final
rule is different than the 2016
Rulemaking, above and beyond this
final rule’s clear focus on relationships
of trust and confidence:
• The final rule and associated
exemptions, unlike the 2016
Rulemaking, contain no contract or
warranty requirements. The 2016
Rulemaking required that advisers and
financial institutions give their
customers enforceable contractual
rights. This final rule and amended
PTEs do not create any such rights. The
sole remedies for non-compliance are
precisely those set forth in ERISA and
the Code, which include only the
imposition of excise taxes in the context
of advice to IRAs.
• The amended PTEs, unlike the 2016
Rulemaking, do not prohibit financial
institutions and advisers from entering
into class-wide binding arbitration
agreements with retirement investors.
• PTE 2020–02, as finalized,
specifically provides an exemption from
the prohibited transaction rules for pure
robo-advice relationships, unlike the
2016 Rulemaking.
• PTE 84–24, unlike the 2016
Rulemaking, does not require insurance
companies to assume fiduciary status
with respect to independent insurance
agents, an important concern of insurers
with respect to the 2016 Rulemaking.
• Neither PTE 2020–02 nor PTE 84–
24, as amended, require financial
institutions to disclose all their
compensation arrangements with third
parties on a publicly available website,
as was required by the 2016
Rulemaking.
In sum, commenters err in asserting
that this rulemaking is simply a repeat
of the 2016 Rulemaking, or in
contending that the final rule fails to
take proper account of the nature of the
relationship between the advice
provider and the advice recipient.
Investment Advisers Care Obligation, (‘‘Both Reg BI
for broker-dealers and the IA fiduciary standard for
investment advisers are drawn from key fiduciary
principles that include an obligation to act in the
retail investor’s best interest and not to place their
own interests ahead of the investor’s interest,’’)
https://www.sec.gov/tm/standards-conduct-brokerdealers-and-investment-advisers.
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D. Discussion of the Final Rule
Under the final rule, a person is an
investment advice fiduciary if they
provide a recommendation in one of the
following contexts:
• The person either directly or
indirectly (e.g., through or together with
any affiliate) makes professional
investment recommendations to
investors on a regular basis as part of
their business and the recommendation
is made under circumstances that would
indicate to a reasonable investor in like
circumstances that the recommendation:
Æ is based on review of the retirement
investor’s particular needs or individual
circumstances,
Æ reflects the application of
professional or expert judgment to the
retirement investor’s particular needs or
individual circumstances, and
Æ may be relied upon by the
retirement investor as intended to
advance the retirement investor’s best
interest; or
• The person represents or
acknowledges that they are acting as a
fiduciary under Title I of ERISA, Title
II of ERISA, or both with respect to the
recommendation.
The recommendation also must be
made ‘‘for a fee or other compensation,
direct or indirect’’ as defined in the final
rule.
The provisions of the final rule are
organized into the following paragraphs
and discussed in greater detail below.
Paragraph (c) of the regulation defines
the term ‘‘investment advice.’’
Paragraph (d) retains the provision in
the existing regulation regarding
‘‘execution of securities transactions.’’
Paragraph (e) defines the phrase ‘‘for fee
or other compensation, direct or
indirect.’’ Paragraph (f) sets forth
definitions used in the regulation.
Paragraph (g) addresses applicability of
the regulation. Paragraph (h) confirms
the continued applicability of State law
regulating insurance, banking, and
securities.
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1. Covered Recommendations
Definition of a Recommendation
Whether a person has made a
‘‘recommendation’’ is a threshold
element in establishing the existence of
fiduciary investment advice. For
purposes of the final rule, whether a
recommendation has been made will
turn on the facts and circumstances of
the particular situation, including
whether the communication reasonably
could be viewed as a ‘‘call to action.’’
The more individually tailored the
communication to a specific customer
or a targeted group of customers about
a security or other investment or group
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of securities or other investments, the
greater the likelihood that the
communication may be viewed as a
recommendation. The determination of
whether a recommendation has been
made is an objective rather than a
subjective inquiry.
The Department intends that whether
a recommendation has been made will
be construed in a manner consistent
with the SEC’s framework in Regulation
Best Interest. In the Regulation Best
Interest release, the SEC stated,
[T]he determination of whether a 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.’’ 167
Commenters generally supported the
Department’s statement in the preamble
for the proposal that it intended to take
an approach that is similar to the SEC
and FINRA on the definition of a
recommendation, and some asked for
confirmation that the Department would
interpret the definition consistent with
the SEC’s framework in Regulation Best
Interest. In this regard, some
commenters identified the word
‘‘suggestion’’ in the following statement
in the Department’s preamble, and said
this set too low a bar for fiduciary
status:
For purposes of the proposed rule, the
Department views a recommendation as a
communication that, based on its content,
context, and presentation, would reasonably
be viewed as a suggestion that the retirement
investor engage in or refrain from taking a
particular course of action.168
Commenters also said this was
inconsistent with the SEC’s approach,
although some commenters
acknowledge this statement was
consistent with prior FINRA guidance—
and, in fact, quoted that guidance.169
167 Regulation Best Interest release, 84 FR 33318,
33335 (July 12, 2019)(footnote omitted).
168 Proposed Retirement Security Rule, 88 FR
75890, 75904 (Nov. 3, 2023).
169 See FINRA Regulatory Notice 11–02
(‘‘[S]everal guiding principles are relevant to
determining whether a particular communication
could be viewed as a recommendation for purposes
of the suitability rule. For instance, a
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32143
Based on the word ‘‘suggestion’’ some
commenters posed scenarios involving
the provision of information to a
retirement investor and said those
communications would appear to be
covered as recommendations under the
proposal.
Commenters also identified other
statements in the proposal’s preamble
that they believed were not consistent
with the SEC’s approach in Regulation
Best Interest. These statements are: ‘‘the
fact that a communication is made to a
group rather than an individual would
not be dispositive of whether a
recommendation exists’’ and ‘‘providing
a selective list of securities to a
particular retirement investor as
appropriate for the investor would be a
recommendation as to the advisability
of acquiring securities even if no
recommendation is made with respect
to any one security.’’ 170
The Department confirms that, for
purposes of the final rule, the
Department intends that whether a
recommendation has been made will be
construed consistent with the SEC
Regulation Best Interest and the inquiry
will focus on whether there is a ‘‘call to
action.’’ To the extent a person provides
information to a retirement investor that
does not rise to the level of a
recommendation as defined in this way,
the communication would not lead to
fiduciary status.
However, the Department does not
believe that the statements regarding
communications to a ‘‘group’’ or
communication’s content, context and presentation
are important aspects of the inquiry. The
determination of whether a ‘‘recommendation’’ has
been made, moreover, is an objective rather than
subjective inquiry. An important factor in this
regard is whether—given its content, context and
manner of presentation—a particular
communication from a firm or associated person to
a customer reasonably would be viewed as a
suggestion that the customer take action or refrain
from taking action regarding a security or
investment strategy. In addition, the more
individually tailored the communication is to a
particular customer or customers about a specific
security or investment strategy, the more likely the
communication will be viewed as a
recommendation. Furthermore, a series of actions
that may not constitute recommendations when
viewed individually may amount to a
recommendation when considered in the
aggregate.’’) (footnote omitted), https://
www.finra.org/rules-guidance/notices/11-02. See
also FINRA Notice to Members 01–23 (‘‘The
determination of whether a ‘recommendation’ has
been made, moreover, is an objective rather than a
subjective inquiry. An important factor in this
regard is whether—given its content, context, and
manner of presentation—a particular
communication from a broker/dealer to a customer
reasonably would be viewed as a ‘‘call to action,’’
or suggestion that the customer engage in a
securities transaction.’’), https://www.finra.org/
rules-guidance/notices/01-23.
170 Proposed Retirement Security Rule, 88 FR
75890, 75904 (November 3, 2023).
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communications about ‘‘a selective list
of securities’’ are inconsistent with the
SEC’s approach. Both of those concepts
appear in the SEC’s discussion in the
Regulation Best Interest release quoted
above that indicates that both
communications to a ‘‘targeted group of
customers’’ and communications about
‘‘a group of securities’’ may be
considered recommendations.
A commenter also said that the
following statement made in the
Department’s preamble described a
concept of a recommendation that was
too expansive and unworkable: ‘‘a series
of actions, taken directly or indirectly
(e.g., through or together with any
affiliate), that may not constitute a
recommendation when each action is
viewed individually may amount to a
recommendation when considered in
the aggregate.’’ 171 The commenter
suggested that the Department withdraw
that preamble statement and include
instead an ‘‘anti-evasion’’ provision
such as: ‘‘No person shall knowingly act
in a manner that functions as an
unlawful evasion of the purposes of this
regulation.’’
Although this quoted language is
similar to language that appeared in the
previous FINRA guidance, the
Department’s proposal expanded it to
include the language ‘‘directly or
indirectly (e.g., through or together with
any affiliate).’’ 172 This language is not
intended to capture all actions of
affiliates, however; rather, ‘‘through or
together with’’ is intended to describe
circumstances in which an advice
provider, in its interactions with the
retirement investor, utilizes an affiliate
to formally deliver the recommendation
to that investor. Therefore, the
Department does not believe that this is
unworkable or difficult to monitor. For
that reason, the Department does not
believe it is necessary to include an
anti-evasion provision instead of this
preamble discussion. However, the
Department cautions that the
description of ‘‘indirectly’’ is not
limited to use of affiliates and would
extend to parties working around this
provision with non-affiliates.
A few commenters suggested
alternative definitions of a
recommendation. One commenter’s
proposed language focused on the
nature of a recommendation as an
endorsement and expression of support
for the retirement investor making or
refraining from making a specific
investment decision. Another
commenter had an opposite view that
the Department should clarify that an
171 Id.
at 75904.
172 See FINRA Regulatory Notice 11–02.
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endorsement or expression of opinion
would not rise to the level of a
recommendation. The Department did
not adopt these suggestions, taking the
view that it should remain consistent
with the SEC on this familiar and wellestablished definitional term.
Commenters also asked the
Department to include a definition of a
recommendation in the regulatory text,
as opposed to a preamble discussion, to
provide parties greater certainty
regarding how the term would be
interpreted. In this regard, however, it is
important to note that the SEC declined
to include a definition of a
recommendation in the text of
Regulation Best Interest. The SEC said,
‘‘what constitutes a recommendation is
highly fact-specific and not conducive
to an express definition in the rule
text.’’ 173 In order to maintain
consistency with the SEC’s approach,
which commenters supported, the
Department also declines to create a
defined term in the final rule’s
regulatory text.
Types of Recommendations Covered
(Paragraph (f)(10))
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 brokerdealers’ ‘‘recommendation of any
securities transaction or investment
strategy involving securities (including
account recommendations).’’ 174 The
phrase’s broader reference to ‘‘other
investment property’’ reflects the
differences in jurisdiction between the
SEC and the Department.
Under 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:
(i) The advisability of acquiring,
holding, disposing of, or exchanging,
securities or other investment property,
investment strategy, or 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) The management of securities or
other investment property, including,
among other things, recommendations
173 Regulation Best Interest release, 84 FR 33318,
33336 (July 12, 2019).
174 17 CFR 240.15l–1(a)(1).
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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
(iii) 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.
The following sections discuss the
components of the definition and the
comments received.
Recommendations Related to Rollovers,
Benefit Distributions, or Transfers From
a Plan or IRA
Both paragraphs (f)(10)(i) and (iii)
describe types of recommendations
related to rollovers, benefit
distributions, and transfers from a plan
or IRA. Paragraph (f)(10)(iii) describes,
as covered recommendations,
recommendations as to ‘‘[r]olling 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.’’
Paragraph (f)(10)(i) describes
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.’’
These provisions of the final rule are
consistent with the Department’s
longstanding interest in protecting
retirement investors in the context of a
recommendation to roll over workplace
retirement plan assets to an IRA, as well
as other recommendations to roll over,
transfer, or distribute assets from a plan
or IRA. Decisions to take a benefit
distribution or engage in a rollover
transaction 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. Advice provided
in connection with a rollover decision,
even if not accompanied by a specific
recommendation on how to invest
assets, is appropriately treated as
fiduciary investment advice, provided
that it falls within one of the two
covered contexts articulated in this final
rule and the other provisions of the final
rule are satisfied. When an advice
provider recommends that a retirement
investor transfer assets out of a Title I
plan, the recommendation entails the
loss of the retirement investor’s property
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rights with respect to the plan, the
sacrifice of protections under Title I of
ERISA, and consequential changes to
the nature of the retirement investor’s
account, services, fees, asset holdings,
and investment options, all of which
can affect the risk, reward, and returns
associated with the retirement investor’s
holdings. Even if the assets would not
continue to be covered by Title I or Title
II of ERISA after they were moved
outside the plan or IRA, the
recommendation to change the plan or
IRA investments in this manner and to
extinguish investor interests and
property rights under the plan is
investment advice under Title I or Title
II of ERISA. In the words of section
3(21)(A)(ii) of ERISA, it is advice with
respect to ‘‘any moneys or other
property of the plan.’’
Under paragraph (f)(10)(iii),
recommendations on distributions from
a workplace retirement plan (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 the final rule, 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
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 provision in paragraph (f)(10)(i),
regarding 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,
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.
The proposal stated that 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.175
It also stated that a prudent and loyal
fiduciary generally could not make a
recommendation on how to invest assets
currently held in a plan after a rollover,
175 Proposed Retirement Security Rule, 88 FR
75890, 75905 (November 3, 2023).
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without even considering the logical
alternative of leaving the assets in the
plan or evaluating how that option
compares with the likely investment
performance of the assets post-rollover,
and that 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.176
The proposal also said that advice to
a plan participant on how to invest
assets currently held in an ERISAcovered plan is ‘‘advice with respect to
moneys or other property of such plan’’
within the meaning of ERISA section
3(21)(A)(ii), inasmuch as the assets at
issue are still held by the plan.177
Many commenters expressed specific
support for the proposal’s coverage of
recommendations to roll over assets
from a workplace retirement plan to an
IRA as advice under Title I of ERISA.
They cited the importance to the
retirement investor of the rollover
decision; the potential for increased
costs outside of a workplace retirement
plan; the loss of a fiduciary responsible
for prudently selecting investment
options in the workplace retirement
plan; and financial professionals’
conflicts of interest because they are
likely to benefit financially if the
retirement investor does roll their assets
out of the workplace retirement plan.
The North American Securities
Administrators Association’s comment
on the proposal said that State securities
regulators have routinely observed
abuse in rollover and account transfer
recommendations.
Other commenters said that
recommendations regarding rollovers
and recommendations regarding assets
after they will leave the plan are not
properly considered ERISA fiduciary
investment advice under Title I, with
the resulting application of the ERISA
section 404 duties and the ERISA
section 502(a) enforcement provisions.
Commenters said that covering these
recommendations as Title I advice is
inconsistent with the Fifth Circuit’s
discussion in the Chamber decision on
the distinction between the
Department’s jurisdiction under Title I
and Title II. A commenter also stated
that Congress has had opportunities in
recent pension legislation to declare
rollover advice as covered under ERISA
Title I but has not. Some also said
covering these recommendations would
create additional liability under Title I
for financial services providers where
none exists now, which is similar to
176 Id.
177 Id.
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32145
creating a private right of action that the
Fifth Circuit found fault with.
Commenters opposing covering these
recommendations as fiduciary
investment advice also said that the
significance of the decision was not a
sufficient basis for the Department to
assert jurisdiction and that these
recommendations would be protected
by the conduct standards in Regulation
Best Interest and the State insurance
laws adopting the NAIC Model
Regulation.
Some commenters focused on the
Department’s statements that
recommendations to take a distribution
necessarily involved a recommendation
to change investments in the plan or to
change fees or services directly affecting
the return on those investments. One
commenter provided examples of
discussions about distributions that they
did not think involved an investment
recommendation, such as
recommendations to take a distribution
from a defined benefit plan, discussion
of the merits of a participant loan or
hardship withdrawal or educating a
retirement investor about rules related
to a required minimum distribution.
The commenter suggested that the rule
be clarified to provide that discussions
about distributions and transfers of
assets that are not for the purposes of
changing investments are not covered
recommendations.
Finally, a number of commenters
expressed concern about the
Department’s position in the proposal
that recommendations of 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 often would involve an implicit
rollover recommendation. They said
this position would lead to the
conclusion that all conversations about
rollovers would be ERISA fiduciary
investment advice under Title I with no
opportunity for information to be
provided in a non-fiduciary capacity.
Commenters believed this outcome
would be detrimental to retirement
investors. For example, one commenter
said it is vitally important for retirement
investors to be informed that they can
leave their assets in the retirement plan
even upon employment termination (if
that is the case). Commenters urged the
Department to state that the rollover
decision can be separate from a
recommendation as to how to invest the
assets, and that discussions about
rollovers can be purely educational. In
this regard, one commenter asked the
Department to make clear that the
delivery of non-individualized
information about a financial service
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provider’s offering without a reference
to a specific investment product or
strategy would not be fiduciary
investment advice.
As discussed below, the Department
views several of the positions taken by
commenters as consistent with this final
rule. The Department agrees that it is
important that retirement investors
continue to have access to information
about the options available to them
regarding rolling over, transferring or
distributing retirement assets and that
these discussions can be purely
educational. However, to the extent
there is a recommendation with respect
to these options, the recommendation is
evaluated under all parts of the final
rule, and if the recommendation is with
respect to assets held in a workplace
retirement plan, it will be fiduciary
advice under Title I of ERISA if all parts
of the final rule are satisfied.
Recommendations to take a distribution
from a workplace retirement plan
necessarily impact the specific
investments in the plan or the fees and
services directly affecting the return on
those investments, even in the context
of a recommendation to roll over from
a defined benefit plan, and clearly
change the investor’s property interests
with respect to the plan and associated
legal protections. For these reasons, the
Department continues to believe it is
appropriate to treat such a
recommendation as advice under Title I
of ERISA if all the parts of the final rule
are satisfied, and has not accepted the
commenter’s suggestion to provide that
recommendations about distributions
and transfers of assets that are not for
the purposes of changing investments
are not covered recommendations. The
recommendation not to hold an asset in
the plan, even if the intention is to hold
essentially the same asset outside the
plan, is still an investment
recommendation. To the extent the
recommendation falls within the test set
forth in this rule it is clearly fiduciary
advice ‘‘with respect to any moneys or
other property of such plan,’’ within the
meaning of ERISA section 3(21)(A)(ii).
The Department also continues to
believe that recommendations of 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 often involve an implicit
rollover recommendation. Further, in
these scenarios too, recommendations
regarding Title I plans are made with
respect to ‘‘moneys or other property of
such plan’’ within the meaning of
ERISA section 3(21)(A)(ii), so coverage
under Title I is appropriate. For this
reason, the Department does not agree
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with a commenter that said a financial
professional should be permitted to
agree with its customer that any advice
to be given will concern how to dispose
of assets once removed from a Title I
plan and no advice will be given
regarding whether to remove the assets
from the plan. If the customer is a
current participant or beneficiary in a
Title I plan, the recommendation
necessarily involves the assets currently
held in the Title I plan. A different
conclusion would create loopholes in
the final rule that would undermine the
protection of retirement investors in this
important context.
These provisions of the final rule do
not create a new private right of action
but rather adopt a regulatory definition
of an investment advice fiduciary with
an appropriate scope. The fact that
Congress has not addressed the status of
rollovers in recent pension legislation
leaves the Department’s clear
jurisdiction, as discussed herein,
undisturbed.
The final rule’s approach in this
respect aligns with the SEC’s Regulation
Best Interest, and with the Advisers Act
fiduciary obligations, which extend to
account recommendations to customers
and clients as well as recommendations
to customers and clients to roll over or
transfer assets from one type of account
to another. As stated by the SEC in
Regulation Best Interest, ‘‘account
recommendations are recommendations
of an approach or method (i.e., a
‘strategy’) for how a retail customer
should engage in transactions in
securities, involve conflicts of interest,
and can have long-term effects on
investors’ costs and returns from their
investments.’’ 178
The Department’s position is not,
however, that all conversations
regarding rollovers and distributions are
recommendations. A recommendation is
a threshold element in the analysis of
178 Regulation Best Interest release, 84 FR 33318,
33339 (July 12, 2019); see also SEC Investment
Adviser Interpretation, 84 FR 33669, 33674 (July 12,
2019) (‘‘An adviser’s fiduciary duty applies to all
investment advice the investment adviser provides
to clients, including advice about . . . account type.
Advice about account type includes advice about
whether to open or invest through a certain type of
account (e.g., a commission-based brokerage
account or a fee-based advisory account) and advice
about whether to roll over assets from one account
(e.g., a retirement account) into a new or existing
account that the adviser or an affiliate of the adviser
manages.’’) The SEC Investment Adviser
Interpretation further provides that ‘‘with respect to
prospective clients, investment advisers have
antifraud liability under section 206 of the Advisers
Act, which, among other things, applies to
transactions, practices, or courses of business which
operate as a fraud or deceit upon prospective
clients, including those regarding investment
strategy, engaging a subadviser, and account type.’’
Id., at 33674 n. 42.
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whether a person is an investment
advice fiduciary. For example,
consistent with the SEC’s position in
Regulation Best Interest, the Department
will not consider merely informing a
retirement investor of the need to take
a required minimum distribution under
the Internal Revenue Code to be an
investment ‘‘recommendation.’’ 179
Likewise, absent additional facts,
merely discussing the merits of a
participant loan or hardship withdrawal
would not rise to the level of an
investment recommendation. Section
E.3. of this preamble provides
additional guidance on investment
information and education that will not
be considered a recommendation
leading to investment advice fiduciary
status.
Recommendations Involving Securities,
Other Investment Property, and
Investment Strategies
Paragraph (f)(10)(i) also describes, as
covered recommendations,
recommendations as to ‘‘the advisability
of acquiring, holding, disposing of, or
exchanging, securities or other
investment property, investment
strategy, or 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.’’
Similar to the SEC and FINRA, the
Department will 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.’’ 180
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 statutory or policy basis for
differentiating advice regarding
investments in CDs, including
investment strategies involving CDs
(e.g., laddered CD portfolios), from other
investment products, and therefore will
interpret paragraph (f)(10) to cover such
recommendations.
The term investment property,
however, does not include health
insurance policies, disability insurance
policies, term life insurance policies,
179 Regulation Best Interest release, 84 FR 33318,
33338 (July 12, 2019).
180 Id. at 33339 (citing FINRA Rule 2111.03 and
FINRA Regulatory Notice 12–25, available at
https://www.finra.org/rules-guidance/notices/12-2).
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and other property to the extent the
policies or property do not contain an
investment component. This is
confirmed in a definition of ‘‘investment
property’’ in paragraph (f)(12). 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.
Commenters also asked the
Department to provide additional
guidance on the definition of
investment property. Several focused on
the definition as it would relate to group
products, as opposed to retail products,
and posed various scenarios involving
recommendations of assets that they did
not think should be considered
investment property, including a group
annuity contract. For example, one
commenter asked the Department to
eliminate both group life insurance
policies and annuities from the
definition of investment property
because the purchase decision would be
made by a plan fiduciary who already
had a duty of loyalty to the plans’
participants and beneficiaries. The
Department has not accepted that
comment, as that result would be
contrary to the general approach taken
in this final rule to include, as
retirement investors, fiduciaries with
control with respect to a plan or IRA. In
those circumstances in which the
person recommending the investment
meets the final rule’s terms, they occupy
a position of trust and confidence with
respect to the recommendation, and that
recommendation merits fiduciary status.
Certainly, nothing in the statute
categorically carves out advice to plan
fiduciaries. Many commenters
supported the application of ERISA’s
protections in this context. Further, the
Department believes there should be
little question that the definition of
investment property should include a
group annuity contract that is a plan
asset. Whether the other arrangements
mentioned by commenters include an
investment component would depend
on a review of the specific facts and
circumstances.
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Recommendations on Management of
Securities or Other Investment Property,
Including Account Types
Paragraph (f)(10)(ii) of the final 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.’’
In this regard, 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 final
rule 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 financial
professionals routinely provide and that
have the potential to impact retirement
investors’ costs and investment returns.
A commenter referenced the fact that
this language was not limited to
recommendations regarding a specific
security or investment as an example
that the proposal appeared overly broad.
The Department does not think there is
a basis for narrowing the definition of a
covered recommendation to those
regarding buying, holding, or selling
particular securities or investment
property. Language in the 1975
regulation indicates that it is not that
narrow but would extend to
recommendations regarding
‘‘investment policies or strategy,’’
‘‘overall portfolio composition,’’ and
‘‘diversification of plan investments.’’
The SEC has also stated in Regulation
Best Interest and the SEC Investment
Adviser Interpretation that the conduct
standards are not limited to
recommendations that mention
particular securities.181
181 Id. at 33339 (July 12, 2019)(‘‘Existing brokerdealer regulation and guidance stresses that the
term ‘‘investment strategy’’ is to be interpreted
broadly. . . . This approach appropriately
recognizes that customers may rely on firms’ and
associated persons’ investment expertise and
knowledge, and therefore the broker-dealer should
be responsible for such recommendations,
regardless of whether those recommendations result
in transactions or generate transaction-based
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32147
A few other commenters said this
covered recommendation, combined
with what they viewed as broad
proposed definitions of a
‘‘recommendation’’ and ‘‘for a fee or
other compensation, direct or indirect,’’
would impact and limit information
provided to plan sponsors. Other
commenters raised questions about the
limits of this covered recommendation.
The Department has made a number
of changes and clarifications to the final
rule to address concerns raised by these
commenters. First, the Department has
confirmed that it intends that whether a
recommendation has occurred will be
construed consistent with the SEC’s
framework in Regulation Best Interest.
This should alleviate some commenters’
concern about whether merely
providing information to a retirement
investor, including a plan sponsor,
might be considered a covered
recommendation under this part of the
final rule. Additionally, it is important
to remember that all parts of the final
rule must be satisfied for ERISA
fiduciary status to apply, including
receipt of a fee or other compensation,
direct or indirect, as defined in the final
rule. Finally, the Department has
provided additional clarifications
regarding the application of the final
rule in the institutional market that
makes clear that parties are permitted
under the final rule to define their own
relationships.
This provision of the final rule 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. This provision too, is
consistent with the SEC’s Regulation
Best Interest and the Advisers Act’s
antifraud provisions, which establish
the Advisers Act fiduciary duty.182
compensation.’’) (footnotes omitted); Cf. 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.’’).
182 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 33669, 33674 (July 12, 2019) (‘‘An adviser’s
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Recommendations on the Selection of
Other Persons To Provide Investment
Advice or Investment Management
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Paragraph (f)(10)(ii) extends to
recommendations as to the ‘‘selection of
other persons to provide investment
advice or investment management
services.’’ Consistent with the
Department’s longstanding position, the
final rule covers recommendations 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 definition are satisfied.
Recommendations of investment
advisers or managers are similar to
recommendations of investments that
the plan or IRA may acquire and are
often, by virtue of the track record or
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.
The Department’s proposal discussed
that the language in paragraph (f)(10)(ii)
regarding recommendations of ‘‘other
persons’’ to provide investment advice
or investment management services was
intentional to avoid concerns that the
final rule would impose fiduciary status
on a person based on the marketing of
the person’s own advisory or investment
management services (sometimes
referred to as ‘‘hire me’’
communications).183 Thus, the
Department said the proposed language
would not result in a person becoming
an investment advice fiduciary merely
by engaging in the normal activity of
marketing themselves (i.e., ‘‘hire me’’)
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.184
Commenters on the ‘‘hire me’’
discussion generally asked the
Department to allow for more expansive
communications outside of ERISA
fiduciary duty applies to all investment advice the
investment adviser provides to clients, including
advice about investment strategy, engaging a subadviser, and account type.’’).
183 Proposed Retirement Security Rule 88 FR
75890, 75906 (Nov. 3, 2023).
184 Id.
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fiduciary status for various marketing of
services, and to make that explicit in the
final rule. These comments and the
Department’s response are discussed
further in Section E.1. of this preamble.
Some commenters also said that the
Department should not consider a
recommendation of other persons to
provide investment services as a
covered recommendation, as they saw it
as distinct from investment advice.
Commenters described referral
arrangements that they believed are
beneficial to investors by assisting in the
identification of fiduciary service
providers. One commenter asked for a
‘‘hire them’’ carve-out, under which a
recommendation of another person to
provide investment advice or
investment management services would
not be a covered recommendation for
purposes of the final rule unless the
person making the referral was
specifically engaged to make such a
recommendation for a fee or other
compensation.
The Department has not eliminated
recommendations of other persons to
provide investment advice or
investment management services as a
type of covered recommendation,
because it continues to believe that the
recommendation of another person to
provide investment advice or
investment management services is
conceptually indistinguishable from
recommendations of investments that
the plan or IRA may acquire. However,
it is important to remember in this
context that all parts of the final rule
must be satisfied for a covered
recommendation to be considered
ERISA fiduciary investment advice,
including the ‘‘for a fee or other
compensation, direct or indirect’’
requirement. Accordingly, if the
recommendation is not made for a fee or
other compensation, direct or indirect, it
would not give rise to fiduciary status.
As the relevant fee or other
compensation may be direct or indirect,
a referral fee paid by a third party (e.g.,
the person to whom investors are
referred) would be relevant to the
inquiry as to whether the person making
the referral would be a fiduciary under
the final rule.
Proxy Voting Appurtenant to
Ownership of Shares of Corporate Stock
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
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fiduciary in nature if the other
conditions of the final rule are
satisfied.185
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 rule.
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 rule, constitute
fiduciary investment advice from the
person who creates or distributes the
proxy statement.
Several commenters addressed
including recommendations regarding
proxy voting as a covered
recommendation under the proposal,
with some supporting the inclusion as
important and relevant to plan
participants’ interests and others
indicating the inclusion was too broad
and likely to impede useful information
from being provided to plan sponsors.
The Department retained this provision
in the final rule, consistent with its
long-term position on this issue.
One commenter requested that the
final rule regulatory text, as opposed to
the preamble, make clear that merely
providing proxy voting materials would
not lead to investment advice fiduciary
status. As discussed in greater detail in
Section E, the Department has generally
not included exceptions and specific
carve-outs in the final rule text for
specific circumstances but instead has
opted to provide guidance in the
preamble as to how the rule will apply.
2. When Covered Recommendations Are
Fiduciary Investment Advice (Paragraph
(c)(1))
Paragraph (c)(1) establishes the
contexts in which a covered
recommendation would be considered
185 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.’’).
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ERISA fiduciary investment advice if
the remaining parts of the final rule are
satisfied. Paragraph (c)(1)(i) sets forth an
objective facts and circumstances test
for when, based on the interactions
between the advice provider and the
retirement investor, the retirement
investor would reasonably place their
trust and confidence in the advice
provider as acting to advance the
retirement investor’s best interest.
Paragraph (c)(1)(ii) identifies a specific
factual scenario—the advice provider’s
acknowledgment of ERISA Title I or
Title II fiduciary status—as one in
which the retirement investor can
always reasonably place their trust and
confidence in the advice provider as
acting to advance the retirement
investor’s best interest. The contexts in
the final rule are:
• Paragraph (c)(1)(i): The person
either directly or indirectly (e.g.,
through or together with any affiliate)
makes professional investment
recommendations to investors on a
regular basis as part of their business
and the recommendation is made under
circumstances that would indicate to a
reasonable investor in like
circumstances that the recommendation:
Æ is based on review of the retirement
investor’s particular needs or individual
circumstances,
Æ reflects the application of
professional or expert judgment to the
retirement investor’s particular needs or
individual circumstances, and
Æ may be relied upon by the
retirement investor as intended to
advance the retirement investor’s best
interest; or
• Paragraph (c)(1)(ii): The person
making the recommendation represents
or acknowledges that they are acting as
a fiduciary under Title I of ERISA, Title
II of ERISA, or both with respect to the
recommendation.
In the proposal, the Department had
identified three contexts in which a
covered recommendation would be
considered ERISA fiduciary investment
advice. The contexts identified in the
proposal were:
• Proposed paragraph (c)(1)(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;
• Proposed paragraph (c)(1)(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
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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
• Proposed paragraph (c)(1)(iii): The
person making the recommendation
represents or acknowledges that they are
acting as a fiduciary when making
investment recommendations.186
Some commenters supported the
paragraphs as proposed and said they
would be appropriate to define an
investment advice fiduciary. For
example, one commenter agreed that in
these contexts, clients reasonably expect
a professional relationship of trust and
confidence involving fiduciary
obligations. Commenters who disagreed
expressed various bases for their
disagreement, including the view that
the proposed paragraphs, without any
specific exclusions or carve-outs, would
result in a final rule that was too broad
and did not sufficiently allow for nonfiduciary sales activity. Some
commenters expressed particular
concern about sales activity in the
institutional market. Some of the
commenters thought the proposal would
result in ERISA fiduciary status being
applied outside of a relationship of trust
and confidence. Many of these
commenters also objected to the
possibility that one-time advice could
ever lead to ERISA fiduciary status.187
One commenter suggested that the
Department issue a ‘‘salesperson’s’’
prohibited transaction exemption under
which parties would not have to comply
with ERISA’s fiduciary obligations as
long as they are clear and explicit that
they are operating in a sales capacity to
186 Proposed Retirement Security Rule, 88 FR
75890, 75977 (Nov. 3, 2023).
187 One commenter said the final rule should be
revised to insert a proximity requirement between
the financial professional providing the
recommendation and the financial professional
with whom the retirement investor works to act on
the recommendation, as well as a time proximity
requirement for the retirement investor to act on the
recommendation. The commenter suggested this
was needed to assist in operationalizing the rule.
The Department believes certain principles will
avoid the operational concerns suggested by this
comment. First, whether ERISA’s fiduciary duties
and the PTEs’ ‘‘impartial conduct standards’’ are
satisfied will be measured as of the time of the
recommendation, not in hindsight. See Donovan v.
Mazzola, 716 F.2d 1226, 1232 (9th Cir. 1983);
Improving Investment Advice for Workers &
Retirees, 85 FR 82798, 82821 (December 18, 2020).
Second, ERISA fiduciary status will occur only if
all conditions of the final rule are satisfied,
including the ‘‘for a fee or other compensation,
direct or indirect’’ requirement.
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32149
retirement investors, as a way of
addressing the impact of the historical
use of advice-oriented titles and
marketing and providing additional
clarity between advice services and
sales. Another commenter suggested a
new provision in the final rule under
which recommendations to a plan
fiduciary would not give rise to
fiduciary status if made ‘‘in the context
of a communication or series of
communications in which the seller of
a product or service clearly indicates
that such product or service provider
has an interest in the transaction and
that such plan fiduciary is responsible
for independently evaluating and
determining whether to enter into a
transaction for the purchase of such
product or service, including
negotiating the terms of the
transaction.’’ Other commenters
likewise advocated for provisions under
which sales activity would not be
considered fiduciary investment advice.
In the final rule, the Department made
a number of changes to the proposal in
response to these comments. As
discussed in greater detail below, the
contexts for fiduciary status in
paragraph (c)(1) were narrowed and
clarified, including the elimination of
proposed paragraph (c)(1)(i).
Additionally, a new paragraph (c)(1)(iii)
was inserted in the regulatory text
confirming that sales recommendations
that do not satisfy the specific contexts
for fiduciary advice will not lead to
ERISA fiduciary status and that the
provision of investment information and
education, without an investment
recommendation, also will not result in
ERISA fiduciary status. Although
commenters suggested different ways of
addressing sales communications,
including the suggestion of a special
PTE for salespersons and the carve-out
described above, the Department
believes the revised regulatory text,
including paragraph (c)(1)(iii), provide
appropriate clarity with respect to those
sales pitches that fall short of fiduciary
advice, without creating improper
loopholes that would defeat legitimate
expectations of trust and confidence.
Additionally, the Department revised
the definition of a retirement investor to
limit the scope of plan and IRA
fiduciaries who would be treated as
retirement investors to those with
authority or control over plan or IRA
assets. As a result, communications to
plan or IRA fiduciaries acting as
investment advice fiduciaries will not
result in the person making the
communication also being considered
an investment advice fiduciary.
This preamble section discusses the
contexts for fiduciary status adopted in
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the final rule paragraphs (c)(1)(i) and (ii)
and the comments received on the
proposed tests. The changes to the
definition of a retirement investor are
discussed in section D.4. of this
preamble. Application of the final rule
to certain specific circumstances is
discussed in Section E of this preamble.
Proposed Paragraph (c)(1)(i)—
Discretion—Not Adopted
Proposed paragraph (c)(1)(i) included
a proposed expansion of a provision of
the Department’s 1975 regulation,
which defined as a fiduciary a person
who renders advice to the plan as to the
value of securities or other property, or
makes a recommendation as to the
advisability of investing in, purchasing,
or selling securities or other property, if
the person
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either directly or indirectly (e.g., through or
together with any affiliate) . . . has
discretionary authority or control, whether or
not pursuant to agreement, arrangement or
understanding, with respect to purchasing or
selling securities or other property for the
plan.188
The Department noted in the
proposal’s preamble that the proposed
language expanded the existing
provision beyond discretionary
authority or control with respect to
investments of the plan, to any
investments of the retirement investor,
stating ‘‘[p]ersons 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.’’ 189
Commenters said the proposed
language to expand this context beyond
investments of the plan was
inconsistent with ERISA. They also said
it would be a significant expansion that
would be difficult to monitor,
particularly in the context of pooled
investment vehicles that a retirement
investor might be invested in.
Commenters also thought the meaning
of discretionary authority or control was
not clear and might be triggered by
limited discretion that would ordinarily
not result in ERISA fiduciary status.
Commenters were particularly
concerned about the language in
proposed paragraph (c)(1)(i) that would
consider whether the person had
discretion ‘‘directly or indirectly (e.g.,
through or together with any
affiliate).’’ 190 Paragraph (f)(1) of the
proposal defined an affiliate as ‘‘any
person directly or indirectly, through
188 29
CFR 2510.3–21(c)(1)(ii)(A).
Retirement Security Rule, 88 FR
75890, 75901 (November 3, 2023).
190 Id. at 75977.
189 Proposed
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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.’’ 191 Commenters viewed this
language as very broad as applied to
discretionary asset management and
said in the context of a large financial
institution, the language in the proposal
could be satisfied by an affiliate with no
direct relationship with the retirement
investor. Other commenters noted that
the provision appeared to use affiliates
as an example of an indirect
discretionary relationship, but the
language would not necessarily be
limited to affiliates.
Several commenters asked that the
provision be revised to include an
objective requirement that the advice or
recommendation be individualized to
the retirement investor. Another
comment was that the provision should
be revised to add language permitting
parties to define their relationship by
focusing on whether the facts and
circumstances indicate that the
recommendation may be relied upon by
the investor as a basis for investment
decisions that are in their best interest.
A few commenters also advocated for
complete removal of the provision,
believing paragraphs (c)(1)(ii) and (iii)
more clearly described an investment
advice fiduciary relationship and to the
extent paragraph (c)(1)(i) would apply
more broadly, it was overbroad.
In response to these comments, the
Department has determined not to
include proposed paragraph (c)(1)(i) in
the final rule. Although it is important
to note that an existing provision in the
1975 regulation applies fiduciary status
to a person who makes a covered
recommendation and ‘‘either directly or
indirectly (e.g., through or together with
any affiliate) . . . has discretionary
authority or control . . . with respect to
purchasing or selling securities or other
property for the plan,’’ the Department
is persuaded by commenters who said
that the general approach in proposed
(c)(1)(ii) would more appropriately
define an investment advice fiduciary
based on the facts and circumstances
surrounding the covered
recommendation and would likely
include, to a more targeted extent,
parties with investment discretion.
Accordingly, paragraph (c)(1)(i) of the
final rule is a revised version of
proposed paragraph (c)(1)(ii). Paragraph
(c)(1)(ii) of the final rule is a revised
191 Id.
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Frm 00030
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version of proposed paragraph (c)(1)(iii).
A new paragraph (c)(1)(iii) clarifies that
sales recommendations that are not
made in one of the contexts set forth in
paragraph (c)(1)(i) or (ii) would not
result in a person being an investment
advice fiduciary and the provision of
investment information and education,
without an investment
recommendation, also will not result in
ERISA fiduciary status.
Adopted Paragraph (c)(1)(i)—Facts and
Circumstances
Adopted paragraph (c)(1)(i),
establishes an objective facts and
circumstances test that is satisfied if the
‘‘person either directly or indirectly
(e.g., through or together with any
affiliate) makes professional investment
recommendations to investors on a
regular basis as part of their business
and the recommendation is made under
circumstances that would indicate to a
reasonable investor in like
circumstances that the recommendation
is based on review of the retirement
investor’s particular needs or individual
circumstances, reflects the application
of professional or expert judgment to the
retirement investor’s particular needs or
individual circumstances, and may be
relied upon by the retirement investor
as intended to advance the retirement
investor’s best interest.’’
Investment Recommendations as a
Regular Part of Their Business
The requirement that the ‘‘person
either directly or indirectly (e.g.,
through or together with any affiliate)
makes professional investment
recommendations to investors on a
regular basis as part of their business’’
is intended to limit application of the
final rule to persons who retirement
investors would typically view as
making investment recommendations
based on the retirement investors’
interests. It is intended to update the
‘‘regular basis’’ prong of the 1975
regulation’s five-part test to properly
focus on persons who are in the
business of providing investment
recommendations, rather than defeating
legitimate investor expectations by
automatically excluding one-time
advice from treatment as fiduciary
investment advice.
A number of commenters addressed
the proposed language which was:
‘‘[t]he 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.’’
One commenter specifically supported
this provision as indicating the test
would suggest that the person making
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the recommendation has expertise and
professionalism.
Other commenters expressed the view
that the proposed language did not
place meaningful limits on investment
advice fiduciary status. Similar to
comments on proposed paragraph
(c)(1)(i), some commenters said the
‘‘directly or indirectly (e.g., through or
together with any affiliate)’’ language
would make this context very broad and
difficult to monitor. Some said the
proposed language would cover
everyone in the financial services
industry.
Commenters also said that whether a
person made investment
recommendations to investors as a
regular part of their business had no
bearing on whether there was a
relationship of trust and confidence
with the particular retirement investor
receiving the recommendation, and
further, that the ‘‘regular basis’’ prong of
the 1975 regulation was needed because
one-time advice would not be fiduciary
advice under the Fifth Circuit’s
Chamber opinion.
The Department has retained this
provision in the final rule with a slight
revision, discussed below. In response
to the commenters who said this
requirement had no bearing on a
relationship of trust and confidence
with the particular retirement investor,
the Department states that satisfying this
provision, on its own, does not result in
status as an investment advice fiduciary.
Fiduciary status is imposed only if all
parts of the final rule are satisfied.
However, the fact that the person
regularly provides advice as part of their
business is an important component of
the test, inasmuch as it limits
application of the fiduciary definition to
financial professionals who could
reasonably be viewed as providing
advice that can be relied upon with trust
and confidence.
Consistent with the discussion in the
preamble to the proposal, this provision
is not intended to exclude parties in the
financial services industry but rather
persons outside the financial services
industry who may engage in isolated
communications that could fit within
the definition of a covered
recommendation but under
circumstances that would not comport
with a general understanding of
professional investment advice.192 In
this way, the final rule’s version of the
regular basis test is more narrowly
tailored than the 2016 rule and is
relevant to the existence of trust and
confidence between the advice provider
and retirement investor, because
192 Id.
at 75902.
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retirement investors consulting advice
providers who meet this test are likely
to expect professional or expert
investment advice that is based on the
retirement investors’ interests.
The final rule retains the language
‘‘either directly or indirectly (e.g.,
through or together with any affiliate).’’
This language is in the 1975 regulation,
and the Department believes it is
important to include so as to avoid
parties structuring their affiliate
relationships to avoid application of
fiduciary status. This language is not
intended to capture all actions of
affiliates, however; rather, ‘‘through or
together with’’ is intended to describe
circumstances in which an advice
provider, in its interactions with the
retirement investor, utilizes an affiliate
to formally deliver recommendations to
investors.
One commenter suggested that the
Department revise the language of this
provision to eliminate the ‘‘indirectly’’
reference and instead use the language
‘‘either directly or through or together
with any affiliate.’’ The Department has
not adopted this suggestion because it
could result in parties working around
this provision with non-affiliates.
Some commenters asked the
Department to provide additional
clarification as to how it would apply
this provision in the rule. A commenter
suggested that the final rule would be
clearer if it were revised to limit
fiduciary status to circumstances in
which the person making the
recommendation is:
an employee, independent contractor, agent,
or representative of a broker or dealer
registered under the Securities Exchange Act
of 1934 . . . , a financial institution
described in [ERISA section 3(38)(B)], or
other organization that provides financial
advice on a regular basis as part of its
business[.]193
Another commenter asked the
Department to clarify that the test would
apply based on whether the individual
person making the recommendation
made regular investment
193 The financial institutions described in ERISA
section 3(38)(B) include an entity that: (i) is
registered as an investment adviser under the
Advisers Act; (ii) is not registered as an investment
adviser under such Act by reason of paragraph (1)
of section 203A(a) of such Act, is registered as an
investment adviser under the laws of the State
(referred to in such paragraph (1)) in which it
maintains its principal office and place of business,
and, at the time the fiduciary last filed the
registration form most recently filed by the
fiduciary with such State in order to maintain the
fiduciary’s registration under the laws of such State,
also filed a copy of such form with the Secretary;
(iii) is a bank, as defined in that Act; or (iv) is an
insurance company qualified to perform services
described in subparagraph (A) under the laws of
more than one State.
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32151
recommendations as part of their
business.
Other commenters said that although
the Department’s preamble said this
provision would exclude human
resources employees of the plan
sponsor, they were not confident that
human resources employees would, in
fact, be excluded by the regulatory text,
especially if they were employed by a
financial services firm. A commenter
asked for clarification regarding actions
taken by a plan sponsor (either directly
or through a third party) in connection
with a merger or acquisition to provide
information and assistance to affected
employees regarding various retirement
plan issues.194 One commenter said the
language also appeared to them to
extend to real estate agents, life coaches,
probation officers and divorce
counselors, since those entities may
provide financial counseling and
education.
The Department will apply the test
based on the activities of the ‘‘person’’,
which would include the firm, and its
employees, agents and representatives.
The fact that the firm is a broker or
dealer registered under the Securities
Exchange Act of 1934 or a financial
institution described in ERISA section
3(38)(B), would indicate that the test
would likely be met, but the final rule
is not limited to these financial
institutions. Further, not all employees,
independent contractors, agents, or
representatives of a financial institution
would be considered to provide
investment recommendations on a
regular basis. The test will also focus on
the role of the individual providing the
recommendation in relation to the
retirement investor. Therefore, the
Department did not adopt the language
suggested by the commenter, as the
inquiry will be based on all facts and
circumstances.
The Department did revise this
provision in the final rule to refer to
‘‘professional’’ investment
recommendations. This change is
designed to provide additional certainty
that the provision would not be satisfied
by the ordinary communications of a
human resources employee, who is not
an investment professional, in
communications with plan
participants.195 Similarly, this language
194 The commenter also asked the Department to
provide guidance that agreements regarding the
integration of plans as part of a merger or
acquisition and resulting plan amendments are
settlor acts. The Department declines to address the
settlor analysis as part of this final rule but will
consider providing sub-regulatory guidance upon
request of interested parties.
195 The Department also would not consider
salaries of human resources employees of the plan
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is intended to make clear that the
provision would not pick up other
employees of the plan sponsor, who are
not investment professionals,
interacting with plan participants,
including in the context of a merger or
acquisition. The Department also does
not intend that this language will be
construed as being satisfied by the
common activities of real estate agents
selling homes to prospective residents,
life coaches, probation officers and
divorce counselors.
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Trusted Advice Provider
The second element of paragraph
(c)(1)(i) is that ‘‘the recommendation is
made under circumstances that would
indicate to a reasonable investor in like
circumstances that the recommendation
is based on review of the retirement
investor’s particular needs or individual
circumstances, reflects the application
of professional or expert judgment to the
retirement investor’s particular needs or
individual circumstances, and may be
relied upon by the retirement investor
as intended to advance the retirement
investor’s best interest.’’
This provision is intended to define,
objectively, when a retirement investor
would reasonably place their trust and
confidence in the advice provider. In
the Department’s view, when a financial
professional provides a
recommendation under circumstances
that would indicate to a reasonable
investor in like circumstances that the
recommendation is individualized to
the retirement investor, reflects
professional or expert judgment as
applied to the individual investor’s
circumstances, and may be relied upon
by the retirement investor to advance
their own interests, that financial
professional has held themselves out as
a trusted advice provider and invited
the retirement investor’s reliance on
them. Several commenters agreed that
when financial professionals hold
themselves out as trusted advice
providers, including through portraying
themselves as knowledgeable experts,
they have invited the investor’s trust,
regardless of the form of compensation
they will receive.
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 final
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.
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In accordance with this facts and
circumstances test, the application of
paragraph (c)(1)(i) does not turn,
however, on whether the financial
professional expressly represents that
each component has been or will be
satisfied. In other words, the specific
components of the test are not intended
as talismanic phrases that the advice
provider must utter before triggering
fiduciary status. Rather, the definition
turns on whether the facts and
circumstances would indicate to a
reasonable investor in like
circumstances that the paragraph’s
components were met. For example, the
retirement investor doesn’t need to be
expressly told the recommendation is
individualized when it follows the
collection of information on the
investor’s personal financial needs or
circumstances. The components of the
definition can be satisfied by the various
facts and circumstances of the parties’
interactions and, as noted above, are
evaluated under the objective standard
of a reasonable investor in like
circumstances. Although the
Department did not finalize proposed
paragraph (c)(1)(i), which would have
applied ERISA fiduciary status based in
part on whether the person making the
recommendation had investment
discretion with respect to the retirement
investor’s assets, investment discretion
could still be relevant to whether
adopted paragraph (c)(1)(i) is satisfied.
For example, absent unusual
circumstances, in any case in which a
financial professional has investment
discretion with respect to the assets that
are the subject of a recommendation, the
circumstances would indicate to a
reasonable investor in like
circumstances that the recommendation
is individualized to the retirement
investor, reflects professional or expert
judgment as applied to the individual
investor’s circumstances, and may be
relied upon by the retirement investor to
advance their own interests.
The language in the final rule was
changed from the proposal which
provided ‘‘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.’’
Some commenters asserted that they
found the proposed language ‘‘under
circumstances indicating that the
recommendation is based on the
particular needs or individual
circumstances of the retirement
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investor’’ to be meaningless and said the
provision should instead require an
explicitly customized or tailored
communication. They also said the
‘‘may be relied upon’’ language set too
low a bar for establishing fiduciary
status and that the Department should
retain the ‘‘primary basis’’ test from the
1975 regulation. Commenters said it was
not clear whether this language was
intended to establish an objective or
subjective test, and several commenters
suggested language that would
specifically reference a ‘‘reasonable’’
investor or ‘‘reasonable person in like
circumstances.’’
Some commenters also said that
overall, the proposed test did not define
a relationship of trust and confidence as
it appeared to focus on the
circumstances from the retirement
investor’s perspective and did not
include the ‘‘regular basis,’’ ‘‘mutual
agreement, arrangement, or
understanding’’ and ‘‘primary basis’’
requirements that they believed were
required to identify a relationship of
trust and confidence as required by the
Fifth Circuit’s Chamber opinion. They
also said the proposed language would
apply in all interactions between
financial professionals and retirement
investors including sales pitches.
Finally, commenters said to the extent
this language would be satisfied because
a financial professional was subject to
another regulator’s best interest
standard, that was inappropriate as
those standards are not intended to
establish fiduciary standards.
In the final rule, the Department
revised the language in several ways in
response to comments. The provision is
now clearly objective as it references a
‘‘reasonable investor in like
circumstances.’’ The revised language
includes three component parts that the
Department believes identify objectively
when a person has held themselves out
as providing an individualized, reliable
recommendation based on the
application of their professional or
expert judgment, and that is intended to
advance the retirement investor’s
interest. Thus, the final rule will result
in the application of fiduciary status
under circumstances in which both
parties should reasonably understand
that the retirement investor would rely
on the recommendation for investment
decisions.196
196 One commenter asked the Department to
clarify that communications to a ‘‘class of
investors’’ in the private equity context would not
be considered individualized. As with the other
scenarios posed by commenters, the Department
will apply the final rule based on all facts and
circumstances.
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The final rule also changed the
language ‘‘may be relied upon by the
retirement investor as a basis for
investment decisions that are in the
retirement investor’s best interest’’ to
‘‘may be relied upon by the retirement
investor as intended to advance the
retirement investor’s best interest’’ in
response to a comment that suggested
that the proposed language might cause
confusion as to how the rule would
apply in the event of a recommendation
that is not in retirement investor’s best
interest. In the context of the final rule,
‘‘best interest’’ is not meant to refer back
to the elements of the precise regulatory
or statutory definitions of prudence or
loyalty, but rather to refer more
colloquially to circumstances in which
a reasonable investor would believe the
advice provider is looking out for them
and working to promote their interests.
The Department also notes that the
1975 regulation’s language in this
respect requires a ‘‘mutual agreement,
arrangement or understanding
’’regarding the retirement investor’s
reliance on the recommendation. This
final rule also will apply in
circumstances in which the parties each
would reasonably understand that the
retirement investor may rely on the
recommendation as intended to advance
their best interest. The Department
continues to believe this is an
improvement over the ‘‘primary’’ basis
requirement in the 1975 regulation, as
that requirement, which is not found in
the text of the statute, is difficult to
apply, unclear in its meaning, and illsuited to determining whether the
advisory relationship is one of trust and
confidence. Similarly, the Department
does not think that the lack of the
‘‘regular basis’’ requirement as
expressed in the 1975 regulation means
that a relationship of trust and
confidence does not exist, as discussed
above.
Finally, while other regulators’
standards may result in firms and
financial professionals being more or
less likely to occupy a position of trust
and confidence, the final rule’s focus is
on the nature of the relationship
between the advice provider and the
advice recipient, not on the specific
status assigned to the advice provider
under other regulatory regimes. The
final rule is neither intended to pick up
all interactions between financial
professionals and retirement investors,
nor to impose fiduciary status based on
considerations other than the nature of
the relationship as defined in the rule’s
specific provisions. Paragraph (c)(1)(i)
will base fiduciary status on evaluation
of the three objective components, as
well as the other parts of the final rule.
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Use of Titles
In the proposal, the Department said
it intended to examine the ways in
which investment advice providers
market themselves and describe their
services in deciding whether the context
in proposed paragraph (c)(1)(ii) was
satisfied.197 The preamble noted that
stakeholders had 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, even
while simultaneously disclaiming status
as an ERISA fiduciary in the fine print
or otherwise.198
The Department expressed the view
that an investment advice provider’s use
of such titles would routinely involve
the provider 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. The Department
invited comments on the extent to
which particular titles are commonly
perceived to convey that the financial
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 requested
comment on whether other types of
conduct, communication,
representation, and terms of engagement
of investment advice providers should
merit similar treatment.
Some commenters who addressed this
issue agreed that when a financial
professional uses titles such as financial
consultant, financial planner, and
wealth manager, they give an
impression of financial expertise that
has an impact on investors and creates
a sense that the retirement investor may
place their trust and confidence in the
professional. One commenter said that
in some cases, including in insurance
markets, financial professionals
characterize themselves as ‘‘trusted
advisors.’’ In addition, the commenter
said, they commonly describe their
services as ‘‘investment advice’’ or
‘‘retirement planning’’ and market those
services as designed to serve investors’
best interest. These commenters said the
197 Proposed Retirement Security Rule, 88 FR
75890, 75902–3 (Nov. 3, 2023).
198 Id. at 75903 (citing the preamble to Prohibited
Transaction Exemption 2020–02, Improving
Investment Advice for Workers Retirees, 85 FR
82798, 82803 (Dec. 18, 2020)).
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32153
Department’s proposed approach to
titles and marketing was appropriate,
although a few commenters said the
Department should provide guidance in
the final rule to clarify when titles,
credentials, and marketing would satisfy
the provisions of the rule. Other
commenters said that the use of titles
should not be determinative or create a
per se rule regarding ERISA fiduciary
status but rather that status should be
based on the facts and circumstances of
the parties’ relationship.
For purposes of evaluating paragraph
(c)(1)(i) in the final rule, the Department
intends that the use of titles, credentials,
and marketing slogans will be a relevant
consideration but will not generally be
determinative. A person holding
themselves out, for example as an
adviser, would contribute to a
reasonable investor’s belief that they are
receiving professional or expert
advisory services and that the person’s
recommendations reflect the application
of professional or expert judgment to the
retirement investor’s particular needs or
individual circumstances, and may be
relied upon by the retirement investor
as intended to advance the retirement
investor’s best interest.
Adopted Paragraph (c)(1)(ii)—ERISA
Title I or Title II Fiduciary
Acknowledgment
Under paragraph (c)(1)(ii), a person
making a recommendation is a fiduciary
if they ‘‘represent[] or acknowledge[]
that they are acting as a fiduciary under
Title I of ERISA, Title II of ERISA, or
both, with respect to the
recommendation.’’ This paragraph
identifies a specific factual scenario—
the advice provider’s acknowledgment
of ERISA Title I or Title II fiduciary
status—as one in which retirement
investors can always reasonably place
their trust and confidence in the advice
provider as acting to advance the
retirement investor’s best interest.
As adopted, this provision of the final
rule will focus on the substance of the
acknowledgment, even if the exact
words vary from the regulatory text; and
thus, the provision will be satisfied if,
for example, the acknowledgment spells
out ERISA (i.e., references ‘‘the
Employee Retirement Income Security
Act’’), or if the acknowledgment
references the Internal Revenue Code
rather than Title II of ERISA. The
Department believes that status as an
ERISA investment advice fiduciary
should apply because a retirement
investor who is told by a person that the
person will be acting as an ERISA
fiduciary reasonably and appropriately
views the advice provider as occupying
a position of trust and confidence.
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The Department noted in the proposal
that this provision 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.199 The
proposal also noted that 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.200
Several commenters expressed support
for this provision for the reasons stated
by the Department in the proposal.
Some commenters said that the
Department should consider all the facts
and circumstances surrounding the
parties’ relationship rather than a single
acknowledgment, and that they,
therefore, did not support including this
provision in the final rule. The
Department disagrees. To the extent that
a person has specifically advised a
retirement investor that their
recommendation is made in their
capacity as a fiduciary under ERISA
Title I or Title II or both, they have
necessarily assumed a position of trust
and confidence with respect to the
investor. Therefore, the Department has
adopted this requirement in the final
rule.
In the final rule, the Department made
some changes to the language of the
proposal, which read, ‘‘[t]he person
making the recommendation represents
or acknowledges that they are acting as
a fiduciary when making investment
recommendations.’’ As adopted,
paragraph (c)(1)(ii) applies when an
advice provider acknowledges their
status as a fiduciary under Title I of
ERISA, Title II of ERISA, or both. This
change from the proposal responds to
comments that said that acknowledging
fiduciary status under Federal securities
laws or State laws may be more
remotely connected to the retirement
investor and should not have the same
effect as an ERISA Title I or Title II
fiduciary acknowledgment. The
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199 Id.
200 Id. noting that Department of Labor FAQs,
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,’’ available at https://
www.dol.gov/agencies/ebsa/about-ebsa/ouractivities/resource-center/faqs/choosing-the-rightperson-to-give-you-investment-advice.
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Department concurs with this comment
and has made the suggested change.
Consequently, it is clear that this
paragraph will not be satisfied by a
person’s marketing statements offering
to be a ‘‘trusted adviser’’ or some term
other than a ‘‘fiduciary’’ under Title I or
Title II of ERISA, as one commenter
suggested might be the case, although
that type of representation will be
relevant under paragraph (c)(1)(i).
Further, some commenters said the
proposed language ‘‘when making
investment recommendations’’ was too
open-ended and should focus on the
particular recommendation at issue.
Otherwise, the commenters said, once a
fiduciary acknowledgment had been
made, it would appear to apply
fiduciary status for every future
interaction regardless of the
circumstances of that interaction.
Additionally, commenters said that if
one financial professional
acknowledged fiduciary status, this
would apply to all financial
professionals employed by the financial
institution. The Department
understands these commenters’
concerns and accordingly revised the
final rule so that it applies fiduciary
status if the person acknowledges
ERISA Title I or Title II fiduciary status
with respect to the recommendation.
Some commenters requested that the
Department ensure that for each
provision in paragraph (c)(1), an
individualized recommendation must
be made. In the Department’s proposal,
only one of the proposed provisions
(proposed paragraph (c)(1)(ii)) had
included a requirement that the
recommendation must be provided
‘‘under circumstances indicating that it
is based on the particular needs or
individual circumstances of the
retirement investor.’’ Commenters
expressed concern that this could result
in fiduciary status being assigned based
on communications that were made
broadly to many investors or in
marketing materials. As the Department
revised the language of paragraph
(c)(1)(ii) to be focused on a particular
recommendation, the Department
believes the commenters’ concerns are
addressed and has therefore not also
revised the language to specify that the
recommendation must be
individualized.
One commenter suggested that the
Department should limit this provision
to a written representation. The
Department has not adopted that
requirement. A written representation
will be the clearest way to demonstrate
that this context has been satisfied, but
the Department does not believe that it
is appropriate to rule out oral
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communications in which an individual
committed to fiduciary status. Whether
the advice provider makes the
acknowledgment in writing or orally,
the significance is the same. In both
circumstances, the provider is holding
themselves out as an ERISA Title I or
Title II fiduciary and should be held to
that status.
Adopted Paragraph (c)(1)(iii)—Sales
Pitches and Investment Education
The final rule includes a new
paragraph (c)(1)(iii) that provides
confirmation that sales pitches and
investment education can occur without
ERISA fiduciary status attaching. The
paragraph generally provides that a
person does not provide investment
advice within the meaning of the final
rule if they make a recommendation but
neither paragraph (c)(1)(i) nor (c)(1)(ii)
is satisfied, and further that the
provision of investment information or
education, without a recommendation,
is not advice within the meaning of the
final rule.
This provision was added to the final
rule in response to commenters who
said that the Department’s proposal
would apply too broadly and would
eliminate the ability of salespeople to
avoid fiduciary status with respect to
mere sales pitches. Paragraph (c)(1)(iii)
of the final rule includes a specific
example regarding salespersons, which
confirms that is not the case so long as
the salesperson does not acknowledge
fiduciary status under Title I or Title II
of ERISA, and so long as the salesperson
does not hold themselves out as making
an individualized recommendation
intended to advance the best interest of
the customer based on the person’s
professional or expert review of the
investor’s particular needs or
circumstances.
When, however, the person making
the recommendation meets the specific
elements of paragraphs (c)(1)(i) or (ii),
they are not merely making a sales
pitch. They are holding themselves out
as providing an important advisory
service, either by expressly
acknowledging their fiduciary status
under ERISA or by indicating that the
recommendation is based on review of
the retirement investor’s particular
needs or individual circumstances,
reflects the application of professional
or expert judgment to the retirement
investor’s particular needs or individual
circumstances, and may be relied upon
by the retirement investor as intended to
advance the retirement investor’s best
interest. In these circumstances, they are
offering far more than a mere sales
pitch. Instead, they have assumed a
position of trust and confidence with
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respect to the investor, and provided a
valuable service to the investor which
the retirement investor can reasonably
rely upon as intended to advance their
interests. In such circumstances, it
denigrates the work of the advice
provider and the reasonable
expectations of the investor to
characterize the recommendation as a
mere sales pitch.
Nothing in the final rule, however,
requires mere sales pitches that fall
short of the definition to be treated as
fiduciary investment advice. Thus, for
example, absent additional facts, the
following scenario described in the
Chamber opinion would not be
sufficient to establish ERISA fiduciary
status under the final rule: ‘‘You’ll love
the return on X stock in your retirement
plan, let me tell you about it,’’ even if,
as the opinion hypothesizes, the advice
recipient buys the stock based solely on
this communication.201 Certainly, the
salesperson touts the stock, but the
scenario falls short of suggesting that the
sales pitch was individualized, the
salesperson considered the investor’s
particular circumstances, applied
professional judgment to the investor‘s
particular needs and circumstances, or
was providing a recommendation
intended to advance the best interest of
the investor. Under the final rule, a
mere sales pitch of this sort, without
more, does not amount to fiduciary
investment advice for purposes of
ERISA.
Paragraph (c)(1)(iii) also makes clear
that the mere provision of investment
information or education, without an
investment recommendation, is not
advice within the meaning of the final
rule. Investment education is discussed
in greater detail in Section E.3. of this
preamble.
Proposed Paragraph (c)(1)(iv)—Not
Adopted
In the final rule, the Department did
not adopt proposed paragraph (c)(1)(iv)
which had provided, ‘‘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.’’ One commenter
said the meaning of this provision was
unclear. Another commenter said, for
purposes of analyzing proposed
paragraph (c)(1)(ii), it was unclear how
or why it would be required to evaluate
the ‘‘individual circumstances’’ of a
financial professional acting as a plan
fiduciary.
In the final rule, the Department
added a new defined term of a
‘‘retirement investor’’ in paragraph
201 Chamber,
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(f)(11) that means a plan, plan
participant or beneficiary, IRA, IRA
owner or beneficiary, plan fiduciary
within the meaning of ERISA section
(3)(21)(A)(i) or (iii) and Code section
4975(e)(3)(A) or (C) with respect to the
plan or IRA fiduciary within the
meaning of Code section 4975(e)(3)(A)
or (C) with respect to the IRA. The
definition of a retirement investor is
discussed in Section D.4. of this
preamble. In that discussion, the
Department notes that under the final
rule, for purposes of paragraph (c)(1)(i),
when advice is rendered to a plan or
IRA fiduciary within the meaning of
ERISA section 3(21)(A)(i) or (iii) or Code
section 4975(e)(3)(A) or (C), the relevant
‘‘particular needs or individual
circumstances’’ are those of the plan or
IRA, and the determination of whether
the recommendation may be relied on
by the ‘‘retirement investor’’ as intended
to advance the ‘‘retirement investor’s
best interest’’, focuses on the plan or
IRA.
Adopted Paragraph (c)(1)(iv)—
Disclaimers
Paragraph (c)(1)(iv) in the final rule
provides that ‘‘[w]ritten statements by a
person disclaiming status as a fiduciary
under the ERISA Title I or Title II, or
this final rule, or disclaiming the
conditions set forth in paragraph
(c)(1)(i) of this final rule, will not
control to the extent they are
inconsistent with the person’s oral or
other written communications,
marketing materials, applicable State or
Federal law, or other interactions with
the retirement investor.’’
This paragraph was proposed as
paragraph (c)(1)(v) but was redesignated
paragraph (c)(1)(iv) in the final rule. The
Department’s intent in including this
paragraph is to permit parties to define
the nature of their relationship, but also
to ensure that to be given weight under
the final rule, any disclaimer is
consistent with oral or other written
communications or actions, marketing
material, State and Federal law, and
other interactions based on all relevant
facts and circumstances. Firms and
financial professionals cannot readily
evade fiduciary status through
disclaimers that are at odds with their
other communications with the
retirement investor. Thus, a written
disclaimer is insufficient to defeat
fiduciary status if the advice provider
makes professional investment
recommendations to investors on a
regular basis as part of their business
and the recommendation is made under
circumstances that would indicate to a
reasonable investor in like
circumstances that the recommendation
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32155
is based on review of the retirement
investor’s particular needs or individual
circumstances, reflects the application
of professional or expert judgment to the
retirement investor’s particular needs or
individual circumstances, and may be
relied upon by the retirement investor
as intended to advance the retirement
investor’s best interest. For example, a
boilerplate disclaimer of fiduciary status
is insufficient to defeat fiduciary status
under the final rule when the rest of the
advice provider’s communications are
calculated to reassure the investor that,
in fact, the advice is precisely the sort
of trustworthy advice that meets the
regulatory standard.
The disclaimer provision extends not
just to broad disclaimers of ERISA
fiduciary status, but also to disclaimers
of the conditions set forth in paragraph
(c)(1)(i) of this final rule. Thus, any
statement disclaiming that a
recommendation is based on review of
the retirement investor’s particular
needs or individual circumstances, that
a recommendation reflects the
application of professional or expert
judgment to the retirement investor’s
particular needs or individual
circumstances, or that a
recommendation is intended to advance
the retirement investor’s best interest,
would not control to the extent it is
inconsistent with other oral or written
communications, marketing materials,
other interactions with the retirement
investor, or with applicable State or
Federal law. For example, depending on
the facts and circumstances, such
disclaimers from a broker-dealer or an
investment adviser under the Advisers
Act making recommendations to and
providing advice to retail customers
would generally be ineffective to the
extent the disclaimers are inconsistent
with their obligations under the
securities laws. These obligations,
which are rooted in fiduciary
principles,202 include, but are not
limited to the requirement under SEC
Regulation Best Interest to ‘‘exercise[ ]
reasonable diligence, care, and skill to
. . . [h]ave a reasonable basis to believe
202 See Regulation Best Interest release, 84 FR
33318, 33327 (July 12, 2019) (‘‘key elements of the
standard of conduct that applies to broker-dealers
under Regulation Best Interest will be substantially
similar to key elements of the standard of conduct
that applies to investment advisers pursuant to their
fiduciary duty under the Advisers Act.’’); see also
SEC Staff Bulletin: Standards of Conduct for BrokerDealers and Investment Advisers Care Obligation
(‘‘Both [Regulation Best Interest] for broker-dealers
and the [Advisers Act] fiduciary standard for
investment advisers are drawn from key fiduciary
principles that include an obligation to act in the
retail investor’s best interest and not to place their
own interests ahead of the investor’s interest.’’),
https://www.sec.gov/tm/standards-conduct-brokerdealers-and-investment-advisers.
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that the recommendation is in the best
interest of a particular retail customer
based on that retail customer’s
investment profile and the potential
risks, rewards, and costs associated with
the recommendation and does not place
the financial or other interest of the
broker, dealer, or such natural person
ahead of the interest of the retail
customer; 203 the obligation under the
Advisers Act to provide investment
advice ‘‘in the best interest of the client
based on a reasonable understanding of
the client’s objectives; 204 and the
requirement in SEC Form CRS to
disclose to retail investors the required
associated standard of conduct
associated with their relationship and
services.205 Waiver of these obligations
under Regulation Best Interest and the
Advisers Act’s is generally not
permitted.206Likewise, a disclaimer of
any of the conditions of paragraph
(c)(1)(i) by an insurance agent would not
govern to the extent such disclaimer
would be inconsistent with State
insurance law.
In other contexts, however, firms and
financial professionals may rely on
disclaimers to a greater degree but must
exercise care to ensure that their actions
and communications are consistent with
their disclaimer of fiduciary
responsibility. When a disclaimer is at
odds with the investment advice
provider’s oral or other written
communications, marketing material,
State or Federal law, or other
interactions, the disclaimer is
insufficient to defeat the retirement
investor’s legitimate expectations.
Commenters who supported this
provision in the proposal said it would
appropriately close loopholes in the
1975 regulation that had allowed
financial professionals to disclaim
elements of the five-part test in fine
print. According to these commenters,
instead of allowing fine print
disclosures to govern, this provision
would result in the consideration of the
nature of the parties’ other interactions
as well as the advice provider’s use of
titles, marketing materials, and
description of services, and would
203 17
CFR 240.15l–1(a)(2)(ii).
Investment Adviser Interpretation, 84 FR
33669, 33673 (July 12, 2019).
205 Form CRS Relationship Summary;
Amendments to Form ADV, 84 FR 33492 (July 12,
2019).
206 Regulation Best Interest release, 84 FR 33318,
33327,33330 (July 12, 2019) (noting, among other
things, that a ‘‘broker-dealer will not be able to
waive compliance with Regulation Best Interest, nor
can a retail customer agree to waive her protections
under Regulation Best Interest’’); SEC Investment
Adviser Interpretation, 84 FR 33669, 33672 (July 12,
2019).
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204 SEC
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better give effect to retirement investors’
expectations.
One commenter said the final rule
should not permit a disclaimer to have
any effect if the person would have met
the fiduciary definition in the absence
of the disclaimer. The Department has
not adopted this suggestion. To the
extent a written disclaimer is otherwise
permitted by Federal or State law and
the firm and financial professional’s
communications and conduct are
consistent with the disclaimer, it is
relevant to determine whether a
reasonable investor in like
circumstances would have viewed the
recommendation as trustworthy advice
aimed at advancing the retirement
investor’s best interest based on their
individual needs and circumstances.
Other commenters criticized the
proposal’s treatment of disclaimers and
even suggested that the proposal
effectively prohibited disclaimers.
Commenters said the proposed
provision on disclaimers—along with
the contexts in proposed paragraphs
(c)(1)(i), (ii), and (iii) which they
described as ‘‘status based’’—left no
viable way for a financial institution or
financial professional to define their
relationship with an investor even by
clearly stating they are not acting as a
fiduciary. One commenter said
disclaimers should be permitted to
manage the legal risk of ‘‘inadvertent’’
fiduciary status unintended by the
parties. Some commenters focused on
the relevance of disclaimers in
communications between plan
fiduciaries, such as in connection with
a request for proposal to provide asset
management services, and in
communications between asset
managers and financial services
providers who are themselves plan and
IRA fiduciaries. One commenter said
the final rule should allow an ‘‘ERISA
disclaimer’’ that would allow parties to
operate under Regulation Best Interest
or other securities law but would limit
their services merely to investment
education to avoid ERISA fiduciary
status.
As discussed above, the Department
has not prohibited disclaimers of
fiduciary status. Under the final rule,
weight will be given to a disclaimer to
the extent the disclaimer is consistent
with State and Federal law, but it is
clear that disclaimers are not
‘‘dispositive’’ when at odds with State
and Federal law, or other actions and
communications. To the extent firms
and financial professionals wish to
avoid fiduciary status, they should take
care to ensure that their disclaimers are
consistent with their actions and
communications with respect to the
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retirement investor as well as with State
and Federal law. Disclaimers should not
function as mere legal boilerplate
intended to insulate advice providers
from fiduciary status and liability, while
the remainder of the provider’s actions,
communications, and marketing
materials are designed to reassure the
investor that, disclaimer
notwithstanding, they are providing the
sort of professional advice that falls
within the fiduciary definition and can
be relied upon with trust and
confidence.
The Department believes that
concerns about ‘‘status based’’
provisions and ‘‘inadvertent’’ fiduciary
status have been appropriately
addressed by the text of the final rule,
which provides an objective test based
on reasonable investor understandings.
As noted above, firms and financial
professionals can best ensure that there
are no misunderstandings as to
fiduciary status by ensuring that they
are clear and consistent in their
communications with their client.
Under the final rule’s objective
standards, fiduciary status does not turn
on the retirement investor’s subjective
state of mind, but rather on how a
reasonable investor in like
circumstances would have viewed the
relationship and recommendation,
including whether the advice provider
has expressly acknowledged ERISA
fiduciary status. In this manner, the
final rule ensures that neither the advice
provider’s, nor the retirement investor’s,
reasonable expectations will be
dishonored. It is within the advice
provider’s control to manage how it
interacts with and holds itself out to the
investor, within the limits of other State
and Federal laws.
A commenter additionally requested
confirmation that a financial institution
may agree with a customer expressly,
clearly, and in writing that it is only
providing brokerage trade execution
services (i.e., acting as an order taker)
and such agreement may govern to
avoid ERISA fiduciary status, so long as
the disclaimer is consistent with the
person’s oral or other written
communications, marketing materials,
applicable State or Federal law, or other
interactions with the retirement
investor. The Department confirms and
notes that this is the case even if other
assets of the retirement investor are
managed on a discretionary basis by the
financial institution or an affiliate.
Moreover, as discussed above, the new
paragraph (c)(1)(iii) confirms that sales
recommendations that do not meet
paragraph (c)(1)(i) or (ii) will not give
rise to fiduciary status.
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The Department believes this
provision on disclaimers should also
address many commenters’ concerns
about communications to plan and IRA
fiduciaries who are retirement investors
under the final rule. Express disclaimers
in the context of a request for proposal
for asset management services or similar
process would be permitted under this
provision and would govern, provided
the disclaimer is consistent with the
other interactions and circumstances set
forth in paragraph (c)(1)(iv). Additional
discussion of requests for proposals and
other specific circumstances is in
Section E of this preamble. Also, as
discussed in Section D.4. of this
preamble, the Department has revised
the definition of a retirement investor to
make clear that financial services
providers serving as plan and IRA
investment advice fiduciaries are not
captured within that definition.
The Department does not agree,
however, that there should be an
‘‘ERISA disclaimer’’ under which
parties that would otherwise satisfy all
of the provisions in the final rule could
nevertheless disclaim ERISA fiduciary
status and only comply with securities
law conduct standards. As Congress
enacted ERISA against the backdrop of
securities laws with the aim of imposing
especially high standards in the context
of retirement plans, the Department
believes a flat disclaimer to avoid ERISA
fiduciary status without limiting
conduct accordingly is inconsistent
with congressional intent and ERISA’s
purposes.207 The final rule defines those
circumstances in which a reasonable
investor is entitled to rely upon a
recommendation as a fiduciary
recommendation made from a position
of trust and confidence. In such
circumstances, the advice provider
cannot upend legitimate investor
expectations and avoid fiduciary
accountability merely by stating that
they disclaim responsibility under
207 See statement by the Chair of the Senate
Committee on Labor and Public Welfare upon
introduction of the Conference Report on ERISA:
‘‘Despite the value of full reporting and disclosure,
it has become clear that such provisions are not in
themselves sufficient to safeguard employee benefit
plan assets from such abuses as self-dealing,
imprudent investing, and misappropriation of plan
funds. Neither existing State nor Federal law has
been effective in preventing or correcting many of
these abuses. Accordingly, the legislation imposes
strict fiduciary obligations on those who have
discretion or responsibility respecting the
management, handling, or disposition of pension or
welfare plan assets. The objectives of these
provisions are to . . . establish uniform fiduciary
standards to prevent transactions which dissipate or
endanger plan assets . . . .’’ Statement by Hon.
Harrison A. Williams, Jr., Chairman, Senate
Committee on Labor and Public Welfare,
introducing the Conference Report on HR 2, 120
Congressional Record S 15737 at 11 (Aug. 22, 1974).
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ERISA, irrespective of the investor’s
reasonable understandings.
3. Fee or Compensation, Direct or
Indirect (Paragraph (e))
Paragraph (e) in the final rule defines
‘‘for a fee or compensation, direct or
indirect’’ for purposes of ERISA section
3(21)(A)(ii) and Code section
4975(e)(3)(B) as follows:
For purposes of section 3(21)(A)(ii) of
ERISA 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 investment 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 investment advice.
In the proposal, the Department
explained that the proposed definition
was consistent with the preamble of the
1975 regulation, which stated 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.208 The
Department’s proposal cited several
other instances where the Department
confirmed its longstanding view in this
respect.209
Like the proposal, the definition in
the final rule makes clear that there
208 Proposed Retirement Security Rule, 88 FR
75890, 75909 (Nov. 3, 2023) (citing 40 FR 50842
(Oct. 31, 1975); 41 FR 56760, 56762 (Dec. 29,
1976)).
209 Id. (discussing the preamble of proposed PTE
77–9, 41 FR 56760, 56762 (Dec. 29, 1976) and 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).
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must be a link between the transactionbased compensation and the financial
professional’s recommendation. Thus,
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.
This definition in the final rule would
also be satisfied by any fee that is paid
explicitly for the provision of
investment advice. This would include,
for example, a fee paid to an investment
adviser as defined in 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
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, close sales, or
make sales pitches. Financial
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.
In the circumstances described in the
fiduciary definition, the advice provider
has either specifically acknowledged
fiduciary status under Title I or Title II
ERISA or both, or has otherwise offered
individualized advice reflecting the
application of expert or professional
judgment to the retirement investor’s
financial circumstances and needs that
may be relied upon to advance the
investor’s best interest. In these
circumstances, the advice provider’s
compensation is not simply a charge for
executing a transaction, but rather
compensates the provider for the
provision of a valuable fiduciary
service.
The SEC acknowledged this reality 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
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recommendations.’’ 210 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.’’ 211 The SEC also
noted that transaction-based
compensation is not limited to
commissions and includes markups or
markdowns, 12b–1 fees and revenue
sharing.212 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
effectively 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.’’ 213 The
definition of ‘‘cash compensation’’ in
the NAIC Model Regulation is: ‘‘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.’’ 214
When a financial professional meets
the regulatory fiduciary definition, 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.215
The statutory exemption for
investment advice to participants and
beneficiaries of individual account
210 Regulation Best Interest release, 84 FR 33318,
33319 (July 12, 2019).
211 Id.
212 Id. at 33402.
213 NAIC Model Regulation at section 5.M.
214 Id. at section 5.B.
215 E.g., 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.
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plans set forth in ERISA section
408(b)(14) indicates that Congress
similarly recognized that compensation
for advice often comes in the form of
commissions and transaction-based
compensation.216 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.’’ 217
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.218
Several commenters indicated the
definition of ‘‘for a fee or other
compensation, direct or indirect’’ in the
proposal was too broad in extending to
commissions outside the context of the
1975 regulation’s five part-test. One said
the Fifth Circuit made clear that
commissions would fall within this
language only if all parts of the of the
five-part test are satisfied including a
mutual understanding that the
commission would be intended to pay
for advice. Concern was expressed that
the proposed rule would extend
fiduciary status to an investment
manager based on its provision of
information about its services in a hiring
context, if it ultimately was hired and
paid, and to a platform provider that is
hired to manage assets based on the
provision of a narrowed-down list of
investment options for the plan. In this
connection, one commenter asked the
Department to state that the definition
does not extend to compensation that
‘‘has a connection with ‘incidental’’’
recommendations of financial products
or services.
The Department does not believe that
the definition of ‘‘for a fee or other
216 29 U.S.C. 1108(b)(14). See Code section
4975(d)(17) (parallel statutory exemption).
217 29 U.S.C. 1108(b)(14) (emphasis added).
218 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.’’)
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compensation, direct or indirect,’’ must
be narrowed in the context of the final
rule. The Department believes the final
rule is appropriately constructed to
define when retirement investors can
reasonably place their trust and
confidence in an advice provider and
their recommendations, and
compensation received ‘‘in connection
with or as a result of’’ recommended
transactions or advice services from
such financial professionals is
appropriate to establish ERISA fiduciary
status. The Department has consistently
interpreted the statutory language ‘‘for a
fee or other compensation, direct or
indirect’’ to include transaction-based
compensation since the adoption of the
1975 regulation, and the Department
believes this approach is consistent with
the recognition by the SEC that
commissions may be paid, in part, for
advice or recommendations. The
Department has not adopted the
suggestion of the commenter that sought
an exception for compensation that has
a connection with ‘‘incidental’’
recommendations of financial products
or services. The commenter did not
define ‘‘incidental’’ or explain why that
restriction would be appropriate under
the statutory definition, which provides
that a person is a fiduciary ‘‘to the
extent’’ the person provides
compensated advice, without any such
carve-out. The Department believes that
concerns about marketing advice
services and products are appropriately
addressed in other ways in the final
rule. Section E of this preamble
discusses application of the final rule in
specific circumstances involving ‘‘hire
me’’ communications, requests for
proposals and platform providers, and
others.
Another commenter made a related
comment that Federal securities laws
recognize that financial professionals
receive ‘‘no compensation’’ for the
provision of advice that is incidental to
brokerage services, and that absent
specific language to the contrary,
Congress must have intended the same
in ERISA. The Department has
concluded this assertion does not hold
up under examination. While the
Advisers Act includes an exception
from the definition of an investment
adviser for broker-dealers ‘‘whose
performance of such advisory services is
solely incidental to the conduct of his
business as a broker or dealer and who
receives no special compensation’’ for
those services, 219 this does not reflect
219 See, e.g., section 202(a)(11)(C) of the Advisers
Act; Commission Interpretation Regarding the
Solely Incidental Prong of the Broker-Dealer
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a broad view that broker-dealers are
uncompensated for their advice or
recommendations. Rather, it
acknowledges that broker-dealers can
provide a form of advice that is
incidental to their primary business and
that they can get compensated for such
advice. They do not go uncompensated
for those services, but rather are
commonly compensated on a
transaction basis for the work required
to make a best interest recommendation.
The SEC acknowledged this reality in
the Regulation Best Interest release.220
The quotes set forth earlier in this
preamble Section D.3 from the NAIC
Model Regulation definition of ‘‘cash
compensation’’ reflect similar views in
the insurance context.221
In response to another commenter
who requested clarification of the
analysis that would apply to nontransaction-based compensation models,
such as salary or hourly paid positions,
the Department responds that the
definition of ‘‘for a fee or other
compensation, direct or indirect,’’
includes any fee that is paid explicitly
by any source for the provision of
investment advice or any fee paid in
connection with investment advice.
This would include an assets under
management fee, flat fee, or hourly fee
paid in connection with advisory work.
Other commenters asked the
Exclusion From the Definition of Investment
Adviser, 84 FR 33681, 33682 (July 12, 2019).
220 Regulation Best Interest release, 84 FR 33318,
33319 (July 12, 2019) (‘‘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.’’)
221 The commenter cited the Chamber opinion,
885 F.3d at 372–373, as support for the assertion
that financial professionals receive ‘‘no
compensation’’ for the provision of advice that is
incidental to brokerage services. On page 373, the
Chamber opinion stated, ‘‘[s]tockbrokers and
insurance agents are compensated only for
completed sales (‘directly or indirectly’), not on the
basis of their pitch to the client. Investment
advisers, on the other hand, are paid fees because
they ‘render advice.’’’ The Department does not
read this passage as foreclosing the view that, in a
completed investment transaction that was the
subject of a fiduciary relationship of trust and
confidence, a portion of the commission would be
considered compensation for the recommendation.
This is consistent with the position taken by the
Department in Advisory Opinion 83–60A, which
was discussed favorably by the court in Chamber.
In that opinion, the Department said ‘‘if, under the
particular facts and circumstances, 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.’’
Available at https://www.dol.gov/sites/dolgov/files/
EBSA/about-ebsa/our-activities/resource-center/
advisory-opinions/1983-60a.pdf.
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Department to confirm that a set salary
or other fixed compensation paid to an
individual who is providing information
such as product information and
operational or administrative
information to participants does not
constitute a fee or other compensation
for rendering investment advice. The
Department is unwilling to state that
any particular compensation
arrangement with an individual would
categorically not constitute a ‘‘fee or
other compensation’’; however, it is
important to note that for fiduciary
status to apply, all parts of the final rule
must be satisfied, including the
provision of a covered recommendation.
4. Retirement Investor Definition
(Paragraph (f)(11))
Sophisticated Advice Recipients
Many commenters argued that the
final rule should explicitly state in the
regulatory text that recommendations to
certain sophisticated advice recipients
would not be considered ERISA
fiduciary advice. Many commenters
who suggested this type of limitation
wanted it to apply to plan sponsors
acting as plan fiduciaries and/or
independent financial services
providers who are themselves plan or
IRA fiduciaries. These commenters said
the Department should adopt a different
approach in the institutional market
than the retail market, where they said
these plan fiduciaries are not expecting
advice in their best interest and do not
have a relationship of trust and
confidence. The commenters said a
specific limitation in the regulatory text
for sophisticated advice recipients is
needed to avoid impeding the exchange
of important information such as market
color and market availability and
pricing between advice providers and
plan fiduciaries. Some commenters
pointed to Regulation Best Interest’s
limitation to recommendations to ‘‘retail
customers’’ and other securities law
provisions, such as for ‘‘accredited
investors’’ as precedent for this
approach.
Some commenters suggested the
Department should include a limitation
similar to the 2016 Final Rule’s
limitation for ‘‘transactions with
independent fiduciaries with financial
expertise,’’ while others said the
Department should not take that
approach again.222 One commenter
suggested including an assets-based test
carving out plan sponsors with more
than $100 million in assets, based on
the commenter’s analysis that there
222 See paragraph (c)(1) of the 2016 Final Rule, 81
FR 20946, 20999 (Apr. 8, 2016).
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would be minimal benefit to plans and
their participants from including these
plan sponsors as retirement investors.
Other commenters suggested securitieslaw based definitions such as
‘‘accredited investors,’’ ‘‘qualified
purchasers,’’ or ‘‘qualified institutional
buyers.’’
Some other commenters discussed the
issue of sophisticated advice recipients
in the context of ‘‘wholesaling’’ activity
aimed at financial services providers
such as broker-dealers, registered
investment advisers, banks, insurance
companies, and consultants, that are or
might be serving in an ERISA Title I or
Title II fiduciary capacity to plans or
IRA investors. Commenters said asset
managers should be free to engage in
marketing efforts with these providers,
sometimes described as intermediaries,
to better inform the providers for
purposes of their own fiduciary
recommendations to plan and IRA
clients. One scenario raised in a number
of comments involves the provision of
model portfolios. One commenter
described a scenario involving model
portfolios created by asset managers as
a service to the financial services
providers, such as broker-dealers, who
then use those models in their direct
interactions with investor clients.
Commenters said that the proposal was
not clear as to whether such interactions
between wholesalers and advisers
constituted fiduciary recommendations,
and if they did, ERISA fiduciary status
might attach broadly to asset managers
providing these models based on the
contexts in proposed paragraphs
(c)(1)(i), (ii), and (iii).
In this regard, commenters said
wholesaling interactions present clear
examples where there is no relationship
of trust and confidence involving a
customer. They said the regulatory text
of the final rule should reflect a
limitation under which financial
services providers receiving information
in wholesaling interactions would not
be considered ‘‘retirement investors,’’
with one commenter suggesting that the
Department should eliminate the
reference to ‘‘plan and IRA fiduciaries’’
altogether in the definition of a
retirement investor and leave the
reference to ‘‘plans’’ and ‘‘IRAs’’ as
advice recipients. The commenter said
this would avoid treating non-fiduciary
interactions between financial
professionals as fiduciary investment
advice. Another commenter suggested
that the definition of a retirement
investor should be limited to plan
fiduciaries that are named fiduciaries
and IRA fiduciaries that are in a
fiduciary relationship to a particular
IRA or IRA owner or beneficiary and
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who are receiving the recommendation
on behalf of a specific IRA or IRA owner
or beneficiary.
A commenter discussed their views
on the potential impact of the proposal
on the private equity market. They
described communications between
fund sponsors and plan fiduciaries as
ranging from sales communications to
information about fund characteristics
and responding to questions to aid in
the due diligence process. Similar to
other commenters expressing their
desire for a sophisticated advice
recipient carve-out, the commenter said
it is widely understood that these
communications are on an arm’s length
basis. Nevertheless, to avoid impacting
ERISA plans’ investment in private
equity, the commenter suggested adding
a provision to the regulatory text as
follows:
Communications with sophisticated and
independent parties. The provision of any
advice, within the meaning of Section
3(21)(A)(ii) of the Act, by a person to a
sophisticated and independent party in
connection with an arm’s length purchase,
sale, loan, exchange or other transaction
related to the investment of securities or
other investment property, if the
sophisticated and independent party has
expressly acknowledged, in a clear and
conspicuous manner, that such person is not
acting as a ‘‘fiduciary,’’ within the meaning
of Section 3(21)(A)(ii) of the Act or Section
4975(e)(3)(B) of the Code, to the sophisticated
and independent party with respect to such
transaction, and such person does not (i)
receive a fee or other compensation directly
from the sophisticated and independent
party solely for the provision of such advice
or (ii) expressly acknowledge or represent
that it acts as a ‘‘fiduciary,’’ within the
meaning Section 3(21)(A) of the Act or
Section 4975(e)(3) of the Code, to such
sophisticated and independent party with
respect to the transaction.
A party is ‘‘sophisticated’’ if such person
(or such person’s representative) (i) is a
‘‘bank,’’ as defined in section 202 of the
Investment Advisers Act of 1940 or similar
institution that is regulated and supervised
and subject to periodic examination by a
State or Federal agency, (ii) is an insurance
carrier which is qualified under the laws of
more than one state to perform the services
of managing, acquiring or disposing of assets
of a plan, (iii) is an investment adviser
registered under the Investment Advisers Act
of 1940 or, if not registered as an investment
adviser under the Investment Advisers Act
by reason of paragraph (1) of section 203A of
such Act, is registered as an investment
adviser under the laws of the State (referred
to in such paragraph (1)) in which it
maintains its principal office and place of
business, (iv) is a broker-dealer registered
under the Securities Exchange Act of 1934,
(v) has total assets or assets under
management of at least $25 million, or (vi)
meets the requirements of a ‘‘qualified
purchaser’’ under the federal securities laws.
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A party is ‘‘independent’’ of another
person if the person were not, and were not
affiliated with, the other person. For these
purposes, an ‘‘affiliate’’ of a person is one
who controls, is controlled by, or is under
common control with, the other person.’’
A communication is ‘‘clear and
conspicuous’’ if it is reasonably
understandable and noticeable to a typical
sophisticated and independent party.
Many supporters of the Department’s
proposal, however, counseled against a
limitation in the regulatory text
regarding sophisticated advice
recipients that are plan sponsors acting
as plan fiduciaries. They said the
various suggested carve-outs from the
fiduciary definition do not reliably
identify whether an advice recipient is
in fact sophisticated, and they did not
believe plan sponsors acting as plan
fiduciaries would necessarily know that
the fiduciary protections under Title I
did not apply when they receive
recommendations and advice. These
commenters also said there is nothing in
the text of ERISA that would indicate
that Congress intended to deny
protections to certain investors based on
their presumed sophistication, and at
least one commenter said that the use of
wealth or income exemptions from
public disclosure requirements in the
securities context has led to harms to
retail investors. Many of these
commenters specifically supported
extending ERISA’s protections to plan
sponsors and believed there would be
significant benefits to plan participants
and beneficiaries as a result. These
commenters said that the fact that plan
sponsors are neither protected under
Regulation Best Interest nor under State
laws adopting the NAIC Model
Regulation weighs in favor of including
them within the definition of a
retirement investor.
In the final rule, the Department has
determined not to include a provision
that would generally exclude plan
sponsors acting as fiduciaries from the
definition of a retirement investor. The
Department believes that rather than
attempt to define financial
sophistication through a particular asset
test or other specific regulatory
limitation as suggested by a few
commenters, including the commenter
advocating for a carve-out for
‘‘communications with sophisticated
and independent parties,’’ it is
preferable to retain the facts and
circumstances test set forth in this rule
for all recommendations. For example,
when a financially sophisticated
retirement investor engages in an arm’s
length transaction with a counterparty
who makes an investment
recommendation, absent an
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acknowledgment of fiduciary status
under ERISA Title I or Title II, it is
appropriate to consider whether a
reasonable investor in like
circumstances would rely on the
recommendation as intended to advance
the investor’s best interest.
In many circumstances, plan
fiduciaries with responsibility for plan
investments may need professional
advice to responsibly discharge their
duties. For example, many fiduciaries of
small plans do not have specialized
investment expertise and are quite
dependent on recommendations from
financial professionals about the
complexities of constructing a prudent
401(k) plan investment lineup. As noted
above, in a comment on the proposal,
Morningstar quantified the potential
benefits from the proposal’s coverage of
recommendations to plan fiduciaries
about the fund lineups in defined
contribution plans as exceeding $55
billion in the first 10 years and $130
billion in the subsequent 10 years, in
undiscounted and nominal dollars, due
to reductions in costs associated with
investing through their plans, noting
that over 80 percent of these savings
would be experienced by small-plan
participants. Even plan fiduciaries
responsible for large portfolios may
require fiduciary advice to make
decisions with respect to categories of
investment or financial transactions for
which they lack expertise. In these
circumstances, the regulatory text
enables the fiduciary with investment
authority to obtain fiduciary advice
when that is appropriate in accordance
with the same objective test that applies
to fiduciary advice generally. This
approach will avoid an artificial
limitation in the definition of a
retirement investor that may not have
bearing on the parties’ relationships and
could undermine application of the
ERISA fiduciary protections under Title
I to plan sponsors that many
commenters supported. Moreover, as
explained above, the Department
believes this facts and circumstances
approach based on the parties’
relationship is fully consistent with the
Chamber opinion’s emphasis on
relationships of trust and confidence, as
opposed to an artificial carve-out from
fiduciary status that does not reflect the
parties’ reasonable understandings.
In this regard, it is worth noting that
the Department did not finalize
proposed paragraph (c)(1)(i), which
would have automatically treated
recommendations from persons who
had discretionary authority over the
retirement investor’s assets as fiduciary
investment advice provided all the other
parts of the definition were satisfied.
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Many of the comments related to the
proposed rule’s overbreadth, especially
in the institutional market, were focused
on this provision, which the Department
has deleted. As discussed in greater
detail in Section E of this preamble, the
Department has also made a number of
other changes to the final rule that
should alleviate concerns about the flow
of information in the institutional
marketplace.
In addition, the final rule does
include a limitation in the regulatory
text for recommendations to plan and
IRA fiduciaries that are merely
themselves investment advice
fiduciaries. In such cases, the recipient
of the communication does not have the
authority or control necessary to invest
the plans’ assets, and the final rule does
not treat the recommendation as
fiduciary investment advice to the plan.
Accordingly, a new paragraph (f)(11) is
added in the final rule defining a
‘‘retirement investor’’ and it extends
only to plan and IRA fiduciaries to the
extent they are described in ERISA
section 3(21)(A)(i) or (iii) or Code
section 4975(e)(3)(A) or (C), which
generally involve the exercise of
authority or control over plan assets, or
discretionary authority or discretionary
control with respect to the plan’s
management, or the possession of
discretionary authority or discretionary
responsibility in the plan’s
administration. Any subsequent
recommendation made by the
investment advice fiduciary directly
advising the plan or IRA, however,
would itself be treated as fiduciary
investment advice to the extent it met
the terms of the final rule, including
paragraph (c)(1).
In this regard, under the final rule, for
purposes of paragraph (c)(1)(i), when
advice is rendered to a plan or IRA
fiduciary within the meaning of ERISA
section 3(21)(A)(i) or (iii) or Code
section 4975(e)(3)(A) or (C), the relevant
‘‘particular needs or individual
circumstances’’ are those of the plan or
IRA, and the determination of whether
the recommendation may be relied on
by the ‘‘retirement investor’’ as intended
to advance the ‘‘retirement investor’s
best interest’’, focuses on the plan or
IRA.
The Department disagrees with
commenters’ suggestion that the
category of fiduciary retirement
investors should be limited to the
‘‘named fiduciary,’’ inasmuch as it
would exclude advice to many
fiduciaries who have or exercise direct
control over plan investments. The
Department did not wholly eliminate
the reference to plan or IRA fiduciaries
leaving only the ‘‘plan’’ and the ‘‘IRA’’
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as the retirement investor, as suggested
by one commenter, out of concern that
there would continue to be uncertainty
as to whether recommendations
received by a financial services provider
that is a fiduciary would be considered
advice to the plan or IRA.
Some commenters also presented an
additional concern that a wholesaler
would not be able to tell if a particular
financial professional that they are
interacting with might be a plan or IRA
fiduciary, particularly if the wholesaler
is presenting in a group setting such as
an educational forum. To the extent that
is the case, and the scenario is not
addressed through the limited definition
of a retirement investor discussed
above, it would appear that any
communication in this context would
not be investment advice under the final
rule as it would not be based on the
individual needs or particular
circumstances of any plan or IRA. Such
communications, to the extent they are
covered recommendations that are not
accompanied by an acknowledgment of
ERISA Title I or Title II fiduciary status
with respect to the recommendation,
would not meet paragraph (c)(1)(i) of the
final rule. In the scenario in which a
financial professional acts as both an
investment advice fiduciary and a
fiduciary with control over investment
decisions, the limitation in the
definition of a ‘‘retirement investor’’
would apply only to the extent of their
role as an investment advice fiduciary.
In their role as a fiduciary with control,
communications to them would be
analyzed under the provisions of the
final rule discussed in this paragraph.
Several commenters also asked the
Department to address the status of
independent marketing organizations
(IMOs), field marketing organizations
(FMOs) and other insurance
intermediaries, which commenters said
play a significant role in the
distribution, training, and sales support
of producers and insurance carriers.
Specifically, the commenter said these
entities assist independent producers in
training, compliance, marketing,
product selection and many other roles.
Based on the commenter’s description
of the interactions, the Department
would determine the status of these
entities under the final rule based on,
among other things, determination of
whether the communications involve
‘‘recommendations’’ and whether the
insurance producers are considered
‘‘retirement investors’’ pursuant to this
discussion.
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32161
Health and Welfare Plans and Health
Savings Accounts
The proposal included, as retirement
investors, employee benefit plans
described in ERISA section 3(3) and
Code section 4975(e)(1)(A), as well as
IRAs, which were defined to include
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 (HSA). 223
The proposal further stated:
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 taxadvantaged 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.’’ 224
Several commenters asked the
Department to exclude HSAs from the
final rule. These commenters described
HSAs as individually-owned accounts
established exclusively to fund health
care expenses. They said the HSAs
operate more like a deposit account than
a retirement savings vehicle, with
investments being merely an optional
feature that is not commonly utilized.
They said HSAs may accept rollovers
from IRAs but not from workplace
retirement plans, and the amounts they
may accept are limited. Commenters
expressed concern that routine provider
communications regarding HSAs might
become fiduciary investment advice
under the rule, and they said that this
would increase the cost of offering
HSAs. Further, commenters said that
HSAs are often held and administered
by non-bank custodians or trustees, and
223 Proposed paragraph (f)(6) (the term ‘‘plan’’)
and (f)(3) (the term ‘‘IRA’’).
224 Proposed Retirement Security Rule 88 FR
75890, 75891 n. 9 (Nov. 3, 2023).
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these entities are not ‘‘financial
institutions’’ eligible to rely on PTE
2020–02 for prohibited transaction
exemptive relief.
To the extent the Department decided
not to exclude HSAs as retirement
investors under the final rule,
commenters asked the Department to
confirm that HSA providers would be
considered the same as platform
providers because HSA providers make
available investment options that are
acceptable to all of their HSA
customers, including employers who
may select service providers for their
employees’ HSAs. Commenters also
asked the Department to include IRSapproved non-bank trustees and
custodians as financial institutions in
the final amendment to PTE 2020–02.
One commenter more broadly urged
the Department to completely exclude
health and welfare plans, policies, and
benefits from the final rule. The
commenter said these plans are complex
and fundamentally different than
retirement plans. The commenter
expressed appreciation for the
definition of ‘‘investment property’’ in
the proposal but suggested there were
additional questions related to that
definition.225
The Department has not eliminated
health and welfare plans and HSAs from
the definition of a retirement investor in
the final rule. The Department
acknowledges commenters’ views that
there are significant differences in how
these plans operate as compared to
retirement savings vehicles, and that
HSAs may not commonly involve
investment activity at all. However,
these plans are clearly covered by either
Title I of ERISA or by the prohibited
transaction provisions in Title II.
Based on commenters’ descriptions of
HSA operations, the Department agrees
that HSA providers may fall within the
analysis regarding platform providers,
presented below in Section E.2 of the
preamble, which confirms that
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 plan sponsors
and plan fiduciaries in selecting and
monitoring investment alternatives,
without additional screening or
recommendations based on the interests
of the retirement investor, would not be
considered under the final rule to be
making a recommendation.
However, to the extent that a person
makes a covered recommendation and
satisfies the rest of the rule’s
requirements to any of these retirement
investors, the Department does not see
a reason to treat them differently or
provide a lower level of protection for
them than other plans covered by ERISA
Title I or Title II. To address
commenters’ concerns about prohibited
transaction relief, the Department has
accepted the commenters’
recommendation to allow IRS-approved
non-bank trustees and custodians to rely
on the prohibited transaction relief in
PTE 2020–02 when they are serving in
these capacities with respect to HSAs.
E. Application of the Final Rule to
Specific Circumstances
The final rule generally retains the
proposed approach of providing a
general rule under which investment
advice providers can determine their
status through application of the facts
and circumstances surrounding their
interactions with retirement investors,
as opposed to including provisions
addressing specific circumstances. The
use of carve-outs and special provisions
in the 2016 Final Rule was criticized by
the Fifth Circuit in Chamber as evidence
of an overbroad rule.226 Specifically,
with respect to the 2016 Rulemaking,
the Fifth Circuit’s Chamber opinion had
found that the rulemaking was overly
broad and captured relationships that
lacked the requisite hallmarks of a
relationship of trust and confidence,
such that fiduciary status under ERISA
should not attach. The court further
found that the exemptive relief and
other carve-outs included in that
rulemaking amounted to ‘‘backdoor
regulation’’ of parties and transactions
that the Department lacked authority to
regulate.227 As reiterated elsewhere in
this final rule, the Department carefully
considered the Fifth Circuit’s emphasis
on relationships of trust and confidence
in developing this rule. To further
distinguish the careful and judicious
approach of this rulemaking (to extend
fiduciary status to only relationships of
trust and confidence) from the
framework of the 2016 Rule, here the
Department crafted a narrowed
functional test that appropriately
balances competing interests without
the need for carve-outs.
Instead of proposing carve-out
provisions in the regulatory text, the
proposal’s preamble included a
discussion of the rule’s intended
application in certain common
circumstances, specifically including
226 Chamber,
225 Comments
on the definition of investment
property are discussed in Section D.1 of this
preamble.
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885 F3d. 360, 381 (5th Cir. 2018).
id. at 387–88 (citing Hearth, Patio &
Barbecue Ass’n v. U.S. Dep’t of Energy, 706 F.3d
499, 508–09 (D.C. Cir. 2013)).
circumstances involving sophisticated
retirement investors, platform providers
and pooled employer plans, swaps and
security-based swaps, and valuation of
securities and other investments.228 The
proposal sought comment on the
discussion presented and whether the
regulatory text should be adjusted to
address any of the issues discussed.229
Commenters generally expressed
appreciation for the Department’s views
presented in the proposal’s preamble
regarding the specific circumstances,
however, many asked the Department to
add provisions to the regulatory text to
provide additional certainty regarding
the Department’s position. Some
commenters said that without specific
limitations in the regulatory text, the
rule appeared overly broad and that
without increased certainty as to how
the rule would apply, providers may
limit their services and beneficial
information provided to retirement
investors in a variety of settings.
Commenters proposed specific carveouts that they would like to see in the
final rule to address specific
circumstances, including the carve-outs
that were included in the 2016 Final
Rule. Some commenters also urged the
Department to revise its position on
some of the circumstances discussed in
the proposal’s preamble to broaden the
circumstances in which ERISA fiduciary
status would not apply.
Many commenters particularly
highlighted interactions between parties
in the institutional market and asserted
that in these interactions it is clear that
communications are sales activity and
parties are interacting on an arm’slength basis. Commenters also described
a broad range of circumstances and
asked the Department to provide
guidance as to how the rule would
apply to the circumstances. Commenters
also asked the Department to include
specific language in the final rule
addressing specific circumstances. The
circumstances raised by commenters
included those circumstances discussed
in the proposal’s preamble but also
ranged to pension risk transfers; services
provided by futures commission
merchants; persons acting pursuant to
CFTC and SEC safe harbors under 17
CFR 23.440 and 240.15Fh–5,
respectively, related to swaps and
security-based swaps; screening of
retirement investors for access to
exchange traded funds and futures;
compensation arrangements applicable
to less liquid, alternative investments;
financial wellness programs;
227 See
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228 Proposed Retirement Security Rule 88 FR
75890, 75907–8 (Nov. 3, 2023).
229 Id. at 75907.
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discussions regarding foreign exchange
transactions; services in connection
with securities lending transactions; and
financial professionals who solicit
customers to join them when they move
to a new firm, among others. One
commenter posed a list of factual
circumstances and asked the
Department to confirm that they would
not involve a covered recommendation
when made to a retirement investor that
is a financial institution, a named
fiduciary with respect to an ERISA plan,
or an authorized representative of
either; the circumstances included, for
example, the retirement investor
soliciting information from more than
one provider during a request for
proposals. There were also requests for
confirmation in areas outside the scope
of this project, including on ERISA
coverage issues.230
The changes made in the final rule
should address many of the concerns
expressed regarding application of the
final rule and the potential for
overbreadth. These changes include:
• confirmation that whether a
‘‘recommendation’’ has occurred will be
interpreted consistent with the SEC’s
framework;
• elimination of proposed paragraph
(c)(1)(i) and changes to the contexts in
adopted paragraphs (c)(1)(i) and (ii) that
narrowed them and made them more
objective;
• adoption of a new paragraph
(c)(1)(iii) confirming that sales
recommendations that are not made in
the circumstances set forth in paragraph
(c)(1)(i) or (ii) will not result in
investment advice fiduciary status and
that providing investment information
or education, without an investment
recommendation, is not advice for
purposes of the final rule; and
• revision of the definition of a
‘‘retirement investor’’ to exclude plan
and IRA fiduciaries that are investment
advice fiduciaries.
The Department also provided a
discussion in Section D.2. of this
preamble regarding paragraph (c)(1)(iv)
230 One commenter asserted that the Department’s
proposal as applied in the ‘‘hire me’’ context
conflicted with a decision by the U.S. Court of
Appeals for the Fifth Circuit in D.L. Markham v.
VALIC, which the commenter said held that service
providers are not ‘‘parties in interest’’ before the
service provider has started providing services or
has at least agreed to do so. D.L. Markham DDS,
MSD, Inc. 401(K) Plan v. Variable Annuity Life Ins.
Co., 88 F.4th 603 (5th Cir. 2023). The decision,
which involved a different provision of ERISA than
the fiduciary definition at issue here, is inapposite.
Under the final rule, a person is treated as a
fiduciary only if they have made investment
recommendations for which they were ultimately
compensated. The rule does not treat an investment
professional or firm as a fiduciary before they have
rendered the advisory service.
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that makes clear that parties can use
disclaimers to define their relationships
so long as written statements
disclaiming fiduciary status are
consistent with the person’s oral or
other written communications,
marketing materials, applicable State or
Federal law, or other interactions. That
preamble discussion specifically
addressed the use of disclaimers in the
context of requests for proposals.
The Department also made
clarifications in the amended PTEs in
this context. Some commenters said it
would be impractical to rely on a PTE
during preliminary interactions before
they know whether the retirement
investor is going to hire them or
otherwise act on their
recommendations. In response, the
Department confirmed in the amended
PTEs that the disclosure conditions of
the PTEs, such as the acknowledgment
of fiduciary status, are not required at
the time of the first meeting. Rather, the
disclosure obligations apply at or before
the time the covered investment
transaction occurs. The Department also
revised the final amendment to PTE
2020–02 to include a special provision
for firms and financial professionals
who provide fiduciary advice to a
retirement investor in response to a
request for proposal to provide services
as an investment manager within the
meaning of ERISA section 3(38).
The Department has not included
provisions in the final rule’s regulatory
text suggested by commenters to address
certain specific circumstances. The
Department believes that the text of the
rule properly applies a fiduciary
definition that is consistent with the
Fifth Circuit’s Chamber opinion and the
text of the statute, and that can be
properly applied to the wide range of
investment interactions described by the
commenters, without need of special
exceptions or carve-outs. However,
below, the Department confirms that the
proposal’s discussions regarding certain
specific circumstances remain
applicable and adds some additional
discussion to provide further guidance.
The Department has also determined
that it will not include questions and
answers in the regulatory text, as some
commenters suggested. The Department
does not believe that including
questions and answers on these specific
factual circumstances would be an
efficient or effective way to respond to
myriad different factual patterns that
could arise under the final rule. The
Department looks forward to continuing
its engagement with the public
following publication of this final rule.
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1. ‘‘Hire Me’’ Communications
In the preamble to the proposed rule,
the Department stated that the proposal
was not intended to result in a person
becoming 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 (i.e., ‘‘hire me’’
communications). Thus, touting the
quality of one’s own advisory or
investment management services would
not trigger fiduciary obligations. This
was made clear in the language in
proposed paragraph (f)(10)(ii) that
extended to recommendations of ‘‘other
persons’’ to provide investment advice
or investment management services.
However, the Department cautioned
that the proposal’s preamble discussion
should not be read to exempt a person
from being a fiduciary with respect to
any of the investment recommendations
covered by proposed paragraph (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. The
Department also said in the proposal’s
preamble that it believed 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. It does not follow from the
fact that one piece of advice is not
fiduciary investment advice (here, the
‘‘hire me’’ recommendation) 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
recommend that a plan participant roll
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money out of a plan into investments
that generate a fee for the fiduciary but
make an imprudent recommendation
that leaves 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.
In this discussion, the Department
noted its belief that its proposed
approach was consistent with the SEC’s
approach in Regulation Best Interest. In
FAQs, the SEC staff described a scenario
involving broker-dealer
communications with a prospective
retail customer that would not rise to
the level of a recommendation.231 The
FAQs describe a scenario where the
broker-dealer meets a prospective retail
customer at a dinner party and says, ‘‘I
have been working with our mutual
friend, Bob, for fifteen years, helping
him to invest for his kids’ college tuition
and for retirement. I would love to talk
with you about the types of services my
firm offers, and how I could help you
meet your goals. Here is my business
card. Please give me a call on Monday
so that we can discuss.’’ However,
unlike this scenario, the SEC staff
cautioned that a recommendation made
in the context of a ‘‘hire me’’
conversation or otherwise would be
subject to Regulation Best Interest.
Some commenters addressing the
proposal’s ‘‘hire me’’ discussion
advocated for a broader ‘‘hire me’’
limitation. This was based on the
assertion that information beyond
merely touting the quality of one’s own
services is commonly exchanged and
needed for a robust hiring process. One
commenter said that incidental
recommendations in the context of a
‘‘hire me’’ discussion should not be
covered recommendations under the
final rule. Commenters further asked the
Department to include the limitation in
the regulatory text as opposed to the
preamble. They argued that, without
such a limitation, fear of liability could
cause advice providers to curtail
beneficial information exchanges.
One commenter described the reality
of the selection process for an
investment adviser subject to the
Advisers Act as involving the adviser
describing its investment offerings and
231 See SEC Frequently Asked Questions on
Regulation Best Interest, https://www.sec.gov/tm/
faq-regulation-best-interest.
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services and its investment approach in
general, to provide a basis for the
retirement investor to make an informed
hiring decision. The commenter asked
the Department to confirm that this type
of information exchange would not
result in an adviser becoming an
investment advice fiduciary.
Many other commenters addressed
the ‘‘hire me’’ issue in the context of
requests for proposals by plan
fiduciaries. Commenters said requests
for proposals often involve the plan
asking for specific investment ideas, and
if responses included information
tailored to the plan, that would appear
to result in the person marketing their
services being considered an ERISA
fiduciary under the proposal.
Commenters offered varying
descriptions of the types of information
commonly provided, including
‘‘investment strategies,’’ ‘‘industry
trends,’’ ‘‘performance history,’’
‘‘quality of services,’’ ‘‘detailed
description of services,’’ ‘‘portfolio
construction views and approach,’’
‘‘suggestions of one or more strategies
that would appear to be a fit for the
plan’s needs’’ and others.
Some commenters asserted that the
concern expressed about ‘‘hire me’’
conversations was exacerbated by the
lack of a limitation in the proposal for
recommendations to sophisticated
advice recipients that could have
otherwise addressed ‘‘hire me’’
communications in the institutional
market. Commenters said uncertainty in
this area will limit important
information sharing between financial
services providers and plan and IRA
fiduciaries. One commenter also
asserted that the difference in
consequences for a recommendation
under Regulation Best Interest as
opposed to a recommendation under
ERISA are significant enough to warrant
different treatment. This is particularly
the case if the advice provider would
need to comply with a PTE in
connection with the recommendation,
and the communication occurred before
it had entered into a contractual
arrangement with the retirement
investor, according to the commenter.
Commenters also raised questions
about specific circumstances, including
marketing bundled services
arrangements; marketing additional
services where a services relationship
already exists; marketing discretionary
management services; and
communications between limited
partners and private equity fund
sponsors. One commenter suggested
that the rule should be revised to
differentiate ‘‘level-fee’’ advice
providers’ ‘‘hire me’’ discussions where
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the advice provider will operate on a
level-fee basis after being hired and does
not have an incentive to steer investors
towards any particular investment
product. Another commenter suggested
a new paragraph should be added to the
regulatory text as follows:
Marketing or Sales Conversations. A
person who engages in marketing or sales
conversations with a Retirement Investor as
to the advisability of engaging such person
(or an affiliate) to provide investment advice
or investment management services shall not
be deemed to be a fiduciary within the
meaning of section 3(21)(A) of the Act or
section 4975(e)(3)(B) of the Code to the extent
of such conversations, provided the person
engaging in such conversations does not have
discretionary authority or control with
respect to a decision to engage the service
provider and does not represent or
acknowledge that they are acting as a
fiduciary with respect to such decision.
In the final rule, the Department has
taken the same approach as it took in
the proposal regarding ‘‘hire me’’
communications. Persons can tout their
own services and provide other
information (including information
about their affiliates’ services), but to
the extent ‘‘hire me’’ communications
include covered investment
recommendations, those
recommendations are evaluated
separately under the provisions of the
final rule. The Department believes it is
important to retain this distinction to
avoid opening loopholes in the
protections of the final rule similar to
those resulting from the 1975
regulation’s ‘‘regular basis’’ test. When
firms and financial professionals make
investment recommendations that
satisfy the objective terms of the final
rule’s fiduciary definition, they occupy
a position of trust and confidence with
respect to those recommendations and
are appropriately held to fiduciary
protections and accountability under
ERISA Titles I and II. In many cases, as
in the rollover context or when the
recommendation concerns the design of
an entire plan portfolio, the investment
recommendation made in those initial
communications may be among the
most important the plan receives.
Denying fiduciary status to such
recommendations would defeat
legitimate investor expectations that
meet the terms of the final rule just as
it would in subsequent communications
that are not associated with ‘‘hire me’’
conversations. Thus, the final rule
extends ERISA fiduciary status to
covered recommendations that are made
in accordance with all parts of the final
rule, even if the recommendations occur
during ‘‘hire me’’ communications.
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The Department does not believe this
approach in the final rule will
realistically expose advice providers to
significantly increased litigation risk or
unduly impair business interactions in
the institutional market. Persons
marketing their own services can
provide a significant amount of
information described by commenters
(e.g., ‘‘industry trends,’’ ‘‘performance
history,’’ ‘‘quality of services,’’ ‘‘detailed
description of services’’) that would not
appear, without more, to rise to the level
of a recommendation. Under the revised
provisions of paragraph (c)(1)(i), they
can also provide other generalized
information, including information on
investment strategies, including, for
example, portfolio construction views,
that are not based on the particular
needs or individual circumstances of
the plan, without ERISA fiduciary status
attaching, as confirmed in paragraph
(c)(1)(iii). Under paragraph (c)(1)(iv)
they can also reinforce the non-fiduciary
nature of their communications by
including a clear disclaimer of ERISA
fiduciary status with respect to
communications provided in
connection with the request for
proposal, which one commenter said
was common, so long as the disclaimer
is consistent with person’s oral or other
written communications, marketing
materials, applicable State or Federal
law, or other interactions with the
retirement investor.
The Department has declined to
provide a special provision in the final
rule for ‘‘level-fee’’ advice providers in
connection with their marketing of their
own services. The final rule states a
functional test that applies based on the
facts and circumstances without the
need for carve-outs and that assigns
fiduciary status in circumstances where
a covered recommendation is made and
the retirement investor can reasonably
place their trust and confidence in the
compensated provider. The Department
does not agree that the assignment of
fiduciary status should vary based on
the nature of the compensation
arrangement, or that it could plausibly
read ‘‘level fees’’ out of the broad
statutory reference to ‘‘fee or other
compensation, direct or indirect.’’ The
receipt of ‘‘level fees’’ may change the
nature of conflicts of interest or affect
the application of the prohibited
transaction rules and administrative
exemptions, but it is not a basis for
avoiding fiduciary status under the
statute or this final rule.
Finally, it is also important to
emphasize that investment
recommendations that are made during
such interactions do not become ERISA
fiduciary investment advice unless the
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elements of the facts and circumstances
test are met, and the advice provider
receives compensation, direct or
indirect, for the advice. Moreover, to the
extent concerns about ‘‘hire me’’
communications are based on the
perceived need to rely on a PTE at the
time of a recommendation, additional
clarity has been provided in the
amended PTE 2020–02 regarding the
required timing of disclosures, as
discussed above. In addition, a special
provision has been added to provide
relief for financial professionals
providing fiduciary investment advice
in response to a request for a proposal
to provide services as investment
managers within the meaning of ERISA
section 3(38).
2. Platform Providers and Pooled
Employer Plans
Platform Providers
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.
As stated in the proposal, application
of the final rule to platform providers
may often focus on whether the
communications fall within the
threshold definition of a
recommendation. Whether a
recommendation exists under the final
rule will turn on the degree to which a
communication is ‘‘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
platform 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 provided
by the investor (e.g., expense ratios,
fund size, or asset type specified by the
plan fiduciary) to assist in selecting and
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monitoring investment alternatives,
without additional screening or
recommendations based on the interests
of plan or IRA investors, would not be
considered under the final rule to be
making a recommendation.
Commenters on the proposal’s
platform provider discussion generally
said additional certainty on the status of
platform providers is needed in the
regulatory text to avoid loss of
assistance to plan sponsors in
developing plan investment lineups and
support plan formation. One commenter
said an exception for platform providers
should be explicit in the text of the rule
and should be available regardless of the
legal structure of a particular investment
platform, thus the exception should
apply to insurers offering a variable
annuity. Some of these commenters said
platform provider interactions typically
do not involve individualized
recommendations, while others said the
sample investment lineups are tailored
to the plan but both the platform
providers and the plans’ fiduciaries are
aware that the sample lineup is being
delivered in the context of an arm’slength business negotiation.
One commenter provided specific
language for a platform provider sales
exclusion in the regulatory text as
follows:
Proposals of investment line-ups or menus
by recordkeeping services investment
platform providers, when made within the
context of a request for proposal or other
vendor selection process or where the
platform provider’s communications clearly
indicate that the proposal is being advanced
in connection with a negotiation for the
terms of a potential future business
relationship shall not give rise to a
‘‘recommendation of any securities
transaction or other investment transaction or
any investment strategy involving securities
or other investment property’’.
Another commenter suggested that as
a means of avoiding fiduciary status,
platform providers should be permitted
to make a prominent disclosure on the
website for the investment menu that
the provider is not undertaking to
provide impartial investment advice or
to give advice in a fiduciary capacity.
For purposes of applying the final
rule, the Department has not changed its
position from the proposal that
presenting a list of investments as
having been selected for and
appropriate for the investor (i.e., the
plan and its participants and
beneficiaries) will not be carved out
from ERISA fiduciary status. If the
communications between a platform
provider and a retirement investor
amount to a covered recommendation,
ERISA fiduciary status will attach if the
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other parts of the final rule are satisfied.
If there is a covered recommendation,
the fact that it is made in the context of
a request for proposal or other
negotiation of a future business
relationship should not, in and of itself,
result in the recommendation being
carved out as fiduciary investment
advice. Similar to the conclusion
reached in the ‘‘hire me’’
communications discussion,
immediately above, the Department
believes this position is important to
avoid opening loopholes in the final
rule that will defeat legitimate investor
expectations and frustrate the text and
purposes of ERISA’s fiduciary
definition.
When a firm or financial professional
provides individualized
recommendations to a plan on the
construction of a prudent fund lineup,
and otherwise meets the terms of the
rule’s definition, the investor is entitled
to rely on the recommendation as
fiduciary advice intended to advance
the plan’s best interest. Moreover, such
advice is often profoundly important
given that it defines and constrains the
range of options available to plan
participants for their retirement. As
noted by some commenters who
supported extending ERISA fiduciary
protections to plan sponsors,
recommendations on plan investment
lineups can have significant impact on
plan participants’ and beneficiaries’
retirement security and Morningstar
quantified the potential benefits from
the proposal’s coverage of
recommendations to plan fiduciaries
about the fund lineups in defined
contribution plans as exceeding $55
billion in the first 10 years and $130
billion in the subsequent 10 years, in
undiscounted and nominal dollars, due
to reductions in costs associated with
investing through their plans.
However, the Department’s position
also remains that 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 final rule to be
making a recommendation. Likewise, a
provider does not make a
recommendation merely by offering a
preset list of investments as part of a
variable annuity, or offering a menu of
pre-selected HSA investment options,
without additional facts. In this context,
the parties can also define their
relationship pursuant to paragraph
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(c)(1)(iv) so long as they conform their
other actions and communications
accordingly. The Department does not
agree, however, that mere website
disclosure that the investment menu
provider is not undertaking to provide
impartial investment advice or to give
advice in a fiduciary capacity should be
dispositive, as suggested by one
commenter.232 In this context, as in
other contexts, one must consider all the
relevant facts and circumstances and
apply them to the tests set forth in the
rule. For example, such website
disclosure, even if reviewed by the
retirement investor, would not defeat
fiduciary status to the extent it was
inconsistent with other communications
and actions by the firm or financial
professional that met the terms of the
rule’s objective test and demonstrated
that the recommendation was given
from a position of trust and confidence.
Pooled Employer Plans
In the preamble to the proposal, the
Department stated that the analysis
presented regarding platform providers
would 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 SECURE
Act.233 PEPs are required to designate a
pooled plan provider (PPP) who is a
named fiduciary of the PEP.234 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.
The Department stated in the proposal
that 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.
Commenters that addressed PEPs said
preserving marketing and sales activity
is especially important in the small plan
232 A commenter also advocated for a platform
provider exception that extended to the marketing
and provision of brokerage window services and
factual information provided to participants
through such brokerage windows, as well as to call
centers. The commenter did not describe why there
was concern about ERISA fiduciary status related to
marketing brokerage window services however, so
this comment was not accepted. Comments related
to call centers are discussed in Section E.3. of this
preamble.
233 ERISA section 3(43), 29 U.S.C. 1002(43).
234 ERISA Section 3(43)(B), 29 U.S.C. 1002(43)(B).
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market where many employers cannot
afford an independent adviser and
instead may rely on PEP providers to
help them understand how plans work.
Some believed that the Department’s
proposal would apply fiduciary status
in the event there is only one
investment lineup available through a
PEP because that will be interpreted as
a recommendation of that lineup.
Commenters generally said imposing
compliance burdens on the formation of
these plans is inconsistent with
congressional intent in including these
type of plans in the SECURE Act.
Another commenter said that
communications with employers about
joining a PEP involve employers acting
in their settlor capacity because they are
considering adopting a plan or merging
an existing plan into the PEP. Therefore,
the commenter believed the Department
should revise its discussion of this issue
accordingly.
The Department continues to believe
that the analysis of when a
recommendation is made in the context
of a PEP is the same as that of a platform
provider. Accordingly, 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.
This does not mean, however, that
marketing a PEP with a single
investment lineup is necessarily a
recommendation to each employer that
will result in ERISA fiduciary status.
Whether a recommendation has
occurred will be based on the facts and
circumstances of the interaction. If a
recommendation is made, paragraph
(c)(1)(iii) in the final rule makes clear
that sales and marketing activity can
continue so long as any
recommendation is not made in the
context of paragraphs (c)(1)(i) or (ii).
The Department does not agree that
employers joining the PEP act in a
solely settlor capacity in doing so. The
provisions in ERISA section 3(43)
provide that each employer retains
fiduciary responsibility for the selection
and monitoring of the PPP and any
other person who is designated as a
named fiduciary as well as, to the extent
not otherwise delegated to another
fiduciary by the pooled plan provider
and subject to the provisions of ERISA
section 404(c), the investment and
management of the portion of the plan’s
assets attributable to the employees of
the employer (or beneficiaries of such
employees). For these reasons, the
Department has decided that this final
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rule strikes the correct balance and not
to adopt changes that would single-out
PEPs and PPPs.
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3. Investment Information and
Education
General
In the proposal’s preamble, the
Department stated that Interpretive
Bulletin (IB) 96–1 relating to participant
investment education would continue to
provide guidance with respect to the
fiduciary advice definition under the
rule if finalized. 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.235 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.’’
Multiple commenters supported the
preservation of non-fiduciary
investment education under the IB.
These commenters highlighted the
importance of financial education to
retirement investors and stressed the
need for such communications to
continue freely after adoption of the
final rule. The commenters encouraged
the Department to clarify that the final
rule would not treat investment
education as fiduciary advice, and some
further suggested that the text of the
final rule directly incorporate the IB or
incorporate the provisions of the 2016
Final Rule on investment education.
Several commenters asked for
confirmation that discussions about the
benefits of enrolling and saving in a
plan, including increasing
contributions, would not be deemed
ERISA fiduciary investment advice
under the final rule. They said these
235 29 CFR 2509.96–1; see also 85 FR 40589 (July
7, 2020) (technical amendment reinstating
Interpretive Bulletin 96–1 following the vacatur of
the 2016 Final Rule).
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conversations are important efforts to
prepare retirement investors for
retirement. Relatedly, commenters
asked about educating participants
about products and services offered by
a plan and communicating the value of
investment diversification.
Some commenters requested
additional clarity on information
relating to distributions and rollovers
that can be provided without becoming
an investment advice fiduciary. A
commenter explained that its members
make available beneficial forms of
assistance that inform participants of
their distribution and rollover options,
encourage them to keep money in the
retirement system until they retire, and
help them connect their individual
circumstances to rollover and transfer
options that are available to them. In
this commenter’s view, such tools help
reduce the problems associated with
abandoned accounts and other issues
that result when participants have
accounts scattered among various
employment-based plans and service
providers. Another commenter
indicated that participants can have
avoidable misconceptions about
retirement and termination, such as a
mistaken belief that they are required to
remove their plan accounts when their
employment terminates. The commenter
viewed it as critical that retirement
educators be able to clearly
communicate rules relating to rollovers,
plan terms, general financial and
investment information, and available
distribution options. In this
commenter’s opinion, such
communication could be made
consistent with the principles of IB 96–
1, but the emphasis on IRA rollover
advice in the proposal’s preamble raises
concern that even general advice about
the benefits of retaining retirement
funds in a retirement plan as opposed
to an IRA would be classified as ERISA
fiduciary investment advice.
Some commenters also requested
confirmation regarding the
permissibility of referencing specific
plan investments in non-fiduciary
investment education. They noted that
the preamble included cautionary
language warning that service providers
engaging in investment education may
cross the line into fiduciary investment
advice if the education relates to a
specific investment or investments
strategy. They requested confirmation
that, as provided for conditionally in the
IB, investment education may reference
specific investment options available
under a plan without triggering
fiduciary status under the final rule.
Several commenters suggested that
the Department take the broader step of
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generally updating the IB. They
explained that there have been
significant changes in the types of
information being sought by plan
participants and plan sponsors (e.g.,
relating to spend down of assets, and
auto-enrollment and auto-escalation
plan features) and types of interactions
utilized (e.g., electronic and digital)
since the IB was first published. They
suggested that the Department take the
opportunity to evaluate the impact of
these developments on the types of
information and materials that may be
provided without constituting fiduciary
investment advice under the final
regulation.
In general, for purposes of the final
rule, the line between an investment
recommendation and investment
education or information will depend
on whether there is a call to action.
Thus, many of the types of information
cited by commenters as important to
retirement investors could be provided
under the final rule without the
imposition of fiduciary status. For
example, like the SEC in Regulation
Best Interest, the Department believes
that ‘‘a general conversation about
retirement planning, such as providing
a company’s retirement plan options’’ to
a retirement investor, would not rise to
the level of a recommendation.236
In this regard, the Department
confirms that providing educational
information and materials such as those
described in IB 96–1 will not result in
the provision of fiduciary investment
advice as defined in the final rule absent
a recommendation, regardless of the
type of retirement investor to whom it
is provided. Information on the benefits
of plan participation and on the terms
or operation of the plan, as described in
the first category of investment
education in the IB, clearly could
include information relating to plan
distributions and distribution options.
Additionally, an analysis of the planinformation category of investment
education applied in the context of IRAs
would allow such a plan sponsor or
service provider to also provide a wide
range non-fiduciary information about
IRAs, such as tax benefits associated
with rollovers into IRAs.
Likewise, the Department confirms
that furnishing the categories of
investment-related information and
materials described in the ‘‘Investment
Education’’ provision in the 2016 Final
Rule would not result in the provision
of fiduciary investment advice under
236 Regulation Best Interest release, 33337 (July
12, 2019).
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the final rule.237 The provision in the
2016 Final Rule included, for example,
information on ‘‘[g]eneral methods and
strategies for managing assets in
retirement (e.g., systemic withdrawal
payments, annuitization, guaranteed
minimum withdrawal benefits).’’
To the extent parties seek additional
confirmation of specific information
that may be provided regarding
rollovers within the category of
investment education, the Department
notes that the IRS provides model safe
harbor explanations that may be used to
satisfy the Code section 402(f)
requirement to provide certain
information regarding eligible rollover
distributions to the distributee within a
reasonable period of time prior to
making the distribution.238 The model
safe harbor explanations provide a
significant amount of information on
rollovers, including how to do a
rollover, what types of plans accept
rollovers, how much can be rolled over,
the tax implications of pursuing a
rollover or declining the rollover, and
information about special circumstances
such as offsets against plan balances by
outstanding loans or rules involving
employer stock. Merely providing the
information contained in the model safe
harbor explanations would not
constitute ERISA fiduciary investment
advice.
Some commenters asked the
Department to address education to plan
fiduciaries. They said that financial
professionals may provide information
to plan fiduciaries about how plans
work as part of the sales process.
Several commenters specifically asked
about educational interactions between
service providers and plan sponsors
about features such as automatic
enrollment and automatic escalation,
among others. As stated above,
provision of investment information or
education, absent a recommendation,
would not cause a financial professional
to become a fiduciary under the final
rule regardless of the type of retirement
investor to whom it is provided. Based
on the discussion set forth above, the
Department believes there is significant
flexibility and clarity for a plan sponsor
or service provider to furnish helpful
non-fiduciary investment education
materials to participants relating to plan
participation, distributions and
rollovers. Likewise, the final rule is
clear that absent a recommendation,
provision of investment information to
237 Definition of the Term ‘‘Fiduciary’’; Conflict of
Interest Rule—Retirement Investment Advice, 81
FR 20946, 20998 (April 8, 2016).
238 See IRS Notice 2020–62, 2020–35 I.R.B. 476,
https://www.irs.gov/pub/irs-drop/n-20-62.pdf.
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IRA owners and beneficiaries and plan
and IRA fiduciaries that are retirement
investors would not give rise to
fiduciary status.
The Department emphasizes that the
inquiry in this respect will focus on
whether there is a call to action. Thus,
the Department cautions providers
against steering retirement investors
towards certain courses of action under
the guise of education. The SEC
similarly stated in Regulation Best
Interest that while certain descriptive
information about employer sponsored
plans would be treated as education,
rather than as a recommendation,
broker-dealers should ‘‘ensure that
communications by their associated
persons intended as ‘education’ do not
cross the line into
‘recommendations.’ ’’ 239
The Department further emphasizes
that a recommendation to take a
distribution, even if it is not
accompanied by a recommendation of a
specific investment, is a
‘‘recommendation of any securities
transaction or other investment
transaction or any investment strategy
involving securities or other investment
property,’’ such that if all the other parts
of the final rule are satisfied, the person
making the recommendation will be an
ERISA fiduciary. For example, if a
person states, ‘‘After reviewing your
plan, I think you should roll over into
an IRA’’—that is not investment
education. Although the Department is
not updating IB 96–1 at this time, it
intends to monitor investment
education practices to determine
whether the principles in the IB are
being used to evade fiduciary status
under circumstances that would
otherwise support the conclusion that a
recommendation is being made by
persons who occupy a position of trust
and confidence. The Department may at
a later date determine that the IB should
be revisited.
Call Centers
Within the context of investment
information and education, some
commenters specifically addressed the
functions of recordkeeper call center
personnel and the information they
provide to plan participants and
beneficiaries who need assistance on a
variety of plan-related matters. Several
commenters said that the proposal
would appear to result in the imposition
of ERISA fiduciary status on call center
personnel to the extent they provided
investment-related information to a
retirement investor or referred
239 Regulation Best Interest release, 84 FR 33318,
33337 n. 181 (July 12, 2019)
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retirement investors to a financial
professional. One commenter said that
IB 96–1 is helpful in this context but
does not address all matters that may
arise in call center interactions. Several
commenters stated that call center
interactions typically do not involve
collecting significant data about the
retirement investor because call center
representatives do not make
individualized recommendations or
suggest a specific course of action.
One commenter suggested a
paragraph be added to the final rule
excluding call center support personnel
from fiduciary status as follows:
Participant and Beneficiary Call Center
Support. Notwithstanding other paragraphs
of this section, a person who provides
participant call center support services on
behalf of a recordkeeper or other
administrative services provider to a plan
shall not be deemed to be a 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 recommends a securities or
investment transaction or any other
investment strategy where such
recommendation is limited to unbiased
suggestions, consistent with generally
accepted investment principles and sound
plan administrative practices, that are
directly responsive to a request for assistance
initiated by a participant or beneficiary.
In the Department’s view, the
discussion earlier in this preamble
section about the application of IB 96–
1 in the context of the final rule is
responsive to some comments on call
centers. Further, although commenters
said call center personnel may provide
investment-related information to
retirement investors, commenters
generally indicated that call center
activities involve neither collecting
significant data about the retirement
investor nor individualized
recommendations or suggestions as to a
specific course of action. Under the
revised contexts in paragraph (c)(1)(i)
and (ii), unless call center personnel
provide an acknowledgment of ERISA
Title I or Title II fiduciary status with
respect to the recommendation, they can
provide investment-related information
that is not based on the particular needs
or individual circumstances of the
retirement investor without ERISA
fiduciary status attaching, as confirmed
in paragraph (c)(1)(iii). The Department
declines to provide a broader limitation
for call center activity, as requested by
some commenters. Covered
recommendations that meet all parts of
the final rule should be subject to the
ERISA fiduciary protections and not a
different standard merely because they
are made in a call center setting. Advice
providers can just as easily hold
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themselves out as trusted advisers in
phone communications as in other
contexts.
4. 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 240 and section 15F of the
Securities Exchange Act 241 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.242
Similar requirements apply for securitybased swap transactions.243 The CFTC
and the SEC have issued final rules to
implement these requirements.244
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 and
automatically 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 SEC staff 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 final rule.
The disclosures required of plans’
counterparties under the business
conduct standards would not generally
constitute a ‘‘recommendation’’ under
240 7
U.S.C. 6s(h).
U.S.C. 78o–10(h).
242 7 U.S.C. 6s(h)(5); 17 CFR 23.450.
243 15 U.S.C. 78o–10(h)(4), (5).
244 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 through h–6;
Business Conduct Standards for Security-Based
Swap Dealers and Major Security-Based Swap
Participants, 81 FR 29960 (May 13, 2016).
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the final rule, 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 final rule 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.245 To the extent dealers wish
to avoid fiduciary status under the final
rule, 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 final 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 final rule does not include
valuation and similar services as a
category of covered recommendations.
5. Valuation of Securities and Other
Investment Property
The final 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
paragraph (f)(10) does not include
reference to any of these functions.
245 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).
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Accordingly, the provision of valuation
services, appraisal services, or fairness
opinions would not, in and of
themselves, lead to fiduciary status
under the final rule.
F. Scope of Investment Advice
Fiduciary Duty
Paragraph (c)(2) of the final rule
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 rule.
On the other hand, nothing in paragraph
(c)(2) exempts such a person from the
provisions of section 405(a) of ERISA
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 ERISA or
section 4975(e)(2) of the Code. This
provision is unchanged from the current
1975 regulation.
Further, if a person’s
recommendations relate to the
advisability of acquiring or exchanging
securities or other investment property
in a particular transaction, the final 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.
One commenter asked the Department
to make clear that for one-time
recommendations, the parties’
reasonable expectations typically do not
include an ongoing duty to monitor
unless the parties expressly agree to
such a duty. The commenter believed
that otherwise the Department would
conclude that the parties’ reasonable
expectations always include an ongoing
duty to monitor. The Department
continues to believe that the parties’
reasonable expectations,
understandings, arrangements, or
agreements should govern the
monitoring obligation and does not
concur with the commenter’s concern
that the Department would always
conclude under that standard that a
duty to monitor exists; accordingly the
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discussion was not revised to require an
express agreement to monitor.
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.246 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.
Several commenters expressed
concern about plan sponsors’ cofiduciary liability under ERISA. One
commenter specifically focused on call
centers and human resources
employees. The commenter believed
that if call center personnel cross the
line and provide fiduciary advice, this
would heighten the plan sponsor’s
obligation to monitor the call center and
could expose the plan sponsor to cofiduciary liability. The commenter
asked the Department to provide a safe
harbor to avoid plan sponsors having
liability for acts of any plan service
provider under certain conditions.
Another commenter asked the
Department to clarify that each fiduciary
associated with the plan would not have
to continually monitor the others to
avoid co-fiduciary liability.
In response, the Department notes
that plan sponsors already have
fiduciary obligations in connection with
the selection and monitoring of plan
service providers (both fiduciary and
non-fiduciary service providers),
including service providers that provide
educational materials and assistance to
plan participants and beneficiaries. The
Department does not believe the rule
significantly expands the obligations or
potential liabilities of plan sponsors in
this regard. Accordingly, the
Department does not believe it would be
appropriate to create special rules or
safe harbors with respect to co-fiduciary
status or liability under this final rule,
but rather believes that plan sponsor
activity should be evaluated under the
existing provisions of ERISA.
246 See U.S. Department of Labor, Adv. Op. 97–
15A (May 22, 1997).
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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.247 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.
One commenter suggested revisions to
paragraph (d) to address foreign brokerdealers and transactions in fixed income
securities, options, and currency that
are not executed on an agency basis.
The Department has considered the
suggestion but declines to adopt them
without a more robust record regarding
the reasons for, and impact of, the
suggested changes.
G. 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
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.248 Under the Reorganization
247 The citation in paragraph (d) of the proposal
to ‘‘section 4975(e)(3)(B) of the Code’’ was revised
in the final rule to read ‘‘section 4975(e)(3) of the
Code,’’ consistent with the scope of the 1975
regulation as adopted by Treasury. See 40 FR
50840, 50841 (Oct. 31, 1975).
248 5 U.S.C. App. 752 (2018).
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Plan, which Congress subsequently
ratified in 1984,249 Congress generally
granted the Department authority to
interpret the prohibited transaction
provisions and the definition of a
fiduciary in the Code.250 ERISA’s
prohibited transaction rules, sections
406 to 408,251 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.252 In accordance with the
above discussion, paragraph (g) of the
rule, 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).
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)(i) or (ii)
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 as
defined in paragraph (f)(11), 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
final rule.
In the event of a recommendation to
roll over assets from a Title I plan that
meets the provisions of the final rule,
the fiduciary duties of prudence and
loyalty and the prohibited transaction
provisions of ERISA section 406 would
apply to advice to take the distribution
and to roll over the assets. After the
assets were distributed from the Title I
plan into the IRA, fiduciary investment
advice concerning investment of and
ongoing management of the assets
would be subject to obligations in the
Code, including the prohibited
transaction provisions in Code section
4975. For example, if a broker-dealer
satisfies the fiduciary definition set
249 Sec. 1, Public Law 98–532, 98 Stat. 2705 (Oct.
19, 1984).
250 5 U.S.C. App. 752 (2018).
251 29 U.S.C. 1106–1108.
252 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 Code section 4975(c)(2).
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forth in this rule with respect to a
recommendation to roll a retirement
investor’s assets out of their workplace
retirement plan to an IRA, the brokerdealer would be a fiduciary subject to
Title I with respect to the advice
regarding the rollover. Following the
rollover, the broker-dealer would be a
fiduciary under the Code subject to the
prohibited transaction provisions in
Code section 4975 to the extent it gave
subsequent fiduciary investment advice,
within the meaning of the final rule,
with respect to the assets rolled out of
the plan.
One commenter set forth a series of
assertions regarding the Department’s
jurisdiction to issue the final rule and
the preamble discussion in the proposal.
The commenter said that the proposal’s
preamble was misleading in describing
prohibited transactions under Title II of
ERISA as prohibiting fiduciary conduct,
because the provisions in Code section
4975 do not include prohibitive
language (e.g., ‘‘shall not’’) restricting
the conduct of fiduciaries to Title II
plans. The commenter also asserted the
Department lacked authority to include
plan participants and beneficiaries as
retirement investors, because the
statutory language refers to advice to ‘‘a
plan.’’ The commenter made several
additional arguments that the
Department’s authority to issue a
regulatory definition of an investment
advice fiduciary was limited by ERISA
section 404(c) (providing conditional
relief from certain provisions of Part 4
of Title I of ERISA for fiduciaries of a
pension plan that permits participants
and beneficiaries to exercise control
over the assets in their individual
accounts), by ERISA section 408(b)(14)
(providing a statutory exemption for
transactions in connection with the
provision of investment advice
described in ERISA section 3(21)(A)(ii)
to a participant or beneficiary of an
individual account plan that permits
such participant or beneficiary to direct
the investment of assets in their
individual account) and by the
Reorganization Plan’s provision in
section 102 transferring authority to the
Secretary of Labor to issue ‘‘regulations,
rulings, opinions, and exemptions
under section 4975 of the Code, except
for (i) subsections 4975(a), (b), [and]
(c)(3) . . . of the Code.’’
The Department disagrees with the
assertion that it is misleading to
describe the prohibited transaction
provisions in Code section 4975 as
‘‘prohibiting’’ specified fiduciary
conduct. Code section 4975(c), entitled
‘‘Prohibited Transaction,’’ sets forth a
series of transactions, several of which
apply only to fiduciaries as defined in
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Code section 4975(e)(3). For example,
Code section 4975(c)(1)(E) defines a
prohibited transaction as ‘‘any . . . act
by a disqualified person who is a
fiduciary whereby he deals with the
income or assets of a plan in his own
interest or for his own account.’’
Fiduciaries are subject to an excise tax
for engaging in these transactions.
With respect to the commenter’s other
assertions, it is important to note that
both Congress and the Department have
recognized that advice to a participant
or beneficiary in a participant-directed
plan is advice within the meaning of
ERISA section 3(21)(A)(ii).253 Further,
the fact that Congress provided a
statutory prohibited transaction
exemption applicable to investment
advice fiduciaries is not the same as
defining an investment advice fiduciary
and does not limit the Department’s
authority to do so, as the commenter
suggested. Likewise, the Department
does not agree with the commenter’s
broad assertion that pursuant to ERISA
section 404(c), Part 4 of Title I does not
apply to individual account plans when
participants have control and discretion
over their individual accounts. The
relief provided in ERISA section 404(c)
is conditional and limited, and does not,
for example, relieve a plan fiduciary
from its duty to prudently select and
monitor designated investment
alternatives offered under the plan;
therefore, there is no reason the
Department could not define an
investment advice fiduciary to include
persons making recommendations to
such plan fiduciaries. Finally, given the
Reorganization Plan’s clear assignment
of authority to the Department under
Code section 4975(e)(3), the Department
does not agree that the reservation of
authority with respect to Code section
4975(a), (b), or (c)(3) indirectly limits
this authority. For these reasons, the
Department does not agree with the
commenter that the final rule exceeds
the proper exercise of its regulatory
authority under ERISA section 505, or
that the rule expanded the definition of
a ‘‘plan’’ in violation of ERISA section
514(d).
H. State Law
Paragraph (h) is entitled ‘‘Continued
applicability of State law regulating
insurance, banking, or securities’’ and
253 See ERISA section 408(b)(14) (providing a
statutory exemption for transactions in connection
with the provision of investment advice described
in ERISA section 3(21)(A)(ii) to a participant or
beneficiary of an individual account plan that
permits such participant or beneficiary to direct the
investment of assets in their individual account);
Code section 4975(d)(17) (same); see also
Interpretive Bulletin 96–1, 29 CFR 2509.96–1.
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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
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.
I. Effective Date
The final rule is effective September
23, 2024. The amendments to the PTEs
also finalized today are effective
September 23, 2024. Both amended PTE
2020–02 and amended PTE 84–24
include a one-year transition period
after their effective dates under which
parties have to comply only with the
Impartial Conduct Standards and
provide a written acknowledgment of
fiduciary status for relief under these
PTEs.
In the proposed rule, the Department
proposed that the rule would be
effective 60 days after publication in the
Federal Register but sought comment
on whether additional time would be
needed before the rule became
applicable. Many commenters said 60
days would be an inadequate amount of
time to review their businesses and
prepare for and implement the
compliance obligations in the
rulemaking package, many of them
noting that in previous rulemaking on
this topic, the Department had provided
more transition time than 60 days.
Commenters requesting a delay
suggested a range of compliance
timetables which generally fell between
12 months and 36 months. The
Department was also urged to stay
enforcement for a period after
applicability. On the other hand, several
supporters of the proposal asked the
Department to finalize it without undue
delay.
The timetable established in the final
rule and amendments to the PTEs
provides a phased transition period.
First, parties have approximately 5
months following the date of
publication in the Federal Register
before the final rule and amendments to
the PTEs are effective. As of this
effective date, the rules under Title I
and Title II of ERISA would become
applicable to parties who satisfy the
final rule and compliance with the
PTEs’ Impartial Conduct Standards and
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the fiduciary acknowledgment would be
required for relief under the amended
PTEs. Compliance with all the
conditions of the amended PTEs, in
order to obtain relief under the PTEs,
would not be required until the
expiration of the PTEs’ one-year
transition period. The Department
believes this approach addresses
commenters’ request for additional time
before they would need to comply with
the final rule and PTEs without unduly
delaying the important protections in
this rulemaking. The Department also
confirms that, rather than take an
enforcement-oriented approach in the
initial period following applicability, its
primary focus will be on promoting
compliance and providing assistance to
parties working in good faith to comply
with the law’s obligations.
Commenters also asked for assurances
related to recommendations made and
arrangements entered into before the
effective or applicability date of the
final rule and amended PTEs. One
commenter described services
agreements that would need revision to
recognize that agreed upon services
would now be considered fiduciary
advice services. While the Department
confirms that the final rule and
amended PTEs apply to
recommendations made after the
applicability date, it cannot confirm that
all existing agreements can be
maintained as described by the one
commenter.
J. Severability
The Department proposed that the
rulemaking include a severability
provision. The Department stated its
intent that discrete aspects of the
regulatory package would be
severable.254 The Department explained
that it intended that the definition of
investment advice fiduciary finalized in
this rule would survive even if the
amendments to any of the PTEs were set
aside by a court.255
The Department received one
comment in favor of including a
severability provision. The commenter
expressed the view that a severability
provision is important for closing the
regulatory gap to ensure that small
business owners receive retirement
investment advice that is not conflicted.
The commenter suggested language the
Department could include in the
operative text stating that any aspects of
this rulemaking package not vacated by
potential court action would then
remain in force. Separately, one
commenter expressed the view that the
254 88
FR 75890, 75912.
255 Id.
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Department provided its ‘‘general
intentions on the subject’’ of severability
but did not propose a specific
severability provision or provide any
rationale for severability.
Moreover, several commenters
expressed opposition to a severability
provision on the ground that the
rulemaking package is not amenable to
severability. The Department received
many comments describing the entire
rulemaking, namely the amendments to
the regulation and PTEs, as a
‘‘comprehensive regulatory package.’’
Other commenters described the new
fiduciary investment advice definition
and PTE amendments as ‘‘inextricably
linked’’ or an ‘‘integrated package’’ with
individual parts that operate together.
One commenter suggested that the
entire rulemaking be vacated if any one
part is vacated because the elimination
of one such component could result in
a ‘‘gap for which there is no regulatory
or exemptive solution.’’ In this same
vein, another commenter added that
retaining any aspects of the rulemaking
when another aspect is overturned
would cause ‘‘unintended impacts and
harms.’’
Other commenters suggested that the
remaining aspects of the rulemaking
would be unnecessary if part of the
rulemaking is overturned. One
commenter said that the amendments to
existing PTEs were included to ‘‘blunt’’
the ‘‘over inclusiveness’’ (sic) of the new
regulation. That same commenter added
that the ‘‘new affirmative obligations’’
under amended PTEs 2020–02 and 84–
24 lead to the conclusion that the
elements of the rulemaking are not
severable.
The Department acknowledges, as one
commenter noted, that the notice of
proposed rulemaking did not propose a
specific severability provision. The
Department disagrees, however, with
the commenter that the Department did
not provide notice of its ‘‘initial
position’’ on severability. As noted
above, when this rule was proposed, the
Department expressed its intention that
the definition of investment advice
fiduciary finalized in this rule would
survive even if the amendments to any
of the PTEs were vacated by a court.
This remains the Department’s position.
While courts take into account
severability language in a rule when
analyzing severability, a specific
severability provision is not required for
one element of a rulemaking to be
severable from another.256
256 E.g.,
Bd. of Cnty. Commissioners of Weld
Cnty., Colorado v. Env’t Prot. Agency, 72 F.4th 284,
296 (D.C. Cir. 2023) (‘‘If parts of a regulation are
invalid and other parts are not, we set aside only
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The Department also disagrees with
the comments that different aspects of
the rulemaking are inextricably linked.
While the regulation updates the
definition of an investment advice
fiduciary to better accord with
marketplace changes and the reasonable
expectations of retirement investors, the
amendments to the PTEs provide
additional clarity for investment advice
fiduciaries seeking to receive
compensation for their advice, among
other changes. In all its regulatory
actions, the Department endeavors to
ensure that any changes to the
regulatory structure function smoothly.
In accordance with that guiding
principle, the Department has worked to
ensure that each separate regulatory
action being finalized today works
together and works within ERISA’s full
framework. Together, these changes
reduce the gap in protections with
respect to ERISA-covered investments
and level the playing field for all
investment advice fiduciaries. Still, the
amended regulation and PTEs operate
independently and should remain if any
component of the rulemaking is
invalidated.
K. Administrative Procedure Act
Reliance Interests
The Department received comments
that the proposed rulemaking failed to
properly weigh reliance interests of
advice providers in the pre-existing
regulatory and exemptive framework, in
violation of the Administrative
Procedure Act (APA). One commenter
states that, under the APA, when an
agency reverses an existing policy and
‘‘changes course,’’ the agency must take
into account ‘‘serious reliance interests’’
associated with the existing policy. The
commenter further states that an agency
must provide a ‘‘reasoned explanation’’
for the policy change. The commenter
believes that the proposal did not
adequately justify changing the
definition of fiduciary investment
advice when compared to the advice
providers’ reliance interests at stake and
that the Department did not consider
that advice providers have provided
one-time rollover advice, for a fee or
other compensation, for decades
without needing to rely on exemptive
relief from the prohibited transaction
provisions in ERISA Title I and Title II.
Other commenters described reliance
interests in aligning their business
the invalid parts unless the remaining ones cannot
operate by themselves or unless the agency
manifests an intent for the entire package to rise or
fall together. This is true for agency rules in general
. . . .’’).
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models in accordance with the 1975
regulation and the existing PTEs.
The Department notes that even when
there are certain reliance interests, an
agency may change an existing policy if
the new policy is permissible under the
respective statute and the agency
provides a reasoned explanation for the
change—namely that the agency
demonstrates awareness of the change
and justifies the change with ‘‘good
reasons.’’ 257 The Department is aware
that a ‘‘more detailed justification’’ for
a policy change is required ‘‘when [the]
prior policy has engendered serious
reliance interests that must be taken into
account.’’ 258 In the event of
‘‘significant’’ reliance interests, an
agency must ‘‘weigh any such interests
against competing policy concerns.’’ 259
The Department has considered the
reliance interests described by
commenters and ultimately determined
that these interests are outweighed by
the public interest in protecting the
interests of retirement investors to
ensure the security of the retirement
benefits of America’s workers and their
families.
As the Department outlines
extensively throughout this document,
there have been significant changes in
the retirement plan landscape and
investment marketplace since the 1975
regulation was adopted. Individuals,
regardless of their financial literacy,
have become increasingly responsible
for their own retirement savings, and
have increasingly become direct
recipients of investment advice. At the
same time, there has been 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. One of the particular
concerns of the Department is that
recommendations to roll over from a
workplace retirement plan to an IRA
should be made in accordance with the
retirement investors’ best interest. This
rulemaking ensures that ERISA’s
fiduciary protections in Title I and Title
II apply to all advice that retirement
investors receive from trusted advice
providers concerning investment of
their retirement assets in a way that
aligns with the retirement investors’
reasonable expectations.
Fundamentally, this rulemaking
responds to the pervasiveness of
conflicts of interest in investment
advice, and the associated cost of these
257 Encino Motorcars, LLC v. Navarro, 579 U.S.
211, 221 (2016); FCC v. Fox Television Stations,
Inc., 556 U.S. 502, 515 (2009).
258 Fox, 556 U.S. at 515.
259 Dep’t of Homeland Sec. v. Regents of the Univ.
of California, 140 S. Ct. 1891, 1915 (2020).
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conflicts. Ultimately, that cost is borne
by workers saving for a secure
retirement, as the conflicts leave plan
participants vulnerable to lower returns
on their critical investment savings.
Likewise, as greater numbers of
retirement savers consider whether to
roll over their retirement savings from a
workplace retirement plan into an IRA
or other plan, these savers are receiving
conflicted advice from financial
professionals, despite their reasonable
expectations that the advice is provided
in a fiduciary capacity and in each
saver’s best interest.
The Department recognizes that the
final rule will result in some advice
providers newly becoming investment
advice fiduciaries. However, under the
final rule, these providers would be
fiduciaries only to the extent they make
covered recommendations in contexts in
which retirement investors reasonably
expect that they can place their trust
and confidence in the recommendation.
As discussed above, the advice provider
will be aware, by its conduct, that it has
invited this trust and confidence.
Accordingly, the advice provider should
be able to adhere to the basic fiduciary
norms of care and loyalty that
correspond to such relationships of trust
and confidence. Further, in developing
the final rule and amended PTEs, the
Department has considered the
compliance burden on investment
advice fiduciaries and has taken care to
ensure that the compliance
obligations—which generally involve
adherence to fundamental obligations of
fair dealing—align with the conduct
standards adopted by the SEC and other
regulators. These regulators too have
moved to more protective standards in
recent years, so that the Department’s
actions are consistent with the broad
trend in the regulatory landscape. The
Department has also taken care to
ensure that to the extent that providers
had implemented compliance with PTE
2020–02 prior to its amendment, the
providers can build on that compliance
to implement the amended PTE,
without undue burden. Finally, the
Department notes that this rulemaking
follows more than 14 years in which the
Department has expressed concern that
the 1975 regulation no longer sensibly
defined an investment advice
fiduciary.260 In light of each of these
260 See e.g., Definition of the Term Fiduciary, 75
FR 65263, 65265 (Oct. 22, 2010) (‘‘The Department
does not believe [the 1975 regulation’s] approach to
fiduciary status is compelled by the statutory
language. Nor does the Department believe the
current framework represents the most effective
means of distinguishing persons who should be
held accountable as fiduciaries from those who
should not. For these reasons, the Department
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considerations, the Department does not
believe that these providers’ reliance
interests in the 1975 regulation and
current exemption structure, with the
associated lack of comprehensive
protections against conflicts of interest,
outweigh the interests of America’s
retirement investors.
Comment Period
After the rulemaking was proposed,
the Department received several
requests for an extension of the public
comment period beyond the original 60day public comment period.261 The
Department considered the requests and
decided not to extend the public
comment period for the reasons
explained in response to the requests.262
The Department also received several
comments that the comment period was
too short. In the first instance,
commenters said that a 60-day comment
period is insufficient for a rule of this
scope. Further, several commenters
expressed the view that the comment
period was effectively cut short because
it overlapped with year-end holidays
and because the Department held two
days of public hearings on the proposal
during the comment period.
The APA does not specify a minimum
number of days for a comment period,
believes it is appropriate to update the ‘investment
advice’ definition to better ensure that persons, in
fact, providing investment advice to plan
fiduciaries and/or plan participants and
beneficiaries are subject to ERISA’s standards of
fiduciary conduct.’’); see also Fall 2009 Regulatory
Agenda (‘‘This rulemaking is needed to bring the
definition of ‘fiduciary’ into line with investment
advice practices and to recast the current regulation
to better reflect relationships between investment
advisers and their employee benefit plan clients.
The current regulation may inappropriately limit
the types of investment advice relationships that
should give rise to fiduciary duties on the part of
the investment adviser,’’) https://www.reginfo.gov/
public/do/eAgendaViewRule?pubId=200910&RIN=
1210-AB32.
261 Although the proposal was officially
published in the Federal Register on November 3,
2023, the text of the proposal was announced and
released on October 31, 2023. Press Release, EBSA,
US Department Of Labor Announces Proposed Rule
to Protect Retirement Savers’ Interests by Updating
Definition of Investment Advice Fiduciary (Oct. 31,
2023), https://www.dol.gov/newsroom/releases/
ebsa/ebsa20231031. The Department first alerted
the public that this rulemaking was underway in
the Spring 2021 Unified Regulatory Agenda, nearly
three years ago. U.S. Dep’t of Lab., Unified
Regulatory Agenda, RIN: 1210–AC02 (last visited
Jan. 26, 2024), available at https://www.reginfo.gov/
public/do/eAgendaViewRule?pubId=202104&
RIN=1210-AC02.
262 Letter from Lisa M. Gomez, Assistant
Secretary, EBSA, to Lisa J. Bleier, SIFMA (Nov. 14,
2023) (on file with Department).The Department
noted that the Department did not agree that an
extension of the comment period was warranted in
light of the significant public engagement on the
topic of fiduciary investment advice since at least
2010, as well as the more recent informal
engagements with an array of stakeholders, among
other reasons. Id.
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though it must be long enough to afford
the public a meaningful opportunity to
comment.263 Ultimately, courts
recognize the broad discretion agencies
have in determining the reasonableness
of a comment period, and courts have
frequently upheld comment periods that
were significantly less than the 60-day
comment period here.264 Moreover,
holding hearings within the comment
period did not limit the opportunity to
comment; to the contrary, it provided
commenters a forum for exchanging
views and sharpening their own
understanding prior to submitting
comments. The record generated by the
public notice and comment process was
robust and reflected strong input from a
wide range of affected parties on a wide
range of issues. Based on its careful
review of that record, the Department is
confident that the process was full and
fair, the process served its important
goals, and the final rulemaking
benefitted from the thoughtful input of
the thousands of commenters, including
firms, investment professionals,
consumers, and others who participated
in the process.
Regulatory Impact Analysis
The Department received a comment
stating that it had failed to provide the
underlying documents on which the
regulatory impact analysis relied.
Specifically, the commenter noted that
the proposal’s regulatory impact
analysis cited a Department-sponsored
study by Panis and Padmanabhan (2023)
that had examined how investors timed
the purchase and sale of mutual funds
between 2007 and June 2023.265 Two
commenters noted that the study was
not publicly available at the time the
proposal was released.266 One such
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263 E.g.,
N. Carolina Growers’ Ass’n, Inc. v. United
Farm Workers, 702 F.3d 755, 770 (4th Cir. 2012)
(holding that there is no bright-line rule for the
number of days necessary for adequate notice);
Executive Orders 12866 and 13563 generally
instruct Federal agencies to provide 60 days of
public comment on a proposed rulemaking. See
E.O. 12866 § 6(a)(1); E.O. 13563 § 2(b).
264 E.g., Nat’l Lifeline Ass’n v. FCC, 921 F.3d 1102
(D.C. Cir. 2019) (endorsing 30 days for meaningful
review of ‘‘substantial rule changes’’ (citing Petry v.
Block, 737 F.2d 1193, 1201 (D.C. Cir. 1984)));
Connecticut Light & Power Co. v. Nuclear
Regulatory Comm’n, 673 F.2d 525, 534 (D.C. Cir.
1982) (upholding adequacy of 30-day comment
period); see North American Van Lines v. ICC, 666
F.2d 1087, 1092 (7th Cir. 1981) (upholding a 45-day
comment period); see also Mayor & City Council of
Baltimore v. Azar, 439 F. Supp. 3d 591, 610–11 (D.
Md. 2020) (upholding a 60-day comment period for
a proposal that was ‘‘complex or based on scientific
or technical data’’ (internal quotation marks
omitted)), aff’d sub nom. Mayor of Baltimore v.
Azar, 973 F.3d 258 (4th Cir. 2020).
265 88 FR 75890, 75943.
266 The proposal noted that the study was then an
‘‘unpublished draft.’’ 88 FR at 75943 fn.414
(citing Constantijn Panis Karthik Padmanabhan, Buy
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commenter requested a copy of the
study through a Freedom of Information
Act filing. On November 28, 2023, that
same commenter also requested a copy
of the study through a submission to the
Federal eRulemaking Portal. The
Department promptly provided a link to
the study the following day, November
29, 2023.
Another comment also noted that the
proposal discussed Form 5500 data for
2021, which was taken from the
Department’s Private Pension Plan
Bulletin: Abstract of 2021 Form 5500
Annual Reports (Bulletin)—a report that
was ‘‘forthcoming’’ at the time of the
proposal’s publication.267 That report
was made publicly available December
13, 2023. Because the Panis and
Padmanabhan (2023) study and updated
Bulletin were not made available until
the comment period was already
underway, one commenter believes this
hindered the commenter’s ability to
evaluate the proposal.
The Department understands the
requirement that an agency supply
technical studies and data relied upon
as part of a rulemaking, including in
particular ‘‘critical factual data’’ on
which a rulemaking relies.268 Here, the
Panis and Padmanabhan (2023) study is
discussed only briefly in the proposal
and was made available during the
comment period.269 The Department
concluded that the results of the study
were consistent with an interpretation
that Regulation Best Interest enhanced
the standard of conduct for brokerdealers.270 This conclusion is not
disputed by commenters. The
Department’s assessment that there
remains a gap in protections with
respect to ERISA-covered investments is
independent of this study. The Panis
and Padmanabhan (2023) study does not
represent critical factual data that are
central to this rulemaking.
The Department used data in the
updated Bulletin to estimate the number
of plans that would be affected by the
proposed amendments to the rule and
related PTEs.271 When this rule was first
proposed, the Bulletin was undergoing
Low, Sell High: The Ability of Investors to Time
Purchases and Sales of Mutual Funds, Intensity,
LLC. (August 14, 2023). Unpublished draft.).
267 88 FR at 75929 fn. 290, 75931 fn. 299.
268 E.g., Window Covering Mfrs. Ass’n v.
Consumer Prod. Safety Comm’n, 82 F.4th 1273,
1283 (D.C. Cir. 2023); Am. Radio Relay League, Inc.
v. F.C.C., 524 F.3d 227, 239 (D.C. Cir. 2008) (citation
omitted).
269 To access a copy of the study on EBSA’s
website, see https://www.dol.gov/sites/dolgov/files/
ebsa/researchers/analysis/retirement/buy-low-sellhigh-the-ability-of-investors-to-time-purchases-andsales-of-mutual-funds.pdf.
270 88 FR at 75943, 75943 fn. 414.
271 88 FR at 75929–31.
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internal departmental clearances for
publication. The Bulletin was
subsequently published online 272 on
December 13, 2023. One group said that
its assessment of the proposal was
‘‘hindered’’ due to the delayed release of
the Bulletin and the Panis and
Padmanabhan (2023) study. The data in
these documents supplements the
information in the rulemaking record,
and confirms the Department’s earlier
assessments.
The Bulletin summarizes Form 5500
data filed by private-sector retirement
plans for plan years ending in 2021. The
underlying data on which the Bulletin
relies were extracted from these
publicly available Form 5500 filings.
Therefore, while the Bulletin summaries
were not available at the time the
proposal was published, interested
parties had the underlying data
available to them and had the option to
perform independent analyses of the
relevant Form 5500 data.273 The
proposal details how the Department
arrived at its estimates of affected
entities, and the Bulletin analysis
expands on and confirms the
information in the proposal. The
commenter did not explain how the
release of the Bulletin summaries
hindered the commenter’s ability to
examine and provide comments on the
proposal, nor does the Department
believe that the public’s ability to
meaningfully engage with the proposal
was negatively affected by the timing of
the publications of the Panis and
Padmanabhan (2023) study and the
Bulletin. This supplemental information
confirms the Department’s prior
assessments, but does not change the
methodology.
L. Other Legal Issues 274
McCarran-Ferguson Act
A few commenters raised questions
about the role of the McCarran-Ferguson
272 To access a copy of the Bulletin on EBSA’s
website, see https://www.dol.gov/sites/dolgov/files/
ebsa/researchers/statistics/retirement-bulletins/
private-pension-plan-bulletins-abstract-2021.pdf.
273 The Department’s Form 5500 search tool
allows users to filter filings by plan year, for
example, and export the data to a Microsoft Excel
spreadsheet. This search tool is available at https://
www.efast.dol.gov/5500search/.
274 Some commenters raised questions about the
authority of Acting Secretary of Labor Julie A. Su.
The Department disagrees and notes that Acting
Secretary Su is serving lawfully in accordance with
both the Department’s organic statute and the
Federal Vacancies Reform Act of 1998. See 5 U.S.C.
3345(a)(1)–(3); 29 U.S.C. 552. The Department also
notes that the signatory for this rulemaking is
Assistant Secretary for Employee Benefits Security
Lisa M. Gomez, who is authorized to promulgate
this rule pursuant to a valid delegation of authority.
See Secretary’s Order 1–2011 § 4, 77 FR 1088 (Jan.
9, 2012).
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Act and the Department’s authority to
regulate insurance products. The
McCarran-Ferguson Act states that
Federal laws do not preempt State laws
to the extent they relate to or are
enacted for the purpose of regulating the
business of insurance; it does not,
however, prohibit Federal regulation of
insurance.275 Specifically, the Supreme
Court has made it clear that ‘‘the
McCarran-Ferguson Act does not
surrender regulation exclusively to the
States so as to preclude the application
of ERISA to an insurer’s actions.’’ 276
The Supreme Court further held that
‘‘ERISA leaves room for complementary
or dual federal or state regulation, and
calls for federal supremacy when the
two regimes cannot be harmonized or
accommodated.’’ 277 The Department
has designed the final rule and amended
PTEs to work with and complement
State insurance laws, not to invalidate,
impair, or preempt State insurance
laws.278
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Major Questions
The Department received several
comments regarding the Major
Questions Doctrine. One commenter
stated that the Doctrine did not apply
because the Department is closing
loopholes and making relatively minor
updates to existing exemptions. This
commenter pointed to the dramatic
changes in the retirement space since
ERISA’s enactment, stating that the
Major Questions Doctrine ‘‘does not
prevent agencies from addressing new
threats to the public interest that come
with such changes.’’ Other commenters
disagreed, characterizing the proposal as
an unprecedented and sudden change in
the Department’s regulatory scheme that
lacked firm footing in ERISA. Many of
those same commenters described the
proposal as enormously impactful both
economically and politically, and
275 See John Hancock Mut. Life Ins. Co. v. Harris
Trust & Sav. Bank, 510 U.S. 86, 97–101 (1993)
(holding that ‘‘ERISA leaves room for
complementary or dual federal or state regulation,
and calls for federal supremacy when the two
regimes cannot be harmonized or accommodated’’).
276 John Hancock, 510 U.S. at 98.
277 Id.
278 See BancOklahoma Mortg. Corp. v. Capital
Title Co., Inc., 194 F.3d 1089 (10th Cir. 1999)
(stating that McCarran-Ferguson Act bars the
application of a Federal statute only if (1) the
Federal statute does not specifically relate to the
business of insurance; (2) a State statute has been
enacted for the purpose of regulating the business
of insurance; and (3) the Federal statute would
invalidate, impair, or supersede the State statute);
Prescott Architects, Inc. v. Lexington Ins. Co., 638
F. Supp. 2d 1317 (N.D. Fla. 2009); see also U.S. v.
Rhode Island Insurers’ Insolvency Fund, 80 F.3d
616 (1st Cir. 1996). The Supreme Court has held
that to ‘‘impair’’ a State law is to hinder its
operation or ‘‘frustrate [a] goal of that law.’’
Humana Inc. V. Forsyth, 525 U.S. 299, 308 (1999).
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characterized it as a ‘‘novel’’ and
‘‘unprecedented’’ expansion of the
Department’s regulatory authority over a
substantial segment of the U.S.
economy. One commenter took specific
issue with the compliance costs of the
proposal as well as the proposal’s
impact on financial markets involving
trillions of dollars.
In certain ‘‘extraordinary cases . . .
the history and the breadth of the
authority that the agency has asserted,
and the economic and political
significance of that assertion,’’ has led
the Supreme Court to consider ‘‘whether
Congress in fact meant to confer the
power the agency has asserted.’’ 279 In
such cases, courts require a showing of
‘‘clear congressional authority’’ for the
regulatory activity at issue.280
As is the case here, the Major
Questions Doctrine does not apply
where the regulatory action is grounded
in neither an ancillary statutory
provision 281 nor in the sudden
‘‘discover[y] . . . [of] an unheralded
power.’’ 282 This final rule is rooted in
one of the most fundamental provisions
of ERISA upon which many of the
statute’s duties, protections, and
liabilities are conditioned—the statute’s
definition of a fiduciary. This final rule
builds on an extensive and continuous
history of Department-issued regulatory
and sub-regulatory guidance of
investment advice fiduciaries. Although
the Department first issued a regulation
defining investment advice in 1975, it
has continued to regulate in this space.
The Department has issued numerous
class PTEs regarding the provision of
investment advice (e.g., 75–1, 80–03,
81–8, 84–24, 86–128, 2020–02).
Additionally, the Department issued
Interpretive Bulletin 96–1, Advisory
Opinions 97–15A, 2001–09A, and 2005–
23A, Field Assistance Bulletins 2007–01
and 2018–02, and proposals to change
the regulatory definition in 2010, 2015,
and 2023. The Department’s regulation
of commission-earning insurance agents
and brokers bears an equally extensive
regulatory history, dating back to 1976
with the issuance of a proposal for what
would become PTE 77–9. The PTE was
issued in response to a class exemption
request submitted by pension
consultants and other interested parties,
including the ACLI and ICI.283 The
279 West Virginia v. EPA, 597 U.S. 697, 721
(2022).
280 Id. at 723.
281 W. Va., 597 U.S. at 725, 730; Whitman v. Am.
Trucking Ass’ns, Inc., 531 U.S. 457, 468 (2001).
282 Util. Air Regulatory Grp. v. Envtl. Prot.
Agency, 537 U.S. 302, 324 (2014).
283 PTE 77–9, 41 FR 56,760, 56,761 (Dec. 28,
1976) (known as ‘‘PTE 84–24’’ following the 1984
amendment).
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applicants also requested the
Department rule that ‘‘the normal sales
presentation and recommendations
made by an insurance agent or broker to
a plan or plan fiduciary will not be
considered to constitute the rendering of
investment advice for a fee so as to
classify such agent or broker as a
fiduciary,’’ 284 but this request was
notably absent from both the proposed
and final versions of PTE 77–9.285 This
regulatory history highlights the
Department’s unique experience and
expertise in matters involving employee
benefit plans and their fiduciaries and
the fact that the Department has the
‘‘great[est] familiarity with the everchanging facts and circumstances
surrounding [employee benefit plans
and their fiduciaries]’’ of any agency.286
In any event, even if the Major
Question Doctrine applied, Congress has
clearly and expressly granted the
Department the authority to issue the
current proposal. Title I of ERISA
delegates broad authority to the
Department to issue regulations defining
terms used in Title I and to establish
exemptions from prohibited
transactions.287 The Department was
granted the same regulatory authority
with respect to Title II plans, including
IRAs, by the President’s Reorganization
Plan No. 4 of 1978, as ratified by
Congress in 1984.288
First Amendment
One commenter posits that the
proposed amendments to the definition
of an investment advice fiduciary
amount to ‘‘content-based’’ and
‘‘viewpoint-based’’ regulation of speech
that would presumptively violate the
First Amendment to the U.S.
Constitution. This commenter believes
the new definition ‘‘would directly
regulate truthful sales speech by
insurance agents and broker-dealers by
prohibiting their recommendations
about retirement products unless the
rule’s onerous fiduciary requirements
are satisfied.’’ As a result, the
commenter claims that the Department
must show the rule both advances a
compelling government interest and is
narrowly tailored to achieve that
interest.
284 Id. Even here, the applicants noted that ‘‘even
if their requested ruling is issued, the consultative
or advisory services performed for plans by
insurance agents and brokers are such that in
particular cases the agent or broker would become
a plan fiduciary.’’
285 Id. at 56, 763–65.
286 See Food & Drug Admin. v. Brown &
Williamson Tobacco Corp., 529 U.S. 120, 132
(2000).
287 29 U.S.C. 1108(a), 1135.
288 Sec. 1, Public Law 98–532, 98 Stat. 2705 (Oct.
19, 1984).
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The rule applies to transactions, and
does not prohibit speech based on
content or viewpoint or in any capacity,
nor does it prohibit financial
professionals from recommending any
type of investment. Rather, the rule
imposes fiduciary duties on covered
parties when those parties are providing
covered investment advice to taxpreferred accounts. The rule works to
ensure that such advice is in the client’s
best interest, is not conflicted, and
accords with the reasonable
expectations of client-investors. In this
way, the rule regulates professional
conduct, rather than speech. Courts
have generally applied a deferential
standard of review to regulations of
professional conduct.289 The
Department is not aware of any cases in
which a court has held that requiring
that a fiduciary act in accordance with
fiduciary obligations would violate the
First Amendment. The rule does not
fundamentally implicate—much less
violate—the First Amendment. For
example, an adviser who did not receive
conflicted compensation (e.g., received
an hourly fee regardless of what was
recommended), would not be governed
by the rule in any way.
When the Federal Government (or a
State) regulates professional conduct in
a way that incidentally burdens speech,
the regulation does not violate the First
Amendment if the measure is
sufficiently drawn to protect a
substantial governmental interest.290
This rule directly advances the
Government’s substantial interest in
protecting retirement savers, and their
tax-preferred accounts, from conflicted
investment advice, the harms of which
are discussed throughout this preamble.
Moreover, the Department drafted this
rule to be responsive to the Fifth
Circuit’s decision in Chamber, which
emphasized relationships of trust and
confidence. In this way, and in contrast
to the 2016 Final Rule, this rule
provides that fiduciary status attaches
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.
Accordingly, this rule advances a
substantial governmental interest and is
sufficiently drawn to advance that
289 Nat’l Inst. of Fam. & Lifdvocs. v. Becerra, 138
S. Ct. 2361, 2372–73, 2377 (2018) [hereinafter
NIFLA] (citations omitted).
290 Cap. Associated Indus., Inc. v. Stein, 922 F.3d
198, 208–09 (4th Cir. 2019); see NIFLA, 138 S. Ct.
at 2375. In the case of a rule with an incidental
burden on speech, a deferential standard of review
applies. See id. at 2372.
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interest, and, as a result, does not
violate the First Amendment.
M. Regulatory Impact Analysis
This section analyzes the economic
impact of the final rule and
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
amendments to the PTEs elsewhere in
this issue of today’s Federal Register.
Collectively, the final rule and
amendments to the PTEs are referred to
as the ‘‘rulemaking’’ for this section for
ease of discussion.
The final rule and the amendments to
the PTEs are designed to work
independently and are each separate
regulatory actions. In order to consider
the full impact of the regulatory actions,
the costs, benefits, transfers and
alternatives to each aspect of this
rulemaking are discussed below.
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 and are increasingly
responsible for deciding how to invest
their retirement savings, professional
investment advice providers can play a
critical role in guiding their investment
decisions. Prudent professional
investment 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 if 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
Retirement Investors and detrimentally
impact consumers’ retirement savings
by eroding plan and IRA investment
results with excess fees and lower
performance.
This rule focuses on the provision of
fiduciary investment advice to ERISA
plans, participants, beneficiaries, IRAs,
IRA owners and beneficiaries, and plan
and IRA fiduciaries with authority or
control over the plans and IRAs, and
seeks to reduce or eliminate the impacts
of conflicts of interest on advice they
receive, as well as to ensure that trusted
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advisers adhere to a stringent
professional standard of care when
making investment recommendations.
The rule amends the definition of a
fiduciary so that investors can be
confident that the recommendations
they receive are made by advisers
relying on their professional judgment,
based on the investor’s individual
circumstances or needs, and made with
the expectation the investor will act on
that advice. This change in the
definition of a fiduciary will primarily
impact service providers to plans, those
recommending rollovers, and
independent insurance producers
recommending non-securities-based
annuities.
The amendments to PTE 2020–02
build on the existing conditions to
provide more certainty for Retirement
Investors receiving advice and clarity
for Financial Institutions and
Investment Professionals that are
complying with the exemption’s
conditions. The amendments expand
the scope of the exemption to cover
transactions involving ‘‘pure’’ roboadvice providers and recommendations
to buy or sell a product on a principal
basis. The amendments revise the
disclosure obligations to more closely
align with existing SEC disclosure
requirements. The amendments will
also provide more guidance for
Financial Institutions and Investment
Professionals complying with PTE
2020–02’s requirements related to
Financial Institutions’ policies and
procedures.
PTE 84–24 is also being amended to
provide relief for compensated
investment advice only for independent
insurance producers that recommend
annuities from multiple unaffiliated
insurance companies to Retirement
Investors, subject to conditions similar
to those in PTE 2020–02. Additionally,
PTEs 75–1 Parts III and IV, 77–4, 80–83,
83–1, and 86–128 are being amended to
eliminate relief for the receipt of
compensation 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—will generally be expected
to rely solely on the amended PTE
2020–02 for administrative exemptive
relief for covered investment advice
transactions. These amendments extend
the same or similar requirements for the
provision of advice to Retirement
Investors, regardless of the market and
investment product.
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The most significant benefits of the
rulemaking are expected to result from
(1) changing the definition of a fiduciary
by amending the 1975 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 duties of
care and loyalty in the market for nonsecurities-based annuities, to create a
uniform standard of trust and
confidence for investment advice across
different retirement products and
markets, and (4) requiring that more
rollover recommendations be in the
Retirement Investor’s best interest.
These amendments generally align
with the Advisers Act and the SEC’s
Regulation Best Interest. ERISA has a
functional fiduciary test 291 and imposes
fiduciary status only to the extent the
functional test is satisfied.292 The
Department intends for the compliance
obligations under this rulemaking to
broadly align with the standards set by
the SEC in Regulation Best Interest and
the Advisers Act where practicable and
has tried to accomplish such alignment
in this rulemaking. The Department
believes that by harmonizing the
application of fiduciary duty for
retirement investment advisers,
irrespective of the type of product they
recommend, Retirement Investors will
benefit from more uniform protections
from conflicted advice that ensures
prudent and loyal investment
recommendations from financial
advisers regardless of the type of
investment vehicle used. While
extending fiduciary duties to more
entities will generate costs, the
Department believes any new
compliance costs will not be unduly
burdensome, as the rulemaking broadly
aligns with those compliance
obligations imposed under the Advisers
Act and the SEC’s Regulation Best
Interest on investment advisers and
broker-dealers, respectively, and simply
expands these protections to additional
sectors of the retirement market.
The Department has examined the
effect of the rulemaking as required by
Executive Order 13563,293 Executive
Order 12866,294 the Regulatory
291 E.g., Perez v. Bruister, 823 F.3d 250, 259 (5th
Cir. 2016) (discussing ERISA’s ‘‘functional
fiduciary’’ test).
292 See Pegram v. Herdrich, 530 U.S. 211, 225–26
(2000) (explaining the ‘‘two hats’’ doctrine under
ERISA and how one may be a ‘‘fiduciary only ‘to
the extent’ that [the person] acts in such a capacity
in relation to a plan’’ (citing 29 U.S.C.
1002(21)(A))).
293 76 FR 3821 (Jan. 21, 2011).
294 58 FR 51735 (Oct. 4, 1993).
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Flexibility Act,295 section 202 of the
Unfunded Mandates Reform Act,296 and
Executive Order 13132.297
1. Executive Orders
Executive Orders 12866 (as amended
by 14094) 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 14094,298
entitled ‘‘Modernizing Regulatory
Review,’’ section 3(f) of Executive Order
12866 defines a ‘‘significant regulatory
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
rulemaking is significant within the
meaning of section 3(f)(1) of the
Executive Order. Therefore, the
Department has provided an assessment
of the rulemaking’s costs, benefits, and
transfers, and OMB has reviewed the
rulemaking. Pursuant to the
Congressional Review Act, OMB has
determined that the rule and amended
PTEs are ‘‘major rules,’’ as defined by 5
U.S.C. 804(2).
295 Public Law 96–354, 94 Stat. 1164 (Sept. 19,
1980).
296 Public Law 104–4, 109 Stat. 48 (Mar. 22,
1995).
297 64 FR 43255 (Aug. 9, 1999).
298 88 FR 21879 (Apr. 6, 2023).
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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
potentially imprudent advice and
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 amending
the definition of fiduciary and certain
exemption relief.
Why Being an ERISA Fiduciary Matters
As described above, fiduciaries under
ERISA are subject to specific
requirements. ERISA section 404
requires Title I 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 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 transaction rules
that forbid them from, among other
things, self-dealing.299 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.300
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 301 (2016 Regulatory Impact
299 ERISA section 406, 29 U.S.C. 1106; Code
section 4975(c), 26 U.S.C. 4975(c).
300 Lockheed Corp. v. Spink, 517 U.S. 882 (1996);
Commissioner v. Keystone Consol. Industries, Inc.,
508 U.S. 152 (1993).
301 Employee Benefits Security Administration
(EBSA), Regulating Advice Markets Definition of the
Term ‘‘Fiduciary’’ Conflicts of Interest—Retirement
Investment Advice Regulatory Impact Analysis for
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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;
• economic theory, which predicts
that when expert investment advice
providers have conflicts of interest, nonexpert investors will be harmed; and
• international experience with
harmful advisory conflicts and
responsive reforms.
The Department’s analysis found that
conflicted investment advice was
widespread and caused serious harm to
Retirement Investors, and that solely
disclosing conflicts would fail to
adequately mitigate the conflicts or
remedy the harm. While subsequent
market developments and changes to
the regulatory landscape have mitigated
some of this harm, the Department still
finds that Retirement Investors are
subject to conflicted investment advice
and that conflicted advice causes
Retirement Investors harm. Therefore,
extending fiduciary protections to more
types of advice will reduce advisory
conflicts and deliver substantial net
gains for Retirement Investors.
Some commenters criticized the
Department’s use of research and
reports pre-dating the passage of
Regulation Best Interest to justify the
need for this rulemaking and in
assessing its costs and benefits. The
Department is aware of the limitations
of using findings that precede the SEC’s
regulatory action to measure the impact
of this rulemaking, and requested data
measuring both the impact of Regulation
Best Interest on mitigating harm from
conflicted advice as well as how that
action may have impacted markets not
covered by the SEC’s Regulation. While
the Department relied on updated data
Final Rule and Exemptions, (Apr. 2016), https://
www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf.
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and research as much as possible, it also
utilizes earlier evidence that clearly
demonstrates that conflicted advice
causes harm and that, without a uniform
standard requiring that all advisers act
with both loyalty and prudence,
Retirement Investors will continue to be
subject to significant harm.
Also, while Regulation Best Interest
caused important changes to the
investment marketplace, Regulation
Best Interest, in tandem with the
Advisers Act, covers only a subset of the
investment products and Investment
Professionals covered by the
Department’s rulemaking. To a
considerable degree, this rulemaking
would extend the same important
protections provided by Regulation Best
Interest and the Advisers Act to the
wider range of advisory relationships
and transactions that ERISA covers, but
Regulation Best Interest and the
Advisers Act do not (e.g., non-security
recommendations, recommendations by
broker-dealers to persons other than
retail investors, such as plan fiduciaries,
and advice given by Investment
Professionals who are not broker-dealers
or registered investment advisers). A
large body of evidence, dating from
before and after 2016, supports a finding
that conflicted advice causes significant
injury to investors, and that the broader
and more uniform imposition of
ERISA’s fiduciary standards to such
relationships will result in improved
investor outcomes.
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.
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Since then, much of the responsibility
for investment decisions in
employment-based plans has shifted
from these large private pension fund
managers to plan participants and
beneficiaries, as well as IRA owners and
beneficiaries, many with low levels of
financial literacy.302 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 79 percent in 2021.303 By 2021,
94 percent of active participants in
defined contribution plans had
responsibility for directing the
investment of some or all of their
account balances.304 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 consulting
with 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 still receive significant
ERISA fiduciary oversight and
protections while participating in
certain employment-based plans—for
example, plan fiduciaries must ensure
that 401(k) plan lineups are prudently
constructed and that the assets of
defined benefit plans are managed in
full conformity with ERISA’s fiduciary
duties. However, workers who change
jobs or retire often roll over their
retirement savings to an IRA, where
they assume full responsibility for
investing the assets in the larger
marketplace without the protections
302 Indeed, the American College of Financial
Services announced in early 2024 the results of its
2023 Retirement Income Literacy Study, a
‘‘comprehensive survey of retirement income
literacy.’’ Press Release, Am. C. of Fin. Servs.,
Retirement Income Literacy Study (Feb. 14, 2024),
available at https://www.theamericancollege.edu/
knowledge-hub/press/study-finds-that-improvingfinancial-literacy-supports-retirement-wellness-andconfidence. According to the study, ‘‘older
Americans [age 50–75] lack actionable retirement
knowledge—averaging 31% [out of 100 percent] on
a retirement literacy quiz.’’ Id.
303 EBSA, Private Pension Plan Bulletin Historical
Tables and Graphs 1975–2021, Table E4, (Sept.
2023), https://www.dol.gov/sites/dolgov/files/ebsa/
researchers/statistics/retirement-bulletins/privatepension-plan-bulletin-historical-tables-andgraphs.pdf.
304 EBSA, Private Pension Plan Bulletin: Abstract
of 2021 Form 5500 Annual Reports, Table D5, (Sept.
2023), https://www.dol.gov/sites/dolgov/files/EBSA/
researchers/statistics/retirement-bulletins/privatepension-plan-bulletins-abstract-2021.pdf.
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that an employment-based plan could
offer. Not only is it very common for
defined contribution plan participants
to roll over their retirement savings into
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.305
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 third quarter of 2023, the order
had reversed: IRAs held $13.0 trillion in
assets, private defined contribution
plans held $8.4 trillion, and private
defined benefit plans held $3.7 trillion
in assets.306 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 2027.307
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 age 66—which in 2021
was 57 percent of new retired-worker
beneficiaries—receive reduced
benefits.308 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
2025.309
305 U.S. Bureau of Labor Statistics, National
Compensation Survey: Retirement Plan Provisions
For Private Industry Workers in the United States,
2022, Table 6, (Apr. 2023), https://www.bls.gov/ebs/
publications/retirement-plan-provisions-for-privateindustry-workers-2022.htm.
306 Board of Governors of the Federal Reserve
System, Financial Accounts of the United States:
Flow of Funds, Balance Sheets, and Integrated
Macroeconomic Accounts: Third Quarter 2023,
Tables L.117 & L.118, (Dec. 7, 2023), https://
www.federalreserve.gov/releases/z1/20231207/
z1.pdf. https://www.federalreserve.gov/
datadownload/Build.aspx?rel=z1.
307 Cerulli Associates, U.S. Retirement Markets
2022: The Role of Workplace Retirement Plans in
the War for Talent, Exhibit 8.06, (2023).
308 Cong. Res. Ser., The Social Security
Retirement Age (July 6, 2022), https://sgp.fas.org/
crs/misc/R44670.pdf.
309 Social Security Administration, Office of the
Chief Actuary, Replacement Rates for Hypothetical
Retired Workers, Actuarial Note, 2021.9, Tables B
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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 employmentbased pension plan sponsors and
investment managers and their
consulting advisers have been
supplanted by retail relationships
between consumers and the trusted
experts they turn to for help managing
their retirement 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 conditions for
fiduciary responsibility requiring,
among other things, that advice must be
on a ‘‘regular basis’’ and be ‘‘a primary
basis for investment decisions’’ to
confer fiduciary status. While advice
providers that meet all of these
conditions clearly occupy a position of
trust and confidence, and are
appropriately treated as fiduciaries
under ERISA, the 1975 rule’s technical
requirements often defeat legitimate
expectations of trust and confidence by
failing to treat advice providers as
fiduciaries, even though they hold
themselves out as providing
individualized and expert
recommendations on behalf of the
Retirement Investor and in the
Retirement Investor’s best interest.
Advice providers that are not ERISA
fiduciaries are not subject to its
stringent duties of prudence and loyalty,
leaving plans and plan participants
vulnerable to advice providers who may
engage in self-dealing transactions that
would otherwise be flatly prohibited by
ERISA and the Code. Moreover, the
Department has found that the 1975
regulation requirement that a ‘‘mutual
agreement, arrangement, or
understanding’’ that advice would serve
as ‘‘a primary basis for investment
decisions’’ had unwittingly encouraged
investment advisers, who presented
themselves to investors as making a
recommendation that considered an
individual’s personal circumstances and
was in their best interest, to use fine
print disclaimers stating that no such
agreement or understanding exists, as
potential means of avoiding ERISA
fiduciary status.
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
& D (Aug. 2021), https://www.ssa.gov/oact/NOTES/
ran9/an2021-9.pdf.
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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, if a plan participant
seeks advice on whether to roll over all
their retirement savings, representing a
lifetime of work, out of an ERISAcovered 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 or
who has regularly provided advice to
that investor on non-ERISA related
investments such as the purchase of
insurance products, 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
had not previously been rendered on a
‘‘regular basis’’ with respect to plan
assets under the 1975 rule, in the
absence of an expectation of ongoing
advice to the Title I Plan, the adviser
has no obligation under ERISA to
adhere to fiduciary standards in the
context of the rollover recommendation,
and thus would not be subject to
ERISA’s requirement to act solely in the
interests of the participant, allowing the
adviser to recommend an annuity that is
imprudent and ill-suited to the
participant’s circumstances, and favor
the adviser’s own financial interests at
the expense of the participant.310 This is
not a sensible way to draw distinctions
in fiduciary status, and finds no support
310 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
Carfora v. TIAA, 631 F. Supp. 3d 125, 138 (S.D.N.Y.
2022).
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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 311 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.’’ 312
Ultimately, however, that policy
interpretation was struck down as
inconsistent with the text of the 1975
rule.313 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.’’ 314 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.’’ 315 As a result, the first instance
311 EBSA, New Fiduciary Advice Exemption: PTE
2020–02 Improving Investment Advice for Workers
& Retirees Frequently Asked Questions, (April
2021), https://www.dol.gov/agencies/ebsa/aboutebsa/our-activities/resource-center/faqs/newfiduciary-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 instance 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,
No. 3:22–CV–00243–K–BT, 2023 WL 5682411, at
*18, (N.D. Tex. June 30, 2023) (‘‘First-time advice
may be sufficient to confer fiduciary status and is
consistent with ERISA.’’) (emphasis added).
312 EBSA, New Fiduciary Advice Exemption: PTE
2020–02 Improving Investment Advice for Workers
& Retirees Frequently Asked Questions, (April
2021), https://www.dol.gov/agencies/ebsa/aboutebsa/our-activities/resource-center/faqs/newfiduciary-advice-exemption.
313 Am. Sec. Ass’n v. U.S. Dep’t of Lab., No. 8:22–
CV–330VMC–CPT, 2023 WL 1967573, at *14–*19
(M.D. Fla. Feb. 13, 2023).
314 Id. at *16.
315 Id. at *17; id. (‘‘Because assets cease to be
assets of an ERISA plan after the rollover is
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of advice with respect to the assets that
were rolled over will not be treated as
fiduciary advice, no matter how
important the recommendation (e.g., to
expend a lifetime of savings on a single
annuity), even though the professional
had previously made recommendations
about plan assets and planned to
continue making recommendations after
the rollover. Based on the court’s ruling,
the Department sought to remedy the
shortcomings of the ‘‘regular basis’’ test,
which has no basis in the statutory text
of ERISA, 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, for the
population age 50 and older and nearing
retirement, many ‘‘fail to grasp essential
aspects of risk diversification, asset
valuation, portfolio choice, and
investment fees.’’ 316 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.317
Retirement Investors face increasingly
complex investment options that vary
widely with respect to return potential,
risk characteristics, liquidity, degree of
diversification, contractual guarantees
and/or restrictions, degree of
transparency, regulatory oversight, and
available consumer protections. As a
result, Retirement Investors often rely
on professional investment advice.
While, theoretically, individuals know
more about their personal assets and
risk preferences than an adviser,
Schwarcz and Siegelman argue in the
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).
316 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, (Oct. 2014).
317 Mark Egan, Gregor Matvos, & Amit Seru, The
Market for Financial Adviser Misconduct, 127(1)
Journal of Political Economy, (2019).
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insurance context that agents are much
better situated than consumers to
appreciate the implications of these
facts and that the ability to process such
information requires training and
experience.318 Due to high information
costs, Retirement Investors are in a poor
position to assess the quality of the
advice they receive while the advisers’
incentives are often misaligned with the
investors’ interests.319 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 regulatory
impact analysis 320 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.321 A
subsequent 2018 FINRA study of nonretired individuals age 25–65 found that
those investors who only had retirement
accounts through their employment
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.322 In
318 Daniel Schwarcz and Peter Siegelman,
Insurance Agents in the 21st Century: The Problem
of Biased Advice, in D. Schwarcz & P. Siegelman
(Eds.), Handbook on the Economics of Insurance
Law (pp. 36–70). (Edward Elgar), https://doi.org/
10.4337/9781782547143.
319 Mark Egan, Brokers vs. Retail Investors:
Conflicting Interests and Dominated Products, 74(3)
Journal of Finance 1217–1260, (June 2019).
320 2016 RIA in this document refers to EBSA,
Regulating Advice Markets Definition of the Term
‘‘Fiduciary’’ Conflicts of Interest—Retirement
Investment Advice Regulatory Impact Analysis for
Final Rule and Exemptions, (Apr. 2016), https://
www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/completedrulemaking/1210-AB32-2/ria.pdf.
321 EBSA, 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/rulesand-regulations/completed-rulemaking/1210-AB322/ria.pdf.
322 Jill E. Fisch, Andrea Hasler, Annamaria
Lusardi, & Gary Mottolo, New Evidence on the
Financial Knowledge and Characteristics of
Investors (Oct. 2019), https://gflec.org/wp-content/
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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
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.323 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.’’ 324 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.325
If investors are unable to distinguish
between types of advice providers, 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.326 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
uploads/2019/10/FINRA_GFLEC_Investor_
FinancialIlliteracy_Report_FINAL.pdf?x20348.
323 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).
324 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, (Oct. 2008), https://www.sec.gov/
news/press/2008/2008-1_randiabdreport.pdf.
325 Brian Scholl, & Angela A. Hung, The Retail
Market for Investment Advice (Oct. 2018), https://
bit.ly/3hGGNj4.
326 EBSA, 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.
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their relationship with the firm and its
financial professionals in plain
language.327 Although it does not apply
to all of the products that a Retirement
Investor might purchase, 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 securities laws.328
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.329 The 2016 regulatory
impact analysis cited research that
advisers may inflate the bias in their
advice to counteract any discounting
that might occur because of the
disclosure of conflicts.330 It further cited
evidence that advice from providers
often encouraged investors’ cognitive
biases, such as return chasing, rather
than correcting such biases; 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.331
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.332 Investors who are unable to
discern when they are receiving bad
327 SEC, Form CRS Relationship Summary:
Amendments to Form ADV, (September 19, 2019).
https://www.sec.gov/info/smallbus/secg/form-crsrelationship-summary
328 Form CRS Relationship Summary;
Amendments to Form ADV, 84 FR 33492 (July 12,
2019).
329 William Rogerson, Reputation and Product
Quality, 14(2) The Bell Journal of Economics 508–
516 (1983).
330 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).
331 EBSA, 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 (Apr. 2016), https://www.dol.gov/sites/dolgov/
files/EBSA/laws-and-regulations/rules-andregulations/completed-rulemaking/1210-AB32-2/
ria.pdf.
332 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).
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32181
advice are at greater risk of being
persuaded to make decisions that are
not in their best interest.
The complexity of evaluating
investment results to assess the quality
of advice received is difficult for most
Retirement Investors. Multiple studies
have found that many individuals,
across a variety of demographic groups,
are not able to correctly answer
questions about even the most basic
principles of finance.333 334 335
Furthermore, even if investors can
determine whether investment returns
are favorable, this is not tantamount to
determining whether an adviser
provides consistently sound investment
advice.336 Investment returns are noisy,
and even several years of experience
cannot reveal with high confidence
whether the performance difference
between an adviser’s recommendations
and a benchmark are due to chance or
skill, unless the difference is substantial
and persistent.337
Overall, the evidence demonstrates
that the combination of inexpert
customers and conflicted advisers
results in investment underperformance
compounded over time and negative
outcomes for Retirement Investors. A
substantial body of research showed
that prior to 2016, IRA holders receiving
conflicted investment advice could
expect their investments to
underperform by approximately 50 to
100 basis points per year.338
Compounded over a 10 to 20 year
investment period could mean that a
retiree spending their savings down
over 30 years would have 6 to 12
333 Lusardi, Annamaria, Olivia Mitchell, and
Vilsa Curto. Financial Literacy and Financial
Sophistication among Older Americans. NBER
Working Paper 15469, 2009.
334 Lusardi, Annamaria, and Olivia Mitchell.
‘‘Financial Literacy and Retirement Planning in the
United States.’’ Journal of Pension Economics and
Finance 10, no. 4 (2011): 509–525.
335 Lusardi, Annamaria, and Olivia S. Mitchell.
Financial Literacy: Evidence and Implications for
Financial Education. Dartmouth College and
University of Pennsylvania, 2009.
336 EBSA, Regulating Advice Markets Definition
of the Term ‘‘Fiduciary’’ Conflicts of Interest—
Retirement Investment Advice Regulatory Impact
Analysis for Final Rule and Exemptions, pp. 136–
140 (Apr. 2016), https://www.dol.gov/sites/dolgov/
files/EBSA/laws-and-regulations/rules-andregulations/completed-rulemaking/1210-AB32-2/
ria.pdf.
337 EBSA, Regulating Advice Markets Definition
of the Term ‘‘Fiduciary’’ Conflicts of Interest—
Retirement Investment Advice Regulatory Impact
Analysis for Final Rule and Exemptions, pp. 136–
140 (Apr. 2016), https://www.dol.gov/sites/dolgov/
files/EBSA/laws-and-regulations/rules-andregulations/completed-rulemaking/1210-AB32-2/
ria.pdf.
338 Council of Economic Advisers, 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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percent less to spend.339 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.340
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Pervasiveness of Conflicts of Interest in
Investment Advice
Since the Department finalized the
current rule in 1975, 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.
Moreover, the existence of safeguards in
only certain markets, such as those
regulated by the SEC’s Regulation Best
Interest or the Advisers Act, creates
incentives for agents to recommend
conflicted products in less regulated
markets.341
While the relative newness of
Regulation Best Interest makes it
challenging to measure its impact on the
quality of advice in other markets, there
is research demonstrating similar
impacts from other policies addressing
financial conflicts of interest or
misconduct that varied across markets.
Consistent with the previous version of
their paper cited in the proposal,
Bhattacharya et al. (2024) found that
higher fiduciary standards lead to the
sale of higher quality annuity products,
identified as products with higher risk339 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 2percentage point figure illustrates a scenario for an
individual where the impact of conflicts of interest
is more severe than average. See EBSA, Regulating
Advice Markets Definition of the Term ‘‘Fiduciary’’
Conflicts of Interest—Retirement Investment Advice
Regulatory Impact Analysis for Final Rule and
Exemptions, p. 4 (Apr. 2016), https://www.dol.gov/
sites/dolgov/files/EBSA/laws-and-regulations/rulesand-regulations/completed-rulemaking/1210-AB322/ria.pdf.
340 Council of Economic Advisers, The Effects of
Conflicted Investment Advice on Retirement
Savings (2015), https://obamawhitehouse.
archives.gov/sites/default/files/docs/cea_coi_
report_final.pdf.
341 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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adjusted returns.342 Honigsberg et al.
(2022) showed that variation in
regulatory oversight regimes leads to a
situation where the worst financial
advisers, with a history of serious
misconduct, operate in the most lightly
regulated regimes.343 Blanchett and
Fichtner (2023) found that among
households with higher levels of
financial wealth, those that worked with
commission-based financial advisers
(i.e., broker-dealers) claimed Social
Security benefits two years earlier than
those working with advisers paid
hourly. This raises concerns that
commission-based advisers were not
acting in their clients’ best-interest, as
claiming Social Security earlier is
generally inconsistent with the interests
of higher income households who have
more discretion on when they claim
Social Security, and delaying claiming
is associated with improved retirementincome outcomes.344 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.345 This rulemaking will impose
the impartial conduct standards on
trusted advice pertaining to ERISAcovered investments, regardless of the
market, thereby extending the
protections associated with fiduciary
status under ERISA and ensure the
security of retirement benefits of
America’s workers and their families.
Conflicts of Interest After the SEC’s
Regulation Best Interest
Under the Advisers Act, the SEC
imposes a fiduciary duty on investment
advisers, requiring them to act in a
client’s best interest. In 2019, with
Regulation Best Interest, the SEC
extended a ‘‘best interest’’ standard of
conduct for broker-dealers and
342 Vivek Bhattacharya, Gaston Illanes, & Manisha
Padi, Fiduciary Duty and the Market for Financial
Advice, Working Paper, (February 27, 2024),
https://www.dropbox.com/scl/fi/gj5skfflsip2
nhee1662c/Draft.pdf?rlkey=msd12c734n8
ddrct8uzqg0qut&dl=0. This is an updated version of
the working paper cited in the proposal. (See Vivek
Bhattacharya, Gaston Illanes, & Manisha Padi,
Fiduciary Duty and the Market for Financial
Advice, Working Paper, (May 20, 2020), https://
www.nber.org/papers/w25861.)
343 Colleen Honigsberg, Edwin Hu, & Robert J.
Jackson, Jr., 74 Regulatory Arbitrage and the
Persistence of Financial Misconduct, Stanford Law
Review 797, (2022).
344 David Blanchett and Jason Fichtner. Biased
Advice? The Relationship between Financial
Professionals’ Compensation and Social Security
Benefit Claiming Decisions, 12(1) Retirement
Management Journal (December 2023)
345 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.
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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.346 In the Regulation Best
Interest Release, the SEC stated that
‘‘[t]he Commission has crafted
Regulation Best Interest to draw on key
principles underlying fiduciary
obligations, including those that apply
to investment advisers under the
Advisers Act, while providing specific
requirements to address certain aspects
of the relationships between brokerdealers and their retail customers.’’ 347
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.’’ 348
The SEC also noted that the standard
of conduct established by Regulation
Best Interest cannot be satisfied through
disclosure alone.349 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.’’ 350 In guidance on
conflicts of interest applicable to both
broker-dealers and investment advisers,
the SEC staff stated,
All broker-dealers, investment advisers,
and financial professionals have at least some
conflicts of interest with their retail
investors. Specifically, they have an
economic incentive to recommend products,
services, or account types that provide more
revenue or other benefits for the firm or its
financial professionals, even if such
recommendations or advice are not in the
best interest of the retail investor. . . .
Consistent with their obligation to act in a
retail investor’s best interest, firms must
address conflicts in a way that will prevent
the firm or its financial professionals from
providing recommendations or advice that
places their interests ahead of the interests of
the retail investor.351
The SEC Investment Adviser
Interpretation, published simultaneously
with
346 See
17 CFR 240.15l–1.
FR 33318, 33320 (July 12, 2019).
348 Id. at 33321.
349 Id. at 33318.
350 17 CFR 240.15l–1(b)(3).
351 Staff Bulletin: Standards of Conduct for
Broker-Dealers and Investment Advisers Conflict of
Interest, https://www.sec.gov/tm/iabd-staff-bulletinconflicts-interest.
347 84
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Regulation Best Interest, reaffirmed
and in some cases clarified aspects of
the fiduciary duty of an investment
adviser under the Advisers Act.352 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.’’ 353
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.’’ 354 The
fiduciary duty under the Federal
securities laws requires an adviser ‘‘to
adopt the principal’s goals, objectives,
or ends.’’ 355
The SEC stated:
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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.356
While the standards of care imposed
under the Advisers Act and Regulation
Best Interest overlap with ERISA’s
fiduciary standard, the SEC’s
jurisdiction does not cover all
transactions that are covered under
ERISA. Specifically, Regulation Best
Interest does not cover advice to nonretail investors, and the SEC’s authority
under Regulation Best Interest and the
Advisers Act is tied to the regulation of
securities. 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 do not apply
more broadly. For example, Congress
prohibited transactions (absent an
exemption) that were determined to
raise significant risk to retirement plan
participants and beneficiaries.
Regulation Best Interest shares the
same goal as the Department’s own
rulemaking, in seeking to ensure
investors are receiving investment
advice in their best interest. Further,
Regulation Best Interest expands
protections in some of the same markets
that are a concern of this rulemaking.
After Regulation Best Interest’s
adoption, the North American Securities
Administrators Association’s (NASAA)
Broker-Dealer Section Committee
concluded a review of over 200
examinations evaluating broker-dealers’
352 84
FR 33669 (July 12, 2019).
at 33671 (footnote omitted).
354 Id. at 33670.
355 Id. at 33671.
356 Id. (footnote omitted).
353 Id.
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compliance of Regulation Best Interest
by State Examiners in 25 States.357 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
alternatives.358
Moreover, the majority of the firms
did not cease (94 percent) or restrict (76
percent) sales of any products following
Regulation Best Interest. Only 2 percent
or less of firms ceased the sale of
options, non-traded real-estate
investment trusts (REITs), highlyleveraged products, private securities,
cryptocurrency or other digital assets,
Special-purpose Acquisition Companies
(SPACs), leveraged or inverse ETFs/
ETNs, and penny stocks or other thinlytraded securities.359 The report noted,
however, that firms still struggled with
considering reasonably available
alternatives and conflict mitigation;
ignoring lower cost and less risky
products when recommending complex,
costly and risky products and relying on
financial incentives to sell them; and
that firms have not enhanced point of
sale disclosures.360
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
deficiencies with respect to Regulation
Best Interest’s Disclosure, Care, Conflict
of Interest, and Compliance
Obligations.361 FINRA has identified
similar deficiencies in its Report on
357 North American Securities Administrators’
Association, Report and Findings of NASAA’s
Broker-Dealer Section Committee: National
Examination Initiative Phase II (A), (November
2021), https://www.nasaa.org/wp-content/uploads/
2021/11/NASAA-Reg-BI-Phase-II-A-ReportNovember-2021_FINAL.pdf?_hsenc=p2ANqtz8omG4E39GJ9JKayUxU4AB8lSU7LF_fvSNO6y
Co9KraMk81h65TjgkywccFhKf2QJUpgyaoj1iNEfMJb-l-2CDTG-fTw; and North American Securities
Administrators’ Association, Report and Findings of
NASAA’s Broker-Dealer Section Committee:
National Examination Initiative Phase II (B) (Sept.
2023) https://www.nasaa.org/wp-content/uploads/
2023/08/Reg-BI-Phase-II-B-Report-Formatted8.29.23.pdf.
358 Ibid.
359 Ibid.
360 Ibid.
361 SEC, Risk Alert: Observations from BrokerDealer Examinations Related to Regulation Best
Interest, (Jan. 30, 2023), https://www.sec.gov/file/
exams-reg-bi-alert-13023.pdf.
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32183
Examination and Risk Monitoring
Program.362 At the same time, the SEC’s
Division of Examination notes that, in
response to deficiency letters
identifying these issues, many brokerdealers modified their practices,
policies and procedures.363 In addition,
the SEC staff released additional
guidance in April 2023 focused on
broker-dealers’ and investment advisers’
obligations with respect to their care
and conflicts of interests obligations, in
addition to account
recommendations.364
The SEC staff announced in January
2023 that it intends to incorporate
compliance with Regulation Best
Interest into retail-focused examinations
of broker-dealers 365 and both the SEC
and FINRA have begun enforcement
actions related to Regulation Best
Interest.366 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 367 and in February
2024, the SEC reached a settlement of
over $2.2 million with TIAA–CREF for
failing to comply with Regulation Best
Interest in connection with
362 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.
363 SEC, Risk Alert: Observations from BrokerDealer Examinations Related to Regulation Best
Interest, (Jan. 30, 2023), https://www.sec.gov/file/
exams-reg-bi-alert-13023.pdf.
364 SEC, 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-andinvestment-advisers; SEC, 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; SEC, 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-conflictsinterest; 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.
365 SEC, Risk Alert: Observations from BrokerDealer Examinations Related to Regulation Best
Interest, p. 1, (Jan. 30, 2023), https://www.sec.gov/
file/exams-reg-bi-alert-13023.pdf.
366 See SEC, Press Release: SEC Charges BrokerDealer 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.
367 SEC, 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.
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recommendations to retail customers to
open a TIAA IRA.368 Meanwhile, FINRA
levied its first Regulation Best Interestrelated fine in October 2022 and
suspended two New York-based brokers
in February 2023.369
Conflicts of Interest in Advice Given to
Plan Fiduciaries
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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.370 In 2005, the SEC staff
found evidence that some pension
consultants do not adequately disclose
their conflicts and steer plan fiduciaries
to hire money managers based partly on
the consultants’ own financial
interests.371 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.372 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.373 This confusion leaves
368 Securities and Exchange Commission, Press
Release: SEC Charges TIAA Subsidiary for Failing
to Act in the Best Interest of Retail Customers,
(February 16, 2024), https://www.sec.gov/news/
press-release/2024-22.
369 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/.
370 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).
371 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.
372 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.
373 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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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
of assets rolled over to IRAs is large and
expected to increase substantially.374 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.375
The decision to roll over one’s
retirement savings from an ERISAcovered employment-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 employment-sponsored
retirement plans and of those
households, 85 percent indicated they
had rolled over their entire account
balance in their most recent rollover.376
In 2020, more than 95 percent of the
dollars flowing into IRAs came from
rollovers, while the rest came from
regular contributions.377
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
374 IRS, 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).
375 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.
376 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.
377 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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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, and
there is no expectation of ongoing
advice to the original retirement plan,
then the advice provider has no
fiduciary obligation under ERISA to
honor the worker’s best interest unless
this recommendation is part of a
preexisting ‘‘ongoing’’ advice
relationship with respect to plan assets.
Moreover, if the advice provider makes
the recommendation for the first time
after the participant rolled the money
out of the plan, and before they have
received advice on specific investments
in the IRA from the provider, the
recommendation to invest all the assets
in an annuity would not be treated as
fiduciary advice, even if the adviser had
regularly made recommendations to the
participant for years about investments
in the ERISA-covered plan or about
other non-IRA investments. The
resulting compensation represents a
significant revenue source for
investment advice providers.
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 under the 1975 rule
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.378 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
378 For more information on the different
regulatory regimes, refer to the Regulatory Baseline
section in this analysis.
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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, generally fall outside
its scope. This may be particularly
confusing and, similar to retail
individuals as described above, raise
risks for small plan fiduciaries that lack
investment expertise.
• Securities laws (i.e., the Advisers
Act and Regulation Best Interest) may
not apply to advice on investments such
as real estate, fixed indexed annuities,
commodities, certain 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.
• The NAIC Model Regulation, which
sets standards and procedures for
recommending annuity products, has
been adopted in most, but not all,
States. Some States made substantive
changes to the NAIC Model Regulation
when adopting it, to ensure more robust
protections, while other States adopted
it in its entirety, including carve-outs
that the regulation established for cash
and non-cash compensation from best
interest protections.
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
one-third continued providing financial
advice under a different regulatory
regime, and eight percent of those had
a history of serious misconduct while
registered with FINRA. This share
increased to 12 percent when compared
to those that were still providing
financial advice as an insurance
producer registered with the NAIC and
13 percent when compared to the
National Futures Association members
providing advice regarding derivatives.
The authors argued that the existing
framework for regulating adviser
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misconduct creates incentives for the
worst advisers to migrate to more poorly
regulated State regimes.379
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.380 However, as
discussed above, generally only
annuities that are considered securities
are under the jurisdiction of the SEC
and these comprised just 26 percent of
retail annuity sales in 2023.381 The
remaining annuities are covered by
State regulations that generally hold
those selling such insurance products to
a lower standard. In crafting this
rulemaking, 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 plan
or account covered by ERISA Title I or
Title II, however, the Title I and Title II
ERISA protections apply regardless of
the type of investment product. This
range of investment products held in
these plans and accounts means that the
regulatory definition of an investment
advice fiduciary for purposes of Title I
and Title II of ERISA 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 nonsecurities annuities subject to regulation
by State insurance departments, creates
problematic incentives for financial
professionals to recommend certain
products.
Under the Advisers Act and
Regulation Best Interest, investment
advisers and broker-dealers must have a
379 Colleen Honigsberg, Edwin Hu, & Robert J.
Jackson, Jr., 74 Regulatory Arbitrage and the
Persistence of Financial Misconduct, Stanford Law
Review 797, (2022).
380 Cerulli Associates, U.S. Annuity Markets 2021:
Acclimating to Industry Trends and Changing
Demand, Exhibit 1.06, The Cerulli Report, (2022).
381 LIMRA, U.S. Annuity Sales Post Another
Record Year in 2023, (January 24, 2024), https://
www.limra.com/en/newsroom/news-releases/2024/
limra-u.s.-annuity-sales-post-another-record-yearin-2023/.
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32185
reasonable basis to believe both the
rollover itself and the account being
recommended are in the retail investor’s
best interest.382 SEC staff guidance
recognizes that it would be difficult for
an investment adviser or broker-dealer
to have such a reasonable basis if it does
‘‘not consider the alternative of leaving
the retail investor’s investments in their
employer’s plan, where that is an
option.’’ 383 Moreover, broker-dealers
and investment advisers generally
should consider certain factors when
making rollover recommendations to
retail investors, specifically and without
limitation, including ‘‘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.’’ 384 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, which is the basis for much
of the State regulation on insurers,385
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 $112,000,386
382 The SEC 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 SEC viewed as ‘‘an
inherent aspect of making a ‘best interest’
recommendation.’’ See Regulation Best Interest
Adopting Release, 84 FR 33318, 33381. Investment
advisers have fiduciary obligations with respect to
rollover recommendations: ‘‘An adviser’s fiduciary
duty applies to all investment advice the
investment adviser provides to clients, including
advice about investment strategy, engaging a subadviser, and account type. Advice about account
type includes advice about whether to open or
invest through a certain type of account (e.g., a
commission-based brokerage account or a fee-based
advisory account) and advice about whether to roll
over assets from one account (e.g., a retirement
account) into a new or existing account that the
adviser or an affiliate of the adviser manages.’’ See
2019 Fiduciary Interpretation, 84 FR 33674.
383 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.
384 Ibid; see Regulation Best Interest Adopting
Release, 84 FR 33318, 33383.
385 For more information, refer to the discussion
in the Regulatory Baseline section on state
legislation and regulation.
386 Matched file of Forms 1040, 1099–R, and 5498
for Tax Year 2019. IRS, Statistics of Income
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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.
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 Final Rule Addresses the Need
for Regulatory Action
The amendments to the 1975 rule
contained in this final rule will better
reflect the text and purposes of ERISA
and address inadequacies that the
Department has observed during its
decades of experience in implementing
the 1975 rule. These amendments will
honor the broad statutory definition of
fiduciary in ERISA by amending the
five-part test to create a uniformly
protective fiduciary standard for
Retirement Investors, subject to firmlevel oversight, designed to mitigate and
eliminate the harmful effects of biased
advice. The amendments to the 1975
rule and related exemptions will 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 a lower
care standard than financial
professionals subject to the Advisers
Act, the SEC’s Regulation Best Interest
or the Department’s fiduciary standard.
In contrast, the amended rule will
broadly align the standard of care
required of all financial professionals
giving retirement investment advice
with Retirement Investors’ reasonable
Division, Individual Retirement Arrangements
Study, February 2022.
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expectations that those
recommendations are trustworthy. This
will 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 the
amended PTE 2020–02 and PTE 84–24,
protects investors from getting
investment recommendations that are
improperly biased because of an
adviser’s competing financial interests.
The fiduciary standard 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 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 final rule and amended 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,387 but there is
nearly universal agreement among
Americans who have worked with a
financial professional that those
professionals providing advice about
retirement investments should be
required to act in their client’s best
interest.388 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 brokerdealers and investment advisers alike to
act in their best interest when giving
387 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.
388 CFP Board. ‘‘Retirement Investor Expectations
form Financial Advisors Survey,’’ (Mar. 2024).
https://www.cfp.net/-/media/files/cfp-board/
knowledge/reports-and-research/cfp-retirementinvestor-expectations-from-financial-advisorssurvey.pdf?la=en&hash=D191BA975D8D4D9E
03B5A02CAF029619.
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advice and making
recommendation.’’ 389
Accordingly, when the SEC adopted
Regulation Best Interest, it imposed a
common standard based on fiduciary
principles of care and loyalty that are
applicable to broker-dealers and
registered investment advisers alike. As
noted in recent SEC Staff Bulletins on
Regulation Best Interest, ‘‘[b]oth
[Regulation Best Interest] for brokerdealers and the [Advisers Act] fiduciary
standards for investment advisers are
drawn from key fiduciary principles
that include an obligation to act in a
retail investor’s best interest and not to
place their own interests ahead of the
investor’s interest.’’ 390 These standards
of conduct are aligned with the
Department’s rulemaking, and as SEC
staff has noted, ‘‘[a]lthough the specific
application of [Regulation Best Interest]
and the [Advisers Act] fiduciary
standard may differ in some respect and
be triggered at different times, in the
staff’s view, they generally yield
substantially similar results in terms of
the ultimate responsibilities owed to
retail investors.’’ 391
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
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
389 SEC. ‘‘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.
390 See SEC, SEC Staff Bulletin: Standards of
Conduct for Broker Dealers and Investment
Advisers Care Obligations, (2023), https://
www.sec.gov/tm/standards-conduct-broker-dealersand-investment-advisers. and SEC, SEC Staff
Bulletin: Standards of Conduct for Broker Dealers
and Investment Advisers Conflicts of Interest,
(2023), https://www.sec.gov/tm/iabd-staff-bulletinconflicts-interest.
391 See generally SEC, Staff Bulletin: Standards of
Conduct for Broker Dealers and Investment
Advisers Care Obligations, (2023), https://
www.sec.gov/tm/standards-conduct-broker-dealersand-investment-advisers.
As a practical matter, the most significant
difference between the standards between advisers
subject to the Advisers Act fiduciary standard and
broker-dealers subject to Regulation Best Interest is
that advisers generally have a baseline obligation to
monitor their clients’ accounts on an ongoing basis.
In this respect, ERISA’s fiduciary obligations are
closer to the standards applicable to broker-dealers
because, under ERISA’s functional test of fiduciary
status, a person is a fiduciary only ‘‘to the extent’’
they give the requisite advice, and there is no
baseline obligation to act as a fiduciary adviser on
an ongoing basis. Instead, the determination of
fiduciary status under the definition set forth in
ERISA Section 3(21)(a)(ii) is transactional.
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exacerbated by different regulatory
regimes referencing a ‘‘best interest
standard’’ while defining what that
means and the protections that entails
differently.
The amendments to PTEs 2020–02
and 84–24 will enhance disclosures of
conflicts of interest, while utilizing
existing disclosure requirements from
the SEC and State insurance
commissions in order to mitigate
burden. Nevertheless, the Department
stresses that disclosure alone is limited
in its effectiveness at protecting
investors from the dangers posed by
conflicts of interest. 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 the
disclosure puts the investor on notice of
the conflict, the inexpert investor
remains dependent on the expert’s
advice and may in fact interpret the
disclosure as a sign of honesty, rather
than a warning that the advice they’re
receiving may be influenced by their
adviser’s self-interest.392 By mitigating
or removing conflicts, requiring the
adviser to adhere to a strong conduct
standard, and requiring the adviser to
establish a mechanism for overseeing
and enforcing compliance, the
rulemaking creates a strong
infrastructure for compliance addressing
the problems posed by conflicted and
imprudent advice.
The growing body of evidence
underscores that best interest fiduciary
standards play an important role in
protecting Retirement Investors.393 One
of the Department’s objectives in issuing
this rulemaking is to abate these and
similar harms in areas outside of the
SEC’s jurisdiction, to ensure that
Retirement Investors’ assets outside the
securities space are also protected from
conflicted advice. This rulemaking will
extend the fiduciary best interest
standard to additional individuals,
firms, markets, and investment
products, including annuities and other
non-securities. This rulemaking will
apply to advice given to plan fiduciaries
as well as plan participants.
In addition, for Retirement Investors
who already receive the protections in
the Advisers Act, Regulation Best
Interest, and PTE 2020–02 under the
regulatory baseline, this rulemaking will
provide even stronger protections.
Standards for mitigating conflicts under
this rulemaking will 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 overseeing retirement
investments and the financial markets
in which they operate.
Market Baseline
This rulemaking will expand the
fiduciary standard to individuals, firms,
and markets not currently held to a
fiduciary or best interest standard. This
will in turn impact how advisers make
32187
recommendations to Retirement
Investors and potentially the types of
investments they recommend and how
they are compensated. As such, it is
helpful to understand the regulatory and
market baselines for retirement
investments, including which sectors
will be most significantly impacted by
this rulemaking.
The Department has, in response to a
commenter, estimated the current
market size of a selected set of
commonly held assets and sales of
financial products for retail and
institutional investors, as well as for
Retirement Investors, as summarized in
the table below. The Department
estimates the total value of these assets
at over $168 trillion, of which
approximately $62 trillion is
attributable to retail investors.394 As
seen below, investments in securities,
which are currently covered by
Regulation Best Interest and the
Advisers Act, account for the majority of
the retail market.
This rulemaking will specifically
apply to invested assets subject to
ERISA, including non-securities not
covered by Regulation Best Interest and
the Advisers Act. Where possible, the
Department has provided the amount of
assets in retirement accounts. In 2022,
there were $0.74 trillion of fixed and
variable annuities reported invested in
IRA accounts.395 The Department does
not have data on assets invested in
annuities in pension accounts, nor does
it have a breakdown of how many assets
are invested in fixed and variable
annuities in IRA accounts.
TABLE 1—MARKET DESCRIPTION OF SELECTED COMMONLY HELD ASSETS, 2022
[In USD billions]
Securities
lotter on DSK11XQN23PROD with RULES4
Equities 1
Bonds 2
Money
market
funds 3
Non-securities
Mutual
funds 3
Variable
annuities 4
Fixed
annuities 4
Bank
deposits
Total
Total Assets ......................................................
Retail Investor ...................................................
Institutional Investor ..........................................
Private Pension Investor ...................................
Public Pension Investor ....................................
$64,723
$26,505
$38,218
$2,929
$3,390
$53,890
$4,593
$49,297
$1,688
$3,755
$5,223
$3,080
$2,143
$228
$23
$17,333
$9,749
$7,584
$4,386
$230
$2,016
$2,016
....................
( 5)
( 5)
$1,740
$1,740
....................
( 5)
(5)
$23,597
$14,809
$8,788
$42
$33
$168,522
$62,491
$106,030
10-Year Asset Growth .......................................
Retail Investor ...................................................
Institutional Investor ..........................................
Private Pension Investor ...................................
Public Pension Investor ....................................
9.20%
10.80%
8.20%
4.50%
4.80%
3.70%
¥0.50%
4.20%
4.50%
5.20%
5.70%
5.80%
5.60%
4.90%
¥8.00%
2.60%
2.90%
2.30%
5.30%
¥3.50%
3.00%
3.00%
....................
( 5)
( 5)
6.00%
6.00%
....................
( 5)
( 5)
6.70%
6.80%
6.60%
¥0.60%
¥0.90%
5.80%
6.40%
5.50%
Source: Board of Governors of the Federal Reserve System, Financial Accounts of the United States, December 7, 2023.
Notes: Retail investors include households and non-profits.
1 Includes shares of exchange-traded funds, closed-end funds, and real estate investment trusts.
2 Includes open market paper, treasuries, agency and GSE-backed securities, municipal securities, and corporate bonds.
3 Money market funds and mutual funds include approximately $1.66 trillion in variable annuity mutual fund assets.
4 Variable and fixed annuities of Retirement Investors include some annuities held in IRAs, totaling some $0.74 trillion.
5 The Department does not have data to indicate the total value of fixed and variable annuity assets held by Retirement Investors, only those held by retail investors
or in IRAs.
392 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).
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393 For more information on the relationship of
best interest fiduciary standards and the protection
of Retirement Investors, refer to the Benefits section
of the regulatory impact analysis.
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394 EBSA tabulations based on The Board of
Governors of the Federal Reserve System, Financial
Accounts of the United States, December 7, 2023.
395 Ibid.
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Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations
This rulemaking will affect assets
owned by private pension investors
shown in the table above. As noted
above, the Department does not have
data on how many of the assets in
variable and fixed annuities are owned
by private pension investors but
believes it to be a significant amount.
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Market Developments, the Annuity
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.396 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.’’ 397
• 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.398 399
• 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.400
Annuity regulators also vary by type.
While all annuity products are subject
396 SEC, Annuities, (2021), https://
www.investor.gov/introduction-investing/investingbasics/glossary/annuities.
397 Frank Fabozzi, The Handbook of Financial
Instruments, 596–599 (2002).
398 SEC, Annuities, (2021), https://
www.investor.gov/introduction-investing/investingbasics/glossary/annuities.
399 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).
400 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.
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to State regulation, variable annuities
and some indexed annuities are
considered securities, and therefore are
also subject to SEC and FINRA
regulations.401 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.402
In recent years, the mix in demand for
annuities has changed dramatically.
While variable annuities accounted for
56 percent of the annuities market in
2016 (with fixed annuities accounting
for the remaining 44 percent),403
variable annuities only accounted for 26
percent in 2023 with fixed annuities
now accounting for 74 percent of the
market.404 Driving much of the shift, in
addition to changes in how fees are
structured in the variables annuities
space and recent increases in interest
rates, is the growth in share of the
population approaching retirement age.
The population age 65 and older was 13
percent in 2010 and had risen to 17
percent by 2022.405 Moreover, the
proportion of the population over age 65
is expected to reach more than 20
percent by 2030.406
The aging population has shifted their
demand to annuities that provide
protection against market downturns as
they approach retirement and the
spenddown phase of their retirement
planning, but purchasing such products
also requires them to consider multiple
sources of uncertainty (mortality,
inflation, performance) when making
their investment decisions. At the same
time, annuity contracts are becoming
increasingly complicated. Ninety-four
percent of fixed indexed annuities now
involve hybrid indexes which may
401 SEC, Annuities, (2021), https://
www.investor.gov/introduction-investing/investingbasics/glossary/annuities.
402 Constantijn Panis & Kathik Padmanabhan,
Literature Review of Conflicted Advice in Annuities
Markets, Internal Report for Department of Labor
(February 2023).
403 LIMRA Secure Retirement Institute, U.S,
Individual Annuity Sales Survey (2016, 4th
Quarter) https://www.limra.com/siteassets/
newsroom/fact-tank/sales-data/2016/q4/annuityestimates-fourth-quarter-2016.
404 LIMRA, Preliminary U.S. Individual Annuity
Sales Survey (2023, 4th Quarter) https://
www.limra.com/siteassets/newsroom/fact-tank/
sales-data/2023/q4/4q-annuity-sales.pdf
405 World Bank, Population ages 65 and above for
the United States [SPPOP65UPTOZSUSA],
retrieved from FRED, Federal Reserve Bank of St.
Louis; https://fred.stlouisfed.org/series/
SPPOP65UPTOZSUSA, February 17, 2024.
406 Vespa, Jonathan, Lauren Medina, and David
M. Armstrong, ‘‘Demographic Turning Points for
the United States: Population Projections for 2020
to 2060,’’ Current Population Reports, P25–1144,
U.S. Census Bureau, Washington, DC, 2020.
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Fmt 4701
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utilize alternative or non-traditional
investment strategies and complex
features such as volatility or risk
controls that rely on derivative
instruments and algorithms that are
increasingly complex and lack historical
performance data.407
Research has shown that a person’s
financial decision-making ability peaks
in their early 50s, thereby putting them
at risk in later years as the ability of
older individuals to recover from
financial mistakes may be negatively
impacted by declines in physical health
and cognition and related difficulties
reentering the labor force.408 Angrisani
and Lee (2019) demonstrated this, when
analyzing data for individuals 50 and
older in the Health and Retirement
Survey. Angrisani and Lee (2019)
observed significant declines in wealth
among households whose financial
decision-maker experienced cognitive
decline. Households that received
pension or annuity income or had
assistance with their finances from
children did face smaller wealth
reductions, but the researchers did not
distinguish between pension or annuity
income, or when an annuity might have
been purchased.409 However, given that
the median age of owners when they
first purchase an annuity is 51, roughly
half of annuity purchases would be
made after an individual’s financial
decision-making ability has, according
to research, begun to decline.410
These market trends suggest that,
unless the Department acts, in the
coming years an increasing number of
retiring Americans will pursue more
complex investment options in markets
where advisers are held to a lower
advice standard.
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
407 John Hilton, Kings of the Hill: Indexed
products spur life, annuity sales, InsuranceNewsNet
Magazine (July 1, 2022), https://
insurancenewsnet.com/innarticle/kings-of-the-hill.
408 See Agarwal, Sumit, John C. Driscoll, Xavier
Gabaix, and David Laibson. The Age of Reason:
Financial Decisions over the Life Cycle and
Implications for Regulation,’’ Brookings Papers on
Economic Activity, Fall 2009. https://
www.brookings.edu/wp-content/uploads/2016/07/
2009b_bpea_agarwal.pdf.
409 Agrisani, Marco and Jinkook Lee. ‘‘Cognitive
Decline and Household Financial Decisions at
Older Ages,’’ Journal of the Economics of Ageing
(May 2019). https://www.ncbi.nlm.nih.gov/pmc/
articles/PMC6768425/.
410 The Committee of Annuity Insurers, Survey of
Owners of Individual Annuity Contract. (July 2022)
https://www.annuity-insurers.org/wp-content/
uploads/2023/07/Gallup-Survey-of-Owners-ofIndividual-Annuity-Contracts-2022.pdf.
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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.411 Research suggests that the
Department’s prior efforts produced
positive changes in advice markets,
even without fully taking effect, which
were then 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 2016 Final Rule was struck
down.412 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
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.’’ 413 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
411 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).
413 ‘‘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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412 Aron
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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
for a rollover recommendation and
provide that documentation to the
Retirement Investor.414 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
and adopt a culture of compliance, the
exemption provides that Financial
Institutions and Investment
Professionals will be ineligible to rely
on the exemption for 10 years if they are
convicted of certain crimes arising out
of their provision of investment advice
to Retirement Investors. They can also
become ineligible if they engage in a
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
414 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).’’
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32189
could be used to provide investment
advice in place of PTE 2020–02,
including the other PTEs being
amended in this rulemaking. Leaving
the other PTEs in place allowed for
significant variation in the conditions
and compliance obligations of Financial
Institutions when they provide
investment advice for different types of
assets and financial products. Those
variations create opportunities 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
For investment advisers subject to the
Advisers Act and broker-dealers subject
to Regulation Best Interest, there is
substantial overlap between SEC
requirements and the obligations
imposed by ERISA, the Code, and this
rulemaking.
The Advisers Act, ‘‘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.’’ 415 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.416 The SEC’s Regulation Best
Interest established a standard of
conduct for broker-dealers and
associated persons, requiring a brokerdealer to act in the best interest of a
retail customer when making a
recommendation of any securities
transaction or investment strategy
involving securities.417
The SEC also covers robo-advice, and
robo-advisers that meet the definition of
‘‘investment adviser’’ are regulated
under the Advisers Act. Regulations and
guidance included the need for
adequate disclosure about the roboadviser and the services it provides, the
need to ensure that the robo-adviser is
415 EBSA, Regulating Advice Markets Definition
of the Term ‘‘Fiduciary’’ Conflicts of Interest—
Retirement Investment Advice Regulatory Impact
Analysis for Final Rule and Exemptions, pp. 30
(Apr. 2016), https://www.dol.gov/sites/dolgov/files/
EBSA/laws-and-regulations/rules-and-regulations/
completed-rulemaking/1210-AB32-2/ria.pdf.
416 Commission Interpretation Regarding
Standard of Conduct for Investment Advisers, 84 FR
33669 (July 12, 2019).
417 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. 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.
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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.418
Broker-dealers under Regulation Best
Interest and investment advisers under
the Advisers Act must consider costs,
the level of services available, and
features of existing accounts. This
approach is consistent with this
rulemaking. Regulation Best Interest
applies to recommendations by brokerdealers to rollover or transfer assets
from workplace retirement plan
accounts to an IRA and
recommendations to take a plan
distribution, which are also covered by
this rulemaking. In Regulation Best
Interest, the SEC instructed that, when
making a rollover recommendation:
[B]roker-dealers should consider a variety
of additional factors specifically salient to
IRAs and workplace retirement plans, in
order to compare the retail customer’s
existing account to the IRA offered by the
broker-dealer. These factors should generally
include, among other relevant factors: Fees
and expenses; level of service available;
available investment options; ability to take
penalty-free withdrawals; application of
required minimum distributions; protection
from creditors and legal judgments; holdings
of employer stock; and any special features
of the existing account.419
Similarly, in its 2019 Fiduciary
Interpretation, the SEC clarified that for
registered investment advisers:
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. Advice about account type
includes advice about whether to open or
invest through a certain type of account (e.g.,
a commission-based brokerage account or a
fee-based advisory account) and advice about
whether to roll over assets from one account
(e.g., a retirement account) into a new or
existing account that the adviser or an
affiliate of the adviser manages. In providing
advice about account type, an adviser should
consider all types of accounts offered by the
adviser and acknowledge to a client when the
account types the adviser offers are not in the
client’s best interest.420
Further, the SEC staff issued guidance
stating 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.’’ 421
With respect to these areas of overlap,
the potential costs and benefits of this
rulemaking are more limited, because
the SEC actions and this rulemaking
share many similarities and many firms
have already built compliance
structures based on SEC actions, PTE
2020–02 and initial compliance before
vacatur of the Department’s 2016 Final
Rule. Outside this area of overlap,
however, current standards generally
are lower, so the potential costs—and
benefits—of this rulemaking are likely
to be more significant.
For example, this rulemaking will
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 will 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, certain certificates of
deposit, other bank products and fixed
indexed annuities that are not
considered securities under the Federal
securities laws are also not generally
regulated by the SEC.
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.
TABLE 2—STATES THAT HAVE ENACTED LEGISLATION OR FINALIZED REGULATION
State
Legislation or
regulation
Title of legislation or regulation
Alabama ......................
Regulation ..................
Suitability in Annuity Transactions ..................
Alaska ..........................
Arizona ........................
Arkansas ......................
California .....................
Regulation
Legislation
Regulation
Regulation
Legislation
Colorado ......................
Regulation ..................
Suitability in Annuity Transactions ..................
An Act Relating to Annuity Transactions ........
Article 2—Transaction of Insurance ...............
Stability in Annuity Transactions .....................
An Act Relating to Annuities and Life Insurance Policies.
Colorado Securities Act: Dishonest and Unethical Conduct.
..................
..................
..................
..................
..................
Regulation ..................
Connecticut ..................
Legislation ..................
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Legislation ..................
Delaware .....................
Florida ..........................
Georgia ........................
Hawaii ..........................
Idaho ............................
Illinois ...........................
Regulation
Regulation
Legislation
Regulation
Legislation
Legislation
Regulation
..................
..................
..................
..................
..................
..................
..................
418 U.S. Securities and Exchange Commission
Division of Investment Management, Robo
Advisers, IM Guidance Update No. 2017–02,
(February 2017), https://www.sec.gov/investment/
im-guidance-2017-02.pdf.
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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 ..................
419 Regulation Best Interest, 84 FR 33318, 33383
(July 12, 2019).
420 Commission Interpretation Regarding
Standard of Conduct of Investment Advisers, 84 FR
33669, 33674 (July 12, 2019).
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Affected entities
Insurers, Broker-Dealers, and Independent
Producers.
Insurers 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.
Financial Planners.
Administrators to Municipal 403(b) Plans.
Insurers
Insurers
Insurers
Insurers
Insurers
Insurers
Insurers
and
and
and
and
and
and
and
Independent Producers.
Independent Producers.
Insurance Agents.
Independent Producers.
Independent Producers.
Independent Producers.
Independent Producers.
421 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.
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32191
TABLE 2—STATES THAT HAVE ENACTED LEGISLATION OR FINALIZED REGULATION—Continued
State
Legislation or
regulation
Title of legislation or regulation
Indiana .........................
Iowa .............................
Regulation ..................
Regulation ..................
Kansas .........................
Regulation ..................
Kentucky ......................
Louisiana .....................
Regulation ..................
Legislation ..................
Maine ...........................
Maryland ......................
Regulation
Legislation
Regulation
Regulation
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 ..................
Massachusetts 422 .......
..................
..................
..................
..................
Regulation ..................
Regulation ..................
Michigan ......................
Legislation ..................
Minnesota ....................
Legislation
Regulation
Regulation
Legislation
Mississippi ...................
Montana .......................
..................
..................
..................
..................
Regulation ..................
Nebraska .....................
Legislation ..................
Nevada ........................
Legislation ..................
New Hampshire ...........
New Mexico .................
New York .....................
Regulation ..................
Regulation ..................
Regulation ..................
North Carolina .............
North Dakota ...............
Regulation ..................
Legislation ..................
Ohio .............................
Oklahoma ....................
Regulation ..................
Regulation ..................
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Regulation ..................
Amendments to Fiduciary Conduct Standards
Amendments to Investment Adviser Disclosure Regulations.
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 ......................................
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 in Annuity Transactions ..................
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 ........................
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 ..................
Utah .............................
Vermont .......................
Virginia .........................
Regulation ..................
Regulation ..................
Regulation ..................
Washington ..................
Legislation ..................
West Virginia ...............
Wisconsin ....................
Regulation ..................
Regulation ..................
Legislation ..................
Suitability in Annuity Transactions ..................
Relating to Disclosures and Standards Required for Certain Annuity Transactions and
Benefits Under Certain Annuity Contracts.
Suitability in Annuity Transactions ..................
Suitability in Annuity Transactions ..................
Rules Governing Suitability in Annuity Transactions.
Concerning the Best Interest Standard for
Annuity Transactions.
Suitability Standard for Annuity Transactions
Suitability in Annuity Transactions ..................
An Act Relating to Best Interest in Annuity
Transactions.
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Affected entities
Insurers and Independent Producers.
Insurers and 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.
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.
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 and Independent Producers.
Insurers and Independent Producers.
Insurers and Independent Producers.
Insurers, Independent Producers, Investment
Advisers, and Broker-Dealers.
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TABLE 2—STATES THAT HAVE ENACTED LEGISLATION OR FINALIZED REGULATION—Continued
State
Legislation or
regulation
Wyoming ......................
Regulation ..................
Summary of State Legislative and
Regulatory Developments
In a list compiled in March 2024, the
Department identified 47 States that
have enacted legislation, finalized
regulations, or both that impose conduct
standards and disclosure requirements
on various Financial Institutions.423 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,424 in addition to States that
have adopted conduct standards and
disclosure requirements outside of the
NAIC Model Regulation.
In addition, two 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.425
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NAIC Annuity Transactions Model
Regulation
As shown in the table above, much of
the legislative and regulatory action
among States focuses on insurers and
Independent Producers. In February
422 The Massachusetts Supreme Judicial Court
recently upheld the validity of the Commonwealth’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).
423 States that have enacted legislation include
Arizona, California, 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,
Indiana, Iowa, Kansas, Kentucky, Maine, Maryland,
Massachusetts, Minnesota, Mississippi, Montana,
New Hampshire, New Mexico, New York, North
Carolina, Ohio, Oklahoma, Rhode Island, South
Carolina, Tennessee, Utah, Vermont, Virginia, West
Virginia, Washington, and Wyoming.
424 For more information on the NAIC’s
Suitability in Annuity Transactions Model
Regulation, or NAIC Model Regulation, refer to the
section entitled ‘‘NAIC Annuity Transactions Model
Regulation’’ in this RIA.
425 Missouri and New Jersey have introduced
legislation and/or regulation.
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Title of legislation or regulation
Regulation Governing Suitability in Annuity
Transactions.
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
2023, 39 States had adopted the NAIC
Model Regulation.426 Since then,
additional States have adopted the
NAIC Model Regulation. In March 2024,
the NAIC reported that 45 States had
adopted it, with the recent addition of
California, Indiana, New Hampshire,
Oklahoma, Utah, and Vermont.427
The revisions were in response to
both the SEC’s and the Department’s
work in the regulatory space and
reflected some movement in the
direction of greater uniformity, although
significant differences remain, as
partially discussed below.428 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.429 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
426 Based on internal Department analysis, the
modified NAIC Model Regulation, including a best
interest standard, was adopted by Alabama, Alaska,
Arizona, Arkansas, California, Colorado,
Connecticut, Delaware, Florida, Georgia, Hawaii,
Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky,
Maine, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Montana, Nebraska, New
Hampshire, New Mexico, North Carolina, North
Dakota, Oklahoma, Ohio, Oregon, Pennsylvania,
Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Utah, Vermont, Virginia,
Washington, West Virginia, Wisconsin, and
Wyoming.
427 NAIC, Implementation of 2020 Revision to
Model #275: Suitability in Annuity Transaction
Model Regulations, (March 2024), https://
content.naic.org/sites/default/files/inline-files/
275%20Final%20Map_2020%20Changes_
March%2011%202024.pdf .
428 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 .
429 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.
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Affected entities
Insurers and Independent Producers.
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 NAIC Model Regulation’s
requirements regarding mitigation of
material conflicts of interest is not as
stringent as either the Department’s
approach under ERISA or the SEC’s
approach. The conflict of interest
obligation under the NAIC Model
Regulation 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.’’ However, the NAIC Model
Regulation expressly carves out all
‘‘cash compensation or non-cash
compensation’’ from treatment as
sources of material conflicts of
interest.430 ‘‘Cash compensation’’ that is
excluded from the definition of a
material conflict of interest is broadly
defined to include ‘‘any discount,
concession, fee, service fee,
commission, sales charge, loan,
override, or cash benefit received by a
producer in connection with the
recommendation or sale of an annuity
from an insurer, intermediary, or
directly from the consumer,’’ and ‘‘noncash compensation’’ is also broadly
defined to include ‘‘any form of
compensation that is not cash
compensation, including, but not
limited to, health insurance, office rent,
office support and retirement
benefits.’’ 431
This limited regulation of conflicts of
interest departs substantially from both
ERISA’s treatment of such conflicts as
giving rise to prohibited transactions
430 Id.
431 Id.
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at section 5.I.
at section 5.B. and J.
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and from the SEC’s more robust
regulation of conflicts of interest. For
example, recent guidance from the SEC
staff on broker-dealer and investment
adviser conflicts of interest makes clear
that conduct standards in the securities
market require a ‘‘robust, ongoing
process that is tailored to each
conflict.’’ 432 The SEC staff guidance
provides a detailed list of types of
compensation that the SEC staff believes
are examples of common sources of
conflicts of interest, as follows:
• compensation, revenue or other
benefits (financial or otherwise) to the
firm or its affiliates, including fees and
other charges for the services provided
to retail investors (for example,
compensation based on assets gathered
and/or products sold, including but not
limited to receipt of assets under
management (‘‘AUM’’) or engagement
fees, commissions, markups, payment
for order flow, cash sweep programs, or
other sales charges) or payments from
third parties whether or not related to
sales or distribution (for example, subaccounting or administrative services
fees paid by a fund or revenue sharing);
• compensation, revenue or other
benefits (financial or otherwise) to
financial professionals from their firm
or its affiliates (for example,
compensation or other rewards
associated with quotas, bonuses, sales
contests, special awards; differential or
variable compensation based on the
product sold, accounts recommended,
AUM, or services provided; incentives
tied to appraisals or performance
reviews; forgivable loans based upon the
achievement of specified performance
goals related to asset accumulation,
revenue benchmarks, client transfer, or
client retention);
• compensation, revenue or other
benefits (financial or otherwise)
(including, but not limited to, gifts,
entertainment, meals, travel, and related
benefits, including in connection with
the financial professional’s attendance
at third-party sponsored trainings and
conferences) to the financial
professionals resulting from other
business or personal relationships the
financial professional may have,
relationships with third parties that may
relate to the financial professional’s
association or affiliation with the firm or
with another firm (whether affiliated or
unaffiliated), or other relationships
within the firm; and
• compensation, revenue or other
benefits (financial or otherwise) to the
432 Staff Bulletin: Standards of Conduct for
Broker-Dealers and Investment Advisers Conflict of
Interest, https://www.sec.gov/tm/iabd-staff-bulletinconflicts-interest.
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firm or its affiliates resulting from the
firm’s or its financial professionals’
sales or offer of proprietary products or
services, or products or services of
affiliates.433
The NAIC expressly disclaimed that
its standard creates fiduciary
obligations, and specifically provides
that it does not apply to transactions
involving contracts used to fund an
employee pension or welfare plan
covered by ERISA. The obligations in
the NAIC 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 NAIC Model
Regulation only requires that the adviser
‘‘[h]ave a reasonable basis to believe the
recommended option effectively
addresses the consumer’s financial
situation.’’ 434 This is comparable to the
suitability obligation imposed on
broker-dealers under the federal
securities laws prior to Regulation Best
Interest, which the SEC replaced with
more stringent and protective standards.
Here too, the Department’s
rulemaking is much more closely
aligned with Regulation Best Interest
than to the NAIC Model Regulation. In
contrast to the NAIC Model Regulation,
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,’’ 435 and
the exemptions, 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
433 Id.
434 Id. at § 6(A)(1)(a)(iii) (emphasis added).
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 the NAIC Model
Regulation, Sections 2.B and 6.A.(1)(d)).
435 84 FR 33318, 33458, 33491 (July 12, 2019)
(emphasis added).
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32193
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.’’ 436 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.’’ 437
Additionally, they asserted that ‘‘the
NAIC model regulation does not contain
a ‘prudence’ standard’’ 438 and
characterized ‘‘these best interest
requirements . . . [as] a far cry from the
obligations imposed on an ERISA
fiduciary.’’ 439
The NAIC Model Regulation has come
under additional criticism. The Certified
Financial Planner Board of Standards
noted in a comment that the regulation
‘‘allows a producer to recommend
products that other insurance
professionals would determine
effectively address a consumer’s
financial situation, insurance needs and
financial objectives, even if a prudent
professional would not recommend the
product’’ and ‘‘allows a producer to
recommend an annuity from a limited
menu of products, without
consideration of what is generally
available in the marketplace.’’ 440 This
assessment is consistent with comments
made by New York’s Insurance
Superintendent Lacewell during the
NAIC 2020 Proceedings where she
noted that while the New York standard
is the ‘‘best interest of the consumer
without consideration of the producer’s
financial or other interest in the matter,’’
that is not the standard of the NAIC
Model Regulation.441 New York voted
against adopting the Model Regulation
revisions, instead adopting its own rule,
Regulation 187, whose standard
generally aligns with this rule.
The Department is especially
concerned about the proper regulation
of fixed annuities, as sales totaled an
estimated $286 billion in 2023, or 74
percent of the retail annuity market, an
436 Brief of Plaintiffs, FACC, No. 3:22–CV–00243–
K–BT (Nov. 7, 2022), ECF No. 48 at 45 n.15.
437 Id. at 45–46 n.15.
438 Id. at 45 n. 15.
439 Id. at 45.
440 Comment letter received from the Certified
Financial Planning Board of Standards on the
Notification of Proposed Rulemaking: Retirement
Security Rule: Definition of an Investment Advice
Fiduciary, (January 2024).
441 National Association of Insurance
Commissioners. Minutes of the Executive and
Plenary Meetings February 13, 2020. NAIC
Proceedings, Summer 2020, pp. 3–15 to 3–17.
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increase of 36 percent from 2022, as
investors responded to rising interest
rates.442 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,
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.
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
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442 LIMRA, U.S. Annuity Sales Post Another
Record Year in 2023, (January 24, 2024), https://
www.limra.com/en/newsroom/news-releases/2024/
limra-u.s.-annuity-sales-post-another-record-yearin-2023/.
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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,443 which has already
resulted in the most conflicted advisers
moving to markets with the least
oversight.444
This rulemaking, in accordance with
ERISA, will extend important and
effective protections broadly to
Retirement Investors. Specifically, the
rulemaking will replace the 1975
regulation’s five-part test with a new
fiduciary status test, which, consistent
with ERISA’s text, purpose and focus on
relationships of trust and confidence,
will capture more retirement investment
transactions in which the investor is
reasonably relying on the advice
individualized to the investor’s
financial needs and best interest. This
rulemaking will also increase the
number of rollover recommendations
443 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/.
444 Colleen Honigsberg, Edwin Hu, & Robert J.
Jackson, Jr., Regulatory Arbitrage and the
Persistence of Financial Misconduct, 74 Stanford
Law Review 797 (2022).
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being considered as fiduciary advice in
the context of a relationship of trust and
confidence between the investor and
adviser, which will enhance protections
to Retirement Investors, particularly in
regard to recommendations regarding
annuities.
4. Accounting Table and Discussion
In accordance with OMB Circular A–
4, Table 3 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 rulemaking but has
sought, where possible, to describe
these non-quantified impacts. The
effects in Table 3 reflect non-quantified
impacts and estimated direct monetary
costs resulting from the provisions of
the rulemaking.
The quantified costs are significantly
lower than costs in the 2016 regulatory
impact analysis due to the narrower
scope of the rulemaking 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, existing PTE 2020–02, and the
Department’s 2016 Rulemaking. The
methodology for estimating the costs of
the amendments to the rule and PTEs is
consistent with the methodology and
assumptions used in the 2020 analysis
for the current PTE 2020–02.
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TABLE 3—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 to ensure that this advice adheres to a stringent professional standard of care.
• Protect consumers from losses that can result from advisory conflicts of interest (without unduly limiting consumer choice or adviser flexibility).
• Better align investors’ portfolio with their risk preferences and savings horizons as advisers provide individualized advice based on their
individual circumstances.
• Facilitate Retirement Investors’ trust in advisers.
Costs:
Annualized Monetized ($million/Year) .........................................................
Estimate
Year dollar
Discount rate
(percent)
Period covered
$359.9
356.0
2024
2024
7
3
2024–2033
2024–2033
Quantified Costs:
The Department expects that entities will not incur additional costs from the amendments to PTE 77–4, PTE 80–83, and PTE 83–1. However,
the Department expects that entities will incur costs directly from the amendments to the following PTEs:
• The annualized cost estimates in PTE 2020–02 reflect estimated costs associated with reviewing the rulemaking, preparing written disclosures for investors, 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 rulemaking, providing disclosures to
Retirement Investors, establishing written policies and procedures, conducting a retrospective review, and maintaining recordkeeping.
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 that better meet the individual Retirement Investor’s goals.
• Shifts in the assets in plans and IRAs.
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Implications for Retirement Savings
Estimates
While the Department is confident
that the savings to Retirement Investors
will exceed the costs of this rulemaking,
the Department acknowledges that it has
limited data to assess the magnitude of
savings that would result for Retirement
Investors as a result of the rulemaking.
The SEC’s Regulation Best Interest
extended new protections to
recommendations made by brokerdealers to retail customers 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
recommendation.’’ 445 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
445 Regulation Best Interest, 84 FR 33318, 33447
(July 12, 2019).
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billion to $76 billion.446 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.’’ 447
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 of interests
will benefit Retirement Investors.448
The Department believes that this
rulemaking, by requiring advisers to
provide Retirement Investors with
information about the basis of their
recommendations, fees, and potential
446 Regulation Best Interest, 84 FR 33318, 33491
(July 12, 2019).
447 Regulation Best Interest, 84 FR 33318, 33458
(July 12, 2019).
448 For more information, refer to the Benefits of
a Fiduciary or Best Interest Standard section.
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conflicts, will better align incentives to
ensure advisers act in the long-term
interests of investors and reduce
information asymmetries between
advisers and investors. In doing so,
Retirement Investors’ assets may be
invested more efficiently and consistent
with investors’ savings goals, while
protecting them from potential costs
associated with advisory conflicts.
Many commenters expressed concern
that the Department did not quantify the
benefits of the proposal. The
Department is unable to quantify
benefits and transfers of the rulemaking
across all asset classes and investor
types. The Department has, however,
laid out evidence supporting its claims
that this rulemaking will create
significant benefits that justify the
associated compliance costs. In
response to the proposal, some
commenters provided estimates of the
benefits and costs. The Department has
considered these estimates, many of
which are discussed later in this
document and in Table 4 below. These
estimates provide strong additional
support for the rulemaking.
Benefits and Transfers Scenario
Analysis
This rulemaking fits into a
complicated system of regulatory
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regimes, differing by the types of
investment products being sold and the
type of Investment Professionals selling
the products. As such, the benefits,
transfers, and costs from the rulemaking
will be more prominent in some markets
than others. While the Department
believes that a uniform standard of care
across investment products and
investment advice professionals will
benefit Retirement Investors, the
magnitude of benefits and transfers will
be more significant in markets not under
a fiduciary or best interest standard.
More specifically, the Department
expects Retirement Investors investing
in annuities to see the greatest benefits
or transfers. The table below
summarizes the estimates quantified by
the Department and by commenters
which expand on and confirm the
Department’s views of the benefits, costs
and transfers of the rulemaking. It is
difficult to separate the impacts into
benefits or transfers. However, the
benefits and transfers are both goals of
the rulemaking. These impacts include
transfers from Investment Advisers to
Retirement Investors in the form of
reduced fees and expenses and
improved asset allocations.
TABLE 4—SUMMARY OF QUANTIFIED BENEFIT OR TRANSFER ESTIMATES
Market segment
Average
annual benefit
or transfer:
first 10 years
(billion)
Source
Plan Participants .............
Comment Letter from
Morningstar 449.
$5.5
Annuities ..........................
Comment Letter from
Morningstar 450.
3.3
Council of Economic Advisers 451.
7.0
Vivek Bhattacharya, Gaston
Illanes, & Manisha Padi
(2024) 453.
Department of Labor Illustration, based on Bhattacharya
et al. (2024).
Based on these estimates, the
rulemaking could result in benefits and
transfers amounting to $5.5 billion
annually for plan participants and
amounting to between $3.3 billion and
$7.0 billion annually for Retirement
Investors, due to just reduced price
spreads in the fixed index annuities
market, with potential additional
benefits stemming from reduced spreads
449 NPRM
#290 (Morningstar).
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450 Id.
451 Council of Economic Advisers, The
Retirement Security Rule—Strengthening
Protections for Americans Saving for Retirement,
(October 2023), https://www.whitehouse.gov/cea/
written-materials/2023/10/31/retirement-rule/#_
ftnref1.
452 CEA’s estimate was calculated using August 1,
2023 end-of-day prices, using the historic volatility
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............................
5.3
Estimate
The rule would result in participants saving $55.0 billion in plan
fees in the first 10 years, with small plan participants receiving the largest benefit, estimated as $47.3 billion in the first
10 years.
The rule would result in Retirement Investors rolling retirement
funds into fixed index annuities saving $32.5 billion in the
first 10 years.
CEA provided an illustration of how to try to quantify the benefits and costs of a fixed index annuity, using the fair market
price of the options. Using options on the S&P 500 index for
a specified day in 2023, CEA estimated that investors may
be paying 1.2 percent of the assets invested for the downside risk protection in fixed index annuities.452 If total assets
invested in fixed index annuities in 2021 had paid 1.2 percent of assets for the protection of an annuity, forgone returns could be as high as $7 billion. CEA noted that that this
illustration demonstrates how, under the current system, a
retirement saver could end up with lower returns than they
would under the rule.
Bhattacharya et al. (2024) found that a common law fiduciary
duty increased risk-adjusted returns by 25 basis points in
annuity investments.
If $3.8 trillion dollars are invested in annuities, 70 percent of
the market is not currently subject to a fiduciary standard,
and 80 percent of the market is covered by ERISA, then the
rulemaking could affect 2.1 trillion in annuity assets. If, consistent with Bhattacharya et al. (2024), this segment of the
market sees an increase in average returns of 25 basis
points, the expansion of fiduciary duty would lead to gains
for investors (a mix of societal benefits and transfers) of
$5.3 billion annually.454
in other fixed annuities and reductions
in surrender fees paid as investors
purchase. This implies that if just
looking at the benefits and transfers to
plan participants and to Retirement
Investors investing in fixed index
annuities, the rulemaking could result
in estimated benefits and transfers
ranging from $8.8 billion to $12.5
billion annually.
Cost Scenario Analysis
of the S&P 500 price index on Bloomberg’s options
pricing calculator, with the put option’s strike price
at the current index price, the call option’s strike
price at 6.75% above the index’s price on August
1, and the maturity of the option at 1 year.
453 Vivek Bhattacharya, Gaston Illanes, & Manisha
Padi, Fiduciary Duty and the Market for Financial
Advice, Working Paper, (February 27, 2024),
https://www.dropbox.com/scl/fi/gj5skfflsip2
nhee1662c/Draft.pdf?rlkey=msd12c734n8ddrc
t8uzqg0qut&dl=0. This is an updated version of the
working paper cited in the proposal. (See Vivek
Bhattacharya, Gaston Illanes, & Manisha Padi,
Fiduciary Duty and the Market for Financial
Advice, Working Paper, (May 20, 2020), https://
www.nber.org/papers/w25861.
454 This is estimated as: $3.8 trillion in assets ×
70% of the assets not covered by a fiduciary
standard × 80% covered by ERISA × 0.25% increase
in returns = $5.3 billion.
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The Department estimated that the
costs associated with the proposal
would be $253.2 million in the first year
and $216.2 million in subsequent years.
In response to comments received in the
proposal, the Department has increased
the cost estimates to $536.8 million in
the first year and $332.7 million in
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subsequent years. The largest
contributions to the change in cost
estimates from the proposal to the final
rulemaking are an increase in time to
review the rule as well as an increase in
the number of Independent Producers
and transactions by Independent
Producers affected by the rulemaking.
The justification for the change in costs
is discussed in greater detail in the cost
section below.
It is worth noting that in many cases
the Department likely over-estimated
the number of affected entities. This
includes simplifying assumptions such
as:
• the inclusion of non-ERISA
rollovers in its count of rollovers,
• the inclusion of insurance
companies that do not sell IRA or Title
I Plans,
• the inclusion of insurance
companies domiciled or conducting
business in New York which enforces a
higher standard of care on annuity sales
that is comparable to the standards set
forth in this rulemaking,
• the inclusion of Independent
Producers that do not sell annuity
products,
• inclusion of insurance companies
and captive agents under PTE 84–24
that will rely instead of PTE 2020–02,
• that all eligible entities use PTE
2020–02 or PTE 84–24 for transactions
instead of other existing exemptions,
and
• that all affected entities incur the
costs directly, rather than utilizing a
third-party that is able to perform these
services at a lower rate.
As a result, the Department’s total
costs reported in this rulemaking are
likely overstated.
Moreover, it is important to note that
many of the costs incurred under this
rulemaking are due to the Department
formalizing best practices for those
providing individualized investment
recommendations to investors for whom
they have a relationship of trust and
confidence. The requirements to
describe the services provided, explain
fees and disclose any conflicts as well
as document the basis for an investment
recommendation simply ensures that
advisers are providing all necessary
information that investors should have
access and are entitled to. Similarly,
conducting an annual review to identify
potential violations and ensure that an
entity is in compliance with the guiding
laws and regulations should be standard
practice. Given similar disclosures and
reviews are already required by other
financial regulators, the Department
expects that many of the affected
entities are already performing these
actions for at least some part of their
current business, and so extending the
same or similar requirements to their
remaining clients in practice will be less
costly than the Department’s estimate.
In its comment letter, the Financial
Services Institute cited findings from a
survey conducted by the Oxford
Economics. This survey interviewed
members of the Financial Services
Institute and was commissioned by the
Financial Services Institute. The survey
estimated that the costs of the proposal
imposed on broker-dealers would be
approximately $2.8 billion in the first
year and $2.5 billion in subsequent
years, 11 and 12 times the Department’s
estimate in the proposal, respectively.
They noted that their estimates include
costs to upgrade software systems and
incremental time of staff and brokerdealers.455 The Department has revised
this rulemaking, however, to make PTE
2020–02 largely consistent with the
requirements of Regulation Best Interest,
32197
even more so in this final rulemaking
than in the proposal. As most brokerdealers surveyed for these estimates
would already be subject to Regulation
Best Interest, the Department questions
the magnitude of additional burden on
broker-dealers for complying with the
closely aligned requirements of
Regulation Best Interest.
In its comment letter, the ICI stated
that the Department had underestimated
cost. They provided a sensitivity
analysis on the first-year cost estimates
for PTE 2020–02, estimating that the
costs would exceed $2.9 billion. This is
12.1 times higher than the first-year cost
estimates in the proposal. Notably, 98
percent of the difference between the
proposal and ICI estimates is associated
with costs to review the rule. Excluding
this difference, the ICI estimates for
disclosure, retrospective review, and
policy and procedure costs are only 1.2
times higher than the estimates in the
proposal.456
As discussed above, the Department
questions the validity of some
assumptions made by the commenters.
However, both commenters noted that
the Department’s estimates in the
proposal were off by a factor of 12. For
illustrative purposes, if a multiplier of
12 were applied to the Department’s
estimate in the proposal, the rulemaking
would result in an annualized cost of
$2.7 billion. The Department has
revised its estimates since the proposal
to reflect feedback from commenters,
resulting in a total cost estimate that is
more than double its proposal cost
estimate. This estimate is still
significantly below the estimates
provided from these commenters.
The table below summarizes the
Department estimates calculated by the
Department and by commenters.
TABLE 5—SUMMARY OF QUANTIFIED COST ESTIMATES
Source
First-year
Subsequent years
Total .......................................
Department of Labor: Final ............................
Department of Labor: NPRM .........................
Adjusted NPRM Estimate: Multiplied by 12 ...
Department of Labor: Final ............................
Comment Letter from Financial Services Institute 458.
Department of Labor: Final ............................
Department of Labor: NPRM .........................
Comment Letter from Investment Company
Institute 459.
Department of Labor: Final ............................
$536.8 million ........
$253.2 million ........
$3.0 billion .............
$37.5 million ...........
$2.8 billion .............
$332.7 million ........
$216.2 million .........
$2.6 billion .............
$28.9 million ...........
$2.5 billion .............
$359.9 million.
$316.7 million.
$2.7 billion.
$21.2million.
$2.5 billion.
$248.1 million ........
$231.5 million ........
$2.9 billion .............
$165.5 million .........
$197.3 million .........
N/A .........................
$176.5 million.
$201.9 million.
N/A.
$288.7 million ........
$167.2 million ........
$183.4 million.
Total: Broker-Dealers .............
PTE 2020–02 .........................
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Annualized,
7% discount rate 457
Focus
PTE 84–24 .............................
455 NPRM
#342 (Financial Services Institute).
#395 (Investment Company Institute).
457 The annualized benefits, costs, and transfers
spread the effects equally over each period, taking
account of the discount rate. The annualized value
456 NPRM
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equals the present value divided by the sum of
discount factors.
458 Comment letter received from the Financial
Services Institute on the Notification of Proposed
Rulemaking: Retirement Security Rule: Definition of
an Investment Advice Fiduciary, (January 2024).
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459 Comment letter received from the Investment
Company Institute on the Notification of Proposed
Rulemaking: Retirement Security Rule: Definition of
an Investment Advice Fiduciary, (January 2024).
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TABLE 5—SUMMARY OF QUANTIFIED COST ESTIMATES—Continued
Focus
Source
First-year
Subsequent years
Mass Amendments 1 ..............
Department of Labor: NPRM .........................
Department of Labor: Final ............................
Department of Labor: NPRM .........................
$18.1 million ...........
$0 ...........................
$3.6 million ............
$15.3 million ...........
$0 ...........................
$3.6 million ............
Annualized,
7% discount rate 457
$15.7 million.
$0.
$3.6 million.
1 As finalized, the amendments to the Mass Amendment do not impose an additional burden on entities continuing to rely on those exemptions. However, the amendments will require entities to rely on PTE 84–24 and PTE 2020–02 for exemptive relief covering transactions involving
the provision of fiduciary investment advice. These costs are accounted for in the cost estimates for PTE 84–24 and PTE 2020–02.
Summary
Due to data limitations, a changing
regulatory environment, and the scope
of the entities affected by the
rulemaking, the Department is unable to
calculate a comprehensive estimate for
the benefits and transfers across all asset
classes and account types. However, the
estimates discussed above attempt to
make clear the estimated benefits and
transfers (particularly those from
Investment Advisers to Retirement
Investors in the form of reduced fees
and expenses and improved asset
allocation), and the total expected costs
are discussed below.
5. Affected Entities
The table below summarizes the
estimated number of entities that will be
affected by the amendments to the Rule
and each of the PTEs. These estimates
are discussed in greater detail below.
TABLE 6—AFFECTED FINANCIAL ENTITIES
Prohibited transaction exemptions
Retirement Plans .............................................................
Individual Retirement Account owners ............................
Broker-Dealers .................................................................
Discretionary Fiduciaries ..................................................
Registered Investment Advisers ......................................
Pure Robo-Advisers .........................................................
Insurance Companies ......................................................
Captive Insurance Agents and Brokers ...........................
Insurance Producers ........................................................
Banks ...............................................................................
Mutual Fund Companies ..................................................
Non-Bank Trustees ..........................................................
Investment Company Principal Underwriters ..................
Pension Consultants ........................................................
2020–02
75–1
77–4
80–83
86–128
84–24
765,124
67,781,000
1,920
....................
16,398
200
84
1,577
....................
....................
....................
31
(1)
(1)
765,124
....................
1,920
....................
....................
....................
....................
....................
....................
2,025
....................
....................
....................
....................
277,390
....................
....................
....................
....................
....................
....................
....................
....................
....................
812
....................
....................
....................
6,312
....................
....................
....................
....................
....................
....................
....................
....................
25
....................
....................
....................
....................
1,000
210
....................
251
....................
....................
....................
....................
....................
....................
....................
....................
....................
....................
1,722
500,000
....................
....................
....................
....................
358
1,577
86,410
....................
....................
....................
20
1,011
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1 Pension consultants and investment company principal underwriters who were relying on PTE 84–24 for investment advice will no longer be
able to rely on the exemption as amended for receipt of compensation as a result of providing investment advice. However, these pension consultants and investment company principal underwriters can rely on PTE 2020–02 when they are part of a Financial Institution, such as a registered investment adviser, broker-dealer, insurance company, or bank, which are already accounted for.
In the preamble to the proposed
rulemaking, the Department requested
input from commenters on its estimates
of the entities affected by the proposed
amendments. The Department asked
commenters for information on how
many entities currently rely on each of
the exemptions, how many entities
currently rely on each of the exemptions
for investment advice, and how many
entities would continue to rely on each
of the exemptions, as amended. The
Department also asked for information
on how retirement plans, IRAs, and
Retirement Investors at large would be
affected by the proposed amendments.
The Department has considered the
comments received and revised its
estimates where appropriate. These
considerations are discussed more fully
below.
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Plans and Participants
The amendments to the rule and
related PTEs will 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 will be affected by these
amendments. Approximately 46,000 of
these plans are defined benefit plans,
covering 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
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assets.460 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 will typically be
affected by the amendments.
The Department expects that
participants, in general, will benefit
from the stronger, uniform standards
imposed by the amendments to the rule
and PTEs. Participants who receive
460 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.
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investment advice will be directly
affected by the amendments,
particularly participants receiving onetime 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 will also be directly
affected by the amendments.
In the proposal, the Department
requested comment on how plans
would be affected. Some commenters
stated that the amendment would create
a significant burden on advice providers
because more transactions would be
fiduciary investment advice and
Financial Institutions would need to
satisfy an exemption. Other commenters
remarked that plan and plan
participants, particularly in small plans,
would benefit significantly from the
proposal because the advice would be
held to a fiduciary standard. As
discussed elsewhere, the Department
has revised its estimate of compliance
burden for Financial Institutions
providing fiduciary investment advice
accordingly. Additionally, the
Department has included a discussion
of the benefits plans and plan
participants may experience as a result
of the rulemaking.
Several commenters remarked that the
proposal was unclear on whether
education and ‘‘hire me’’ conversations
would be considered fiduciary advice.
Many of these commenters noted that
this would disincentivize such
communications with plans which
could result in significant costs. The
Department has clarified in the
preamble for the final rule that such
conversations would not constitute
advice, absent a recommendation.
Some commenters expressed concern
that by not providing a specific carveout from fiduciary status for advice to
sophisticated advice recipients, plans
would have access to fewer investment
opportunities. For example, one
commenter suggested plans would have
fewer investment opportunities in
private equity and that this would
decrease investment returns and
diversification in plans. As discussed in
greater detail in the preamble, the
Department has decided not to exclude
plan sponsor fiduciaries from the
protections of the final rule when they
receive advice from trusted advisers,
with the view that it is preferable to
retain a facts and circumstances test for
recommendations to plan sponsor
fiduciaries absent an acknowledgment
of fiduciary status with respect to the
recommendation. However, the
Department made a number of changes
and clarifications in the final rule,
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including a new paragraph (c)(1)(iii)
that confirms how sales
recommendations can occur without
fiduciary status attaching.
In addition to PTE 2020–02, the
Department is amending several other
Prohibited Transactions Exemptions.
PTE 84–24 is being amended to provide
relief for compensation received for
investment advice only for independent
insurance producers that recommend
annuities from multiple unaffiliated
insurance companies to Retirement
Investors, subject to conditions similar
to those in PTE 2020–02. Additionally,
PTEs 75–1 Parts III and IV, 77–4, 80–83,
83–1, and 86–128 are being amended to
eliminate relief for the receipt of
compensation resulting from fiduciary
investment advice, as defined under
ERISA. As amended, PTE 86–128, PTE
84–24, PTE 77–4, and PTE 80–83 will
directly affect subsets of plans,
described below.
The amendments to PTE 86–128 will
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
indicated on the Schedule C that they
were a discretionary trustee. Further,
among these plans, 801 plans also
reported that the discretionary trustee
provided investment management
services or received investment
management fees paid directly or
indirectly by the plan.461 Based on the
range of values (801 and 1,257), the
Department assumes 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 requested 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 and did not
receive any which directly discussed
plan reliance on PTE 86–128.
The Department estimates that of the
1,000 plans discussed above, 7.5 percent
are new accounts or new financial
advice relationships.462 Based on these
assumptions, the Department estimates
that 75 plans will be affected by the
amendments to PTE 86–128.463
461 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.
463 The number of new plans is estimated as:
1,000 plans × 7.5 percent of plans are new = 75 new
462 EBSA
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32199
For PTE 84–24, the Department
estimates that 7.5 percent of plans are
new accounts or new financial advice
relationships 464 and that 3 percent of
plans will use the exemption for
covered transactions.465 Based on these
assumptions, the Department estimates
that 1,722 plans will be affected by the
amendments to PTE 84–24.466
In response to its request for comment
in the proposal, the Department
received one comment noting that
Financial Institutions have relied on
PTE 77–4 for both investment advice
and discretionary programs. This
commenter did not indicate the
proportion of these Financial
Institutions that would continue to use
PTE 77–4 as a result of the proposed
amendments.
To estimate the number of plans
affected by the 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.467 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.468 Applying these
percentages to the universe of pension
plans that filed a Form 5500 in 2021
yields a total of approximately 277,390
plans. The number of new IRAs is estimated as:
10,000 IRAs × 2.1 percent of IRAs are new = 210
new IRAs.
464 EBSA identified 57,575 new plans in its 2021
Form 5500 filings, or 7.5 percent of all Form 5500
pension plan filings.
465 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.
466 765,124 plans × 7.5 percent of plans are new
× 3 percent of plans with relationships with
insurance agents or pension consultants = 1,722
plans.
467 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).
468 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).
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plans with service provider
relationships with mutual fund
companies.469 Thus, the Department
estimates that 277,390 plans will be
affected by the amendments to PTE 77–
4. The Department acknowledges that
this estimate likely overestimates the
number of plans affected by the
amendments.
The Department estimates that 6,312
plans are affected by PTE 80–83 based
on the number of new plans relying on
a broker-dealer.470
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IRA Owners
In addition to the specific requests for
comment discussed below, the
Department requested comments on
how IRAs and rollovers are likely to be
affected by the amendments. The
Department also welcomed comment on
the number of IRAs and rollovers that
might be affected by the rulemaking.
Several commenters provided data,
surveys, or studies on the IRA and
rollover markets. The Department has
considered this information and
adjusted its estimates as appropriate.
Some commenters stated that increased
costs resulting from the rollover
documentation imposed by the
rulemaking would decrease the number
of rollovers. In response to these
concerns, the Department is narrowing
the required rollover disclosure to only
apply to rollovers from Title I Plans to
IRAs. One commenter cautioned that
the rulemaking’s definition of an IRA
would include health savings accounts
(HSAs) and expressed concern about
469 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.
470 EBSA identified 57,575 new plans in its 2021
Form 5500 filings, or 7.5 percent of all Form 5500
pension plan filings. Additionally, the Department
estimates that 12 percent of plans have a
relationship with a broker-dealer. This is a
weighted average of the Department’s estimates of
the share of defined benefit plans and defined
contribution plans with broker-dealer relationships.
The Department assumes that approximately 20
percent of defined benefit plans have relationships
with broker-dealers. As a proxy for the share of
defined contribution plans with broker-dealer
relationships, the Department uses the sum of the
percent of load mutual funds in 401(k) plans (6
percent) and the percent of 401(k) stock mutual
fund assets paying 12b–1 fees between >.0 to 0.25
(5 percent). Both data are published by the 2021
Investment Company e Institute report. (See The
Economics of Providing 401(k) Plans: Services,
Fees, and Expenses, 2021, Investment Company
Institute, June 2022. https://www.ici.org/system/
files/2022-06/per28-06.pdf). The number of plans is
estimated as: 765,124 plans × 7.5 percent of plans
are new × 11 percent of plans with broker-dealer
relationships = 6,312 new plans.
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this inclusion. The Department has
decided to include HSA owners in the
definition of Retirement Investor. The
data sources used below to estimate the
number of IRA owners already include
HSA owners.
According to Cerulli Associates, there
were 67.8 million IRA owners holding
$11.5 trillion in assets in 2022.471 The
amendments to the rule and PTE 2020–
02 will affect Retirement Investors who
roll over money from a plan into an 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.472
In 2022, almost 4.5 million defined
contribution plan accounts with $779
billion in assets were rolled over into an
IRA. Additionally, 0.7 million defined
contribution plan accounts with $66
billion in assets were rolled over to
other employment-based plans.473 The
Department used IRS data from 2020 to
estimate overall rollovers into IRAs and
arrived at estimates of 5.7 million
taxpayers and $618 billion.474 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.475
As amended, PTE 2020–02 requires
rollover disclosure only for rollovers
from a Title I Plan and recommendation
to a participant or beneficiary as to the
post-rollover investment of assets
currently held in a Title I Plan.
According to Cerulli Associates, in
2022, financial advisers intermediated
49 percent of defined contribution
rollovers.476 The Department estimates
471 Cerulli Associates, U.S. Retirement EndInvestor 2023: Personalizing the 401(k) Investor
Experience, Exhibits 5.03 and 5.12. The Cerulli
Report.
472 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.
473 According to Cerulli, in 2022, there were
4,485,059 defined contribution plan-to-IRA
rollovers and 707,104 plan-to-plan rollovers. The
Department was unable to find any data on the
number of IRA to IRA or defined benefit to IRA
rollovers. See Cerulli Associates, U.S. Retirement
End-Investor 2023: Personalizing the 401(k) Investor
Experience, Exhibit 6.04. The Cerulli Report.
474 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).
475 Estimates for the number of IRAs may include
some non-retirement accounts such as HSAs,
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. The final rulemaking has
clarified that HSAs are covered by the amendments;
however, other non-retirement accounts may not be.
476 Rollovers from defined contribution plans are
49% adviser-mediated rollovers into IRAs, 37%
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that 2.2 million rollovers and $535
billion in assets will be affected by the
rollover disclosure in the amendments
to PTE 2020–02.477 These figures are
overestimates because they include
some rollovers from non-ERISA plans
and because they are based on the
assumption that all of the advisers
intermediating rollovers are ERISA
fiduciaries.
As amended, PTE 86–128 and PTE
84–24 will each affect subsets of the
number of IRAs discussed above. The
Department’s estimates of the IRAs that
will be affected by the amendments to
PTE 86–128 and PTE 84–24 are
discussed below.
PTE 84–24, as amended, only requires
rollover disclosure for recommendations
to rollover from a Title I Plan. The
Department requested, but did not
receive, comments on the assumptions
used in the proposal regarding annuity
contracts affected by the rulemaking.
However, in conjunction with updating
its estimate of the number of
independent agents the Department has
revised its estimate of annual annuity
transactions affected by the
amendments to PTE 84–24, increasing
the estimate from 52,449 to 500,000.
While there are several sources of
information regarding total sales or size
of the annuity market that are generally
consistent, the same is not true for
transaction activity, which can vary
dramatically across quarters and
between sources. To improve its
estimate of annual annuity transactions
affected by the amendments to PTE 84–
24, the Department tried two
approaches which both relied on
LIMRA total fixed annuity sales data.
LIMRA data from 2023 indicates that 34
percent of fixed annuity sales were
fixed-indexed annuities.478 Assuming
sales are proportionate to transactions
and using data from the Retirement
Income Journal which reported roughly
109,863 fixed-indexed annuity products
were sold in the fourth quarter of
self-directed rollovers into IRAs, and 14% plan-toplan rollovers. See Cerulli Associates, U.S.
Retirement End-Investor 2023: Personalizing the
401(k) Investor Experience, Exhibit 6.04. The
Cerulli Report.
477 In 2022, 4,485,059 defined contribution plan
accounts were rolled over into IRAs. The rollovers
were mediated by a financial adviser and destined
for an IRA in 49% of cases. (4,485,059 × 49%) =
2,17,679. Additionally, in 2022, $535 billion assets
were advisor intermediated. See Cerulli Associates,
U.S. Retirement End-Investor 2023: Personalizing
the 401(k) Investor Experience, Exhibit 6.04. The
Cerulli Report.
478 LIMRA, Preliminary U.S. Individual Annuity
Sales Survey, Fourth Quarter 2023, (2023), https://
www.limra.com/siteassets/newsroom/fact-tank/
sales-data/2023/q4/4q-annuity-sales.pdf.
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2021,479 annualizing this number to
439,452 the Department estimates that
roughly 838,000 other fixed-rate annuity
products were sold over the same
period, for a total of 1.3 million fixed
annuity transactions in 2021 using this
approach.
The Department considered an
alternative approach which estimated
the number of annual transactions by
dividing the total sales data from
LIMRA described above by the average
contract size as reported by the
Retirement Income Journal, which is
$147,860. Using the same proportional
methodology described above, this
approach yields an estimate of roughly
1.9 million transactions.
Using the average of these estimates,
the Department then applied the
following assumptions to arrive at its
final estimate. Using McKinsey data on
annuity distribution channels, the
Department assumes that third-party
distribution channels account for 81
percent of the annuity sales volume.480
The Department further assumes that 80
percent of these annuities are held in
ERISA-covered accounts or purchased
with ERISA plan assets 481 and that 49
percent of transactions will rely on
investment advice.482 This results in an
estimate of roughly 500,000 ERISAcovered fixed annuity transactions
involving an Independent Producer
providing advice to an investor.483
479 Pechter, K., Moore, S., Fixed Indexed
Annuities: What’s Changed (or Not) in Ten Years,
(June, 2022), https://retirementincomejournal.com/
article/fixed-indexed-annuities-a-retrospective/.
480 McKinsey & Company, Redefining the future
of life insurance and annuities distribution,
(January, 2024), https://www.mckinsey.com/
industries/financial-services/our-insights/
redefining-the-future-of-life-insurance-andannuities-distribution.
481 The Department recognized that not all
annuities sold are covered by this rulemaking,
however data is not available to estimate what
portion are covered with any sense of precision.
Examples of non-covered transactions include use
of non-retirement account funds to purchase an
annuity and noncovered public sector plans being
rolled into an annuity. The Department views 80%
as a reasonable assumption as it includes most
transactions while acknowledging that not all
transactions are covered under this rulemaking. As
a point of reference, each percentage point this
assumption is changed results in a 1.25 percentage
point change in the resulting estimate of ERISAcovered transactions involving an Independent
Producer providing advice to an investor.
482 U.S. Retirement-End Investor 2023:
Personalizing the 401(k) Investor Experience
Fostering Comprehensive Relationships.’’ The
Cerulli Report, Exhibit 6.04.
483 The final estimate is the rounded average of
the two approaches described above. The
calculations are as follows:
[{[(109,863 fixed-indexed contracts written × 4
quarters) ÷ 34% as the percentage of fixed-indexed
to all fixed-rate contracts] × 81% sold by
Independent Producers × 49% sold using
investment advice × 80% ERISA-covered
transactions} + {[(148,860 avg. contract size ÷ 95.6
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The amendments to PTE 86–128 will
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 will
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 will 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.484 In
the proposal, the Department requested
comment on the assumption of managed
IRA accounts but did not receive any
comment directly addressing this
estimate.
These estimates likely overestimate
the number of IRA owners that will be
affected by the amendments, since IRA
owners will only be affected by the
amendments to the rule and PTEs when
they have a relationship with certain
financial entities and are conducting
certain financial transactions, as defined
by the revised fiduciary definition and
the conditions for exemptive relief of
each PTE.
Summary of Affected Financial Entities
In the proposal, the Department
received several comments regarding its
estimate of the number of financial
entities that would be affected.
Commenters expressed concern about
the Department’s assumption that all
eligible entities already rely on PTE
2020–02, as some entities did not
consider their conduct to trigger
fiduciary status. This commenter noted
that under the amended definition of a
fiduciary, these entities would consider
themselves fiduciaries for the first time
and incur significant costs, accordingly.
In response to this comment, the
Department has revised its estimate to
assume that 30 percent of brokerdealers, registered investment advisers,
and insurance companies were not
previously complying with PTE 2020–
billion in annual fixed-indexed sales) ÷ 34% as the
percentage of fixed-indexed to all fixed-rate
contracts] × 81% sold by Independent Producers ×
49% sold using investment advice × 80% ERISAcovered transactions} ÷ 2] ≈ 501,013, rounded to
500,000.
484 (10,000 managed IRAs × 2.1 percent of IRAs
are new) ≈ 210 IRAs.
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32201
02 and will incur the full cost under this
rulemaking.
This rulemaking expands the
definition of a fiduciary such that an
advice provider will be a fiduciary if
they make a covered investment
recommendation to a Retirement
Investor for a fee or compensation and
either (1) or (2) is satisfied: (1) the
person either directly or indirectly (e.g.,
through or together with any affiliate)
makes professional investment
recommendations to investors on a
regular basis as part of their business
and the recommendation is made under
circumstances that would indicate to a
reasonable investor in like
circumstances that the recommendation
is based on review of the Retirement
Investor’s particular needs or individual
circumstances, reflects the application
of professional or expert judgment to the
Retirement Investor’s particular needs
or individual circumstances, and may
be relied upon by the Retirement
Investor as intended to advance the
Retirement Investor’s best interest, or (2)
the person represents or acknowledges
that they are acting as a fiduciary under
Title I of ERISA, Title II of ERISA, or
both, with respect to the
recommendation.
Registered Investment Advisers
Registered investment advisers
providing investment advice to
retirement plans or Retirement Investors
and registered investment advisers
acting as pension consultants will be
directly affected by the amendments to
PTE 2020–02. Generally, investment
advisers must register with either the
SEC or with State securities authorities,
as appropriate.485
Investment advisers registered with
the SEC are generally larger than Stateregistered investment advisers, both in
staff and in regulatory assets under
management.486 For example, according
485 Generally, a person that meets the definition
of ‘‘investment adviser’’ under the 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 Advisers Act or qualify for an exemption
from the Advisers Act’s registration requirement.
An adviser precluded from registering with the SEC
may be required to register with one or more state
securities authorities.
486 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 SEC, General Information on the
Regulation of Investment Advisers, (March 11,
2011), https://www.sec.gov/investment/
divisionsinvestmentiaregulationmemoiahtm; North
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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.487 In addition,
according to one survey of SECregistered investment advisers, about 47
percent of SEC-registered investment
advisers reported 11 to 50 employees.488
In contrast, an examination of Stateregistered investment advisers reveals
about 80 percent reported less than two
employees.489
As of December 2022, there were
15,289 SEC-registered investment
advisers, of which 9,627 provided
advice to retail investors while 5,662
provided advice only to non-retail
investors. Of the 15,289 SEC-registered
investment advisers, 317 were dualregistered as broker-dealers.490 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.491 Therefore, the Department
estimates there to be 14,972 SECregistered investment advisers.
Additionally, as of December 2022,
there were 15,478 State-registered
investment advisers, of which 139 are
dually registered as a broker-dealer and
133 are also registered with the SEC.492
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
Robo-Advisers
The changes to PTE 2020–02 make
investment advice providers providing
pure robo-advice eligible for relief under
the exemption. In the proposal, the
Department requested comment on how
the number of robo-advisers in the
American Securities Administrators Association, A
Brief Overview: The Investment Adviser Industry,
(2019), www.nasaa.org/industry-resources/
investment-advisers/investment-adviser-guide/.
487 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.
488 Investment Adviser Association, 2019
Investment Management Compliance Testing
Survey, (June 18, 2019), https://
higherlogicdownload.s3.amazonaws.com/
INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/about/190618_
IMCTS_slides_after_webcast_edits.pdf.
489 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.
490 Estimates are based on the SEC’s FOCUS
filings and Form ADV filings.
491 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).
492 Estimates are based on the SEC’s FOCUS
filings and Form ADV filings.
493 Cerulli Associates, U.S. RIA Marketplace
2023: Resiliency in the Pursuit of Scale, Exhibit
5.10. The Cerulli Report.
494 The number of registered investment advisers
is estimated as: [(14,972 SEC-registered investment
advisers + 15,206 State-registered investment
advisers) × 55%] = 16,598 registered investment
advisers.
495 For more information on this estimate, refer to
the Robo-Advisers discussion in the Affected
Entities section.
496 As discussed below, the Department estimates
that there are 200 pure robo-advisers. Accordingly,
the Department estimates that 16,398 registered
investment advisers would be affected by the
amendments and are not pure robo-advisers. The
number of registered investment advisers is
estimated as: [(14,972 SEC-registered investment
advisers + 15,206 State-registered investment
advisers) × 55%]¥200 robo-advisers = 16,398
registered investment advisers.
497 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.
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of this analysis, the Department
considers 15,206 State-registered
investment advisers.
In 2023, 55 percent of registered
investment advisers provided employersponsored retirement benefits
consulting.493 Based on this statistic, the
Department estimates there to be
approximately 16,598 registered
investment advisers.494
As discussed in the Baseline section,
PTE 2020–02 historically excluded
investment advisers providing pure
robo-advice. The amendments will
include these entities, however, pure
robo-advisers will 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.495 Accordingly, the
Department estimates that 16,398
registered investment advisers who do
not provide pure robo-advice are
currently eligible for relief under PTE
2020–02.496
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
Advisers Act and already operate under
standards broadly similar to those
required by PTE 2020–02.497
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market has evolved in recent years. The
Department specifically inquired about
what proportion of robo-advisers
provide pure versus hybrid robo-advice,
what proportion of pure robo-advisers
are likely to rely on the amended PTE
2020–02, and whether robo-advisers
operate as registered investment
advisers or broker-dealers. Several
commenters noted that they supported
the inclusion of robo-advice in PTE
2020–02.
Robo-advisers offer varying services
and different degrees of hands-on
assistance.498 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 upon 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.499
Robo-advisers were initially expected
to revolutionize investment advice, as
robo-advisers saw steep growth
initially.500 The expectation of
continued rapid growth has been
tempered as players in the space have
struggled to find the appropriate role for
robo-advice. A 2023 study by
Morningstar evaluated 18 providers of
robo-advice. The findings suggest that
pure robo-advisers have had challenges
in reaching a profitable scale. 501 In
turn, many of these pure robo-advisers
have been acquired by larger investment
advice firms, including banks, brokerdealers, technology firms, and asset
managers, adopting hybrid robo-advice
systems.502 Hybrid robo-advisers can
498 SEC, Investor Bulletin: Robo-Advisers,
(February 23, 2017), https://www.sec.gov/oiea/
investor-alerts-bulletins/ib_robo-advisers.
499 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.
500 Deloitte. ‘‘The Expansion of Robo-Advisory in
Wealth Management.’’ (2016).
501 Morningstar, 2023 Robo-Advisor Landscape:
Our Take on the Digital Advice Industry and the
Best Options for Individual Investors, (June 2023),
https://institutional.vanguard.com/content/dam/
inst/iig-transformation/insights/pdf/Robo-Advisor_
Landscape_2023-Vanguard.pdf.
502 Morningstar, 2023 Robo-Advisor Landscape:
Our Take on the Digital Advice Industry and the
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charge lower fees by automating some of
the services offered, while still offering
access to a human adviser if desired.503
Among firms that have acquired roboadvice firms, integration has been a
continuing challenge.504 A 2023 article
remarked that some of the challenges
faced by firms offering robo-advice face
include competing with traditional
investment advisers on value-added
services and cost efficiency and finding
the correct customer base. Some firms
have pulled back their robo-advice
offerings in recent years.505
Investor preference may also be
playing a role. For instance, one survey
found that only 45 percent of investors
were comfortable using online only
advice services.506 Since 2016, the Plan
Sponsor Council of America has asked
plans whether they provide a roboadviser to participants. In 2016, 10.1
percent of all plans offered robo-advice,
while 14.0 percent were considering
it.507 By 2020, 12.8 percent of plans
offered robo-advice with 8.3 percent
considering it, and by 2022,508 15.8
percent of plans offered robo-advice
with 7.9 percent considering.509 The
Department does not have access to data
on how many plan participants rely on
the robo-advice offered in their plan.
However, this gradual increase in the
Best Options for Individual Investors, (June 2023),
https://institutional.vanguard.com/content/dam/
inst/iig-transformation/insights/pdf/Robo-Advisor_
Landscape_2023-Vanguard.pdf. & Jill E. Fisch,
Marion Laboure, & John A. Turner, The Emergence
of the Robo-Advisor, Wharton Pension Research
Council Working Papers (2018). & Andrew Welsch,
Robo-Advisors Changed Investing. But Can They
Survive Independently, Barron’s (February 2022),
https://www.barrons.com/articles/robo-advisorschanged-investing-but-can-they-surviveindependently-51645172100.
503 Jill E. Fisch, Marion Laboure, & John A.
Turner, The Emergence of the Robo-advisor,
Wharton Pension Research Council Working Papers
(2018).
504 Morningstar, 2023 Robo-Advisor Landscape:
Our Take on the Digital Advice Industry and the
Best Options for Individual Investors, (June 2023),
https://institutional.vanguard.com/content/dam/
inst/iig-transformation/insights/pdf/Robo-Advisor_
Landscape_2023-Vanguard.pdf.
505 FinTech Global, Is the Era of Robo-Advisors
Over? (May 2023), https://fintech.global/2023/05/
16/is-the-era-of-robo-advisors-over/. Nearl, Ryan,
Robo-advisers Struggling to Retain Investors in
2022, Research Finds, InvestmentNews (October
2022), https://www.investmentnews.com/fintech/
news/robo-advisers-struggling-retain-investors-in2022-research-finds-227476.
506 Cerulli Associates, U.S. Retail Investor Advice
Relationships 2022: Rethinking the Advice
Continuum, Exhibit 3.02. The Cerulli Report.
507 Plan Sponsor Council of America, 60th
Annual Survey of Profit Sharing and 401(k) Plans,
(2018).
508 Plan Sponsor Council of America, 64th
Annual Survey of Profit Sharing and 401(k) Plans,
(2021).
509 Plan Sponsor Council of America, 66th
Annual Survey of Profit Sharing and 401(k) Plans,
(2023).
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number of plans offering robo-advice
may signal that plans see robo-advice as
a valuable tool for its participants.
The Department acknowledges that
robo-advice has limitations and that
investors with complex situations or
questions about financial planning
beyond investing may be better served
by a traditional investment adviser. The
Department further acknowledges that
the robo-advice market is evolving
quickly. Nevertheless, the Department
believes that service offered by roboadvisers can play a significant role in
increasing access to investment advice
and improving retirement security.
According to one source, there were
200 robo-advisers in the United States
in 2017.510 For the purposes of this
analysis, the Department estimates that
there are 200 pure robo-advisers that
will be subject to the amended PTE
2020–02 that are not subject to the
current PTE 2020–02.
Broker-Dealers
The amendments will modify PTE
75–1 Parts III and IV such that brokerdealers will 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 amended PTE 75–1 Part V,
broker-dealers will 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 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, will be
required to rely on the amended PTE
2020–02.
According to Financial and
Operational Combined Uniform Single
(FOCUS) filing data, there were 3,490
registered broker-dealers as of December
2022. Of those, approximately 69
percent, or 2,399 broker-dealers,
reported retail customer activities, while
approximately 31 percent, or 1,091
broker-dealers, were estimated to have
no retail customers.511
Not all broker-dealers perform
services for employee benefit plans. In
2023, 55 percent of registered
investment advisers provided employer510 Facundo Abraham, Sergio L. Schmukler, &
Jose Tessada, Robo-advisors: Investing Through
Machines, World Bank Research and Policy Briefs
134881 (2019).
511 Estimates are based on the SEC’s FOCUS
filings and Form ADV filings.
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32203
sponsored retirement benefits
consulting.512 Assuming the percentage
of broker-dealers providing advice to
retirement plans is the same as the
percent of registered investment
advisers providing services to plans, the
Department assumes 55 percent, or
1,920 broker-dealers, will be affected by
the amendments.513
Discretionary Fiduciaries
The amendments to PTEs 75–1 Parts
III & IV, 77–4, 80–83, 83–1, and 86–128
will exclude the receipt of
compensation from transactions that
result from the provision of investment
advice. Therefore, fiduciaries will have
to rely on another exemption to receive
compensation for investment advice,
such as PTE 2020–02. Fiduciaries that
exercise full discretionary authority or
control could continue to rely on these
exemptions as long as they comply with
all of the applicable exemption’s
conditions.
The Department lacks reliable data on
the number of fiduciaries of employee
benefits plans that affect or execute
securities transactions (‘‘transacting
fiduciaries’’) and the independent plan
fiduciaries authorizing the plan or IRA
to engage in the transactions with an
authorizing fiduciary (‘‘authorizing
fiduciaries’’) that will rely on the
amended exemption. In the proposal,
the Department assumed that the
number of transacting and authorizing
fiduciaries relying on the exemption
would be no larger than the number of
broker-dealers estimated to be affected
by the amendments to PTE 2020–02, or
1,919 fiduciaries. The Department
acknowledged that this was likely a
significant overestimate 514 and
requested comments or data on what
types of entities would be likely to rely
on the amended exemption. The
Department did not receive any
comments.
Upon further review, the Department
believes that in trying to capture
financial entities engaging in cross
trades with discretionary control, the
number of dual-registered brokerdealers that provide services to
512 Cerulli Associates, U.S. RIA Marketplace
2023: Expanding Opportunities to Support
Independence, Exhibit 5.10. The Cerulli Report.
513 The estimated of retail broker-dealers affected
by this exemption is estimated as: (2,399 retail
broker-dealers × 55%) = 1,319 retail broker-dealers.
The estimated number of non-retail broker-dealers
affected by this exemption is estimated as: (1,091
non-retail broker-dealers × 55%) = 600 non-retail
broker-dealers. The estimated number of total
broker-dealers is 1,919 (1,319 + 600).
514 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).
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retirement plans is a more accurate
estimate. As of December 2022, there
were 456 broker-dealers registered as
SEC- or State-registered investment
advisers.515 Consistent with the
assumptions made about broker-dealers
affected by the amendments to PTE
2020–02, the Department estimates that
55 percent, or 251 broker-dealers will be
affected by the amendments to PTE 86–
128.516
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Insurance Companies and NonIndependent Agents
The amendments to PTE 2020–02 and
PTE 84–24 will affect insurance
companies and non-independent agents.
The Department requested comments on
the extent to which entities relying on
PTE 84–24 would continue to rely on
the exemption if amended as proposed.
The Department also requested
comments on how many insurance
companies sell annuities through
independent distribution channels and
whether insurance companies rely on
both independent and non-independent
methods of distribution. The
Department did not receive any
comments responsive to these inquiries.
The existing version of PTE 84–24
granted relief for all insurance agents,
including insurance agents who are
overseen by a single insurance
company; however, the amendments
exclude insurance companies and
agents that are not selling through an
independent distribution method
(‘‘captive agents’’) that are currently
relying on the exemption for investment
advice. These entities will 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.
Insurance companies are primarily
regulated by States and no single
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
515 Estimates are based on the SEC’s FOCUS
filings and Form ADV filings.
516 In 2023, 55 percent of registered investment
advisers provided employer-sponsored retirement
benefits consulting. (See Cerulli Associates, U.S.
RIA Marketplace 2023: Expanding Opportunities to
Support Independence, Exhibit 5.10. The Cerulli
Report.) The Department assumes the percentage of
broker-dealers provide advice to retirement plans is
the same as the percent of investment advisers
providing services to plans. This is calculated as
456 hybrid broker-dealers × 55% = 251 affected
entities.
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States. In the Department’s 2016
regulatory impact analysis, it estimated
that 398 insurance companies wrote
annuities.517 The Department also relied
on this estimate in the proposal,
acknowledging that 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 requested information on
the number of insurance companies
underwriting annuities that would be
affected by the rulemaking. While one
commenter expressed concern that the
Department was using a number from
2016 without considering changes in the
annuity market since, the Department
did not receive any data or information
from other commenters.
To form a basis for its assumption of
insurance companies affected by the
rule, the Department looked at the
estimate of 398 insurance companies
writing annuities used in the 2016
regulatory impact analysis. This
assumption was based on data of
insurance companies that reported
receiving either individual or group
annuity considerations in 2014.518
Comparatively, there were 710 firms in
the direct life insurance carrier industry
in 2014.519 By these measures, in 2014,
insurance companies writing annuities
accounted for 56 percent of the direct
life insurance carrier industry.
To gain more insight into annuity
underwriting, as it pertains to the life
insurance industry, the Department
looked to the evolution of premiums. In
2014, annuity premiums accounted for
55 percent of life and annuity insurance
premiums.520 By 2020, annuities had
fallen to 48 percent of life and annuity
insurance premiums. Between 2020 and
517 This estimate is based on 2014 data from SNL
Financial on life insurance companies reported
receiving either individual or group annuity
considerations. See EBSA, 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.
518 EBSA, 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/rulesand-regulations/completed-rulemaking/1210-AB322/ria.pdf.
519 United States Census Bureau, 2014 SUSB
Annual Data Tables by Establishment Industry,
(December 2016).
520 Insurance Information Institute, Life/Annuity
Insurance Income Statement, 2014–2018, https://
www.iii.org/table-archive/222464/file.
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2022, the percentage remained constant
around 48 percent.521
While premiums are not directly
related to the number of firms, the
Department thinks it is reasonable to
assume that the percent of life insurance
companies underwriting annuities may
have declined slightly since 2014. For
the purposes of this analysis, the
Department assumed that approximately
half of life insurance companies
underwrite annuities. According to the
2021 Statistics of U.S. Businesses
release, the most recent data available,
there were 883 firms in the direct life
insurance carrier industry.522 The
Department estimates that 442 life
insurance companies underwrite
annuities and will be affected by the
amendments.
Recent legislative developments may
lead to an expansion in this market. A
2021 survey asked insurers what
impacts they expected to see from 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 inplan 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.523 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.
Insurance companies primarily sell
insurance products through (1) their
employees or captive insurance agents,
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.524
521 Insurance Information Institute, Facts +
Statistics: Life Insurance, (2024), https://
www.iii.org/fact-statistic/facts-statistics-lifeinsurance#Direct%20Premiums%20Written%20
By%20Line,%20Life/Annuity%20Insurance,
%202020-2022.
522 United States Census Bureau, 2021 SUSB
Annual Data Tables by Establishment Industry,
(December 2023).
523 Cerulli Associates, U.S. Annuity Markets 2021:
Acclimating to Industry Trends and Changing
Demand, Exhibit 1.06. The Cerulli Report.
524 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/; Ramnath
Balasubramanian, Christian Boldan, Matt Leo,
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The Department does not have strong
data on the number of insurance
companies using captive agents or
Independent Producers. In the proposal,
the Department assumed that the
number of companies selling annuities
through captive or independent
distribution channels would be
proportionate to the sales completed by
each respective channel. The
Department requested comments on this
assumption but did not receive any
directly addressing it. In the proposal,
the Department based its estimate on the
percent of sales completed by
independent agents and career agents in
the individual annuity distribution
channel. This resulted in an estimate
that approximately 46 percent of sales
are done through captive distribution
channels and 54 percent of sales are
done through independent distribution
channels.
One recent source stated that 81
percent of individual annuities sales are
conducted through an independent
distribution channel.525 The Department
uses this statistic to update its estimate
of the number of sales through the
independent distribution channel. The
Department assumes that the percent of
companies selling annuities through an
independent distribution channel is
proportionate to the percent of sales
conducted through an independent
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.
Also, the Department recognizes that
some insurance companies use multiple
distribution channels, though the
Department did not receive any
comment on how common the use of
multiple distribution channels is.
Looking at the 10 insurance companies
with highest annuity sales in 2022, one
relied on captive distribution channels,
seven relied on independent
distribution channels, and two relied on
David Schiff, & Yves Vontobel, Redefining the
Future of Life Insurance and Annuities Distribution,
McKinsey & Company (January 2024), https://
www.mckinsey.com/industries/financial-services/
our-insights/redefining-the-future-of-life-insuranceand-annuities-distribution.
525 This study considers sales by independent
agents, independent broker-dealers, national brokerdealers, and banks to be sales in the independent
distribution channel, while sales by career agents
and direct means are considered to be in the captive
distribution channel. (See Ramnath
Balasubramanian, Christian Boldan, Matt Leo,
David Schiff, & Yves Vontobel, Redefining the
Future of Life Insurance and Annuities Distribution,
McKinsey & Company (January 2024), https://
www.mckinsey.com/industries/financial-services/
our-insights/redefining-the-future-of-life-insuranceand-annuities-distribution.)
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both.526 Accordingly, most insurance
companies appear to primarily use
either captive distribution or
independent distribution. However, any
entity using a captive insurance
channel, or using both captive and
independent channels, likely has
already incurred most of the costs of
this rulemaking under PTE 2020–02.
Costs are estimated by assuming that
entities using a third-party distribution
system, even if they also use captive
agents, will incur costs for the first time
under amended PTE 84–24. This
assumption leads to an overestimation
of the cost incurred by insurance
companies.
Following from the revised
assumption that 81 percent of activity
being associated with independent, or
third party, channels, the Department
estimates that 84 insurance companies
distribute annuities through captive
channels and will rely on PTE 2020–02
for transactions involving investment
advice. Further, the Department
estimates that 358 insurance companies
distribute annuities through
independent channels and will rely on
PTE 84–24 for transactions involving
investment advice.527
The Department estimates that 70 of
the 442 insurance companies are large
entities.528 In the proposal, the
Department requested data on how
distribution channels differed by size of
insurance company but did not receive
any comments. 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 19
percent of large insurance companies
(13 insurance companies) sell annuities
through captive distribution channels,
while the remaining 71 of the 84
insurance companies that distribute
annuities through captive channels are
assumed to be small.529 Additionally, 81
526 Annuity sales are based on LIMRA, U.S.
Individual Fixed Annuity Sales Breakouts, 2022,
https://www.limra.com/siteassets/newsroom/facttank/sales-data/2022/q4/2022-ye---fixed-breakoutresults.pdf. Information on distribution channels is
based on review of insurance company websites,
SEC filings of publicly held firms, and other
publicly available sources.
527 The number of insurance companies using
captive distribution channels is estimated as 442 ×
81% = 358 insurance companies. The number of
insurance companies using independent
distribution channels is estimated as 442¥358 = 84
insurance companies.
528 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).
529 The number of large insurance companies
using a captive distribution channel is estimate as:
70 large insurance companies × 19% = 13 insurance
companies. The number of small insurance
companies using a captive distribution channel is
PO 00000
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32205
percent of large insurance companies
(57 insurance companies) sell annuities
through independent distribution
channels, while the remaining 301 of
the 358 insurance companies that sell
annuities through independent
distribution channels are assumed to be
small.530
Independent Producers
The amendments will also affect
independent insurance producers that
recommend annuities and other covered
products from unaffiliated Financial
Institutions to Retirement Investors, as
well as the Financial Institutions whose
products are recommended.531 While
captive insurance agents are generally
treated as 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
insurance industry. For this reason, the
Department only considers captive
insurance agents in the analysis for PTE
2020–02.
The Department estimates that the
independent agent distribution channel
has sales of about $69 billion since this
channel is 18 percent of individual
annuity sales and total U.S. annuity
sales reached $385.0 billion in 2023.532
In the proposal, the Department
estimated 4,000 Independent Producers
sold annuities and requested comments
on this assumption as well as how
captive insurance agents and
independent insurance producers
would be affected by the proposed
estimated as: 84 insurance companies¥13 large
insurance companies = 71 small insurance
companies.
530 The number of large insurance companies
using an independent distribution channel is
estimate as: 70 large insurance companies × 81% =
57 insurance companies. The number of small
insurance companies using a captive distribution
channel is estimated as: 358 insurance
companies¥57 large insurance companies = 301
small insurance companies.
531 The Department does not have an estimate of
the number of plans purchasing certain life
insurance policies. However, the Department’s
estimates of affected independent producers and
insurance companies likely include many
independent producers and insurance companies
selling affected life insurance policies as they also
sell annuities. Therefore, many of the costs of
compliance for these independent producers and
insurance companies are included in the regulatory
impact analysis cost estimates.
532 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: U.S.
Annuity Sales Post Another Record Year in 2023,
(January 24, 2024). https://www.limra.com/en/
newsroom/news-releases/2024/limra-u.s.-annuitysales-post-another-record-year-in-2023/.
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amendments to PTE 2020–02 and PTE
84–24. The Department received several
comments suggesting that its estimate
for the number of Independent
Producers was too low. While
commenters provided significantly
larger estimates, between 80,000 and
100,000, they did not provide data to
support their estimate nor clarify
whether their number was limited to
Independent Producers selling annuity
products. In response, the Department
analyzed employment data from the
March 2023 Current Population Survey
to identify the number of self-employed
workers in the ‘‘Finance and Insurance’’
industry whose occupation was listed as
‘‘Insurance Sales Agents.’’ This
identified 86,410 self-employed
insurance sales agents in the Finance
and Insurance industry which the
Department uses as the assumed
number of Independent Producers for
the analyses presented.533 This data
point likely contains a substantial
number of workers who do not sell
annuities or would otherwise not be
impacted by the rulemaking; therefore,
the Department believes this results in
an overestimate of costs associated with
Independent Producers.534
The amendments will not impose any
conditions on insurance intermediaries,
such as Independent Marketing
Organizations (IMOs), Field Marketing
Organizations (FMOs), or Brokerage
General Agencies (BGAs). 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
533 EBSA Tabulations based on the March 2023
Current Population Survey. Note that this number
includes insurance agents that do not sell annuity
products and therefore overestimates the number of
Independent Producers.
534 When revising its estimate of Independent
Producers for the final rulemaking, the Department
considered using the proportion of premiums
attributable to life insurance activity as a proxy for
the share of insurance agents that sell annuities.
Data from the U.S. Department of the Treasury,
Federal Insurance Office, ‘‘Annual Report on the
Insurance Industry,’’ indicates that roughly 23
percent of insurance premiums in 2023 were from
life insurance activity. Assuming that this translates
into 23 percent of insurance agents selling life
insurance products would reduce the number of
estimated independent life insurance producers
affected from 86,410 to 20,185. Using this level of
Independent Producers would result in a lower
total estimated cost associated with the PTE 84–24
rulemaking of $144.1 million in the first year and
$111.3 million in subsequent years. By not
adjusting for the share of insurance agents that sell
annuities, the Department believes that it
significantly overstates the number of Independent
Producers affected by this rulemaking.
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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 will 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.535
The amendments will exclude
compensation received by pension
consultants as a result of providing
investment advice from relief under the
existing PTE 84–24. As such, any
pension consultants relying on the
existing exemption for investment
advice will be required to work with a
Financial Institution under PTE 2020–
02 to receive compensation for fiduciary
investment advice. In this analysis, the
Department includes pension
consultants in the affected entities for
continued relief for the existing
provisions of PTE 84–24 and as a part
of registered investment advisers for the
amended PTE 2020–02. The Department
acknowledges that by doing so it may
overestimate the entities and related
costs to complying with the exemptions.
In the proposal, the Department
requested comment on whether pension
consultants would continue to rely on
the existing provisions of PTE 84–24 or
would rely on the amended PTE 2020–
02 but did not receive any comments.
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 will
choose to rely on the exemption,
however the Department expects
investment company principal
underwriters relying on PTE 84–24 to be
rare. A few commenters on the proposal
noted that entities, such as principal
company underwriters, do currently
rely on Section III(f) of the PTE 84–24.
None of these commenters remarked on
the Department’s estimate of the number
of principal company underwriters. For
535 Internal Department 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 100 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.
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the purposes of this analysis, the
Department continues to assume that 10
investment company principal
underwriters for plans and 10
investment company principal
underwriters for IRAs will use PTE 84–
24 once with one client plan.
The amendments will exclude
compensation received by investment
company principal underwriters as a
result of providing investment advice
from relief under existing PTE 84–24.
As such, any principal company
underwriter relying on the existing
exemption for investment advice will be
required to work with a Financial
Institution under amended PTE 2020–02
to receive compensation for fiduciary
investment advice.
The Department acknowledges that
this approach likely overestimates the
entities and related costs to complying
with the exemptions. The Department
requested comment on whether
principal company underwriters would
continue to rely on the existing
provisions of PTE 84–24 or would rely
on the amended PTE 2020–02 but did
not receive any comments on this topic.
Banks and Credit Unions
The amendments to PTE 75–1, PTE
80–83, and PTE 2020–02 may affect
banks and credit unions. There are
4,614 federally insured depository
institutions in the United States,
consisting of 4,049 commercial banks
and 565 savings institutions.536
Additionally, there are 4,645 federally
insured credit unions.537 In 2017, the
GAO estimated that approximately two
percent of credit unions have private
deposit insurance.538 Based on this
estimate, the Department estimates that
there are approximately 95 credit
unions with private deposit insurance
and 4,740 credit unions in total.539
In the proposal, the Department
requested comment on how many banks
and credit unions currently rely on PTE
2020–02, PTE 75–1, and PTE 80–83 for
536 Federal Insurance Deposit Corporation,
Statistics at a Glance—as of September 30, 2023,
https://www.fdic.gov/analysis/quarterly-bankingprofile/statistics-at-a-glance/2023mar/industry.pdf.
537 National Credit Union Administration,
Quarterly Credit Union Data Summary 2023 Q3,
https://ncua.gov/files/publications/analysis/
quarterly-data-summary-2023-Q3.pdf.
538 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.
539 The total number of credit unions is calculated
as: 4,645 federally insured credit unions/
(100%¥2% of credit unions that are privately
insured) = 4,740 total credit unions. The number of
private credit unions is estimated as: 4,740 total
credit unions¥4,645 federally insured credit
unions = 95 credit unions with private deposit
insurance.
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investment advice and also on what
proportion of credit unions offer IRAs or
sell share certificate products. The
Department did not receive any
comments on these questions.
The amendments will 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 or credit unions currently rely on
these exemptions for investment advice.
PTE 75–1 allows banks to engage in
certain classes of transactions with
employee benefit plans and IRAs. The
Department assumes that half of the
4,049 commercial banks, or 2,025 banks,
will 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 assumes that 25 fiduciarybanks with public offering services will
rely annually on the amended PTE 80–
83.
The Department acknowledges that
some credit unions may rely on PTE 75–
1 and PTE 80–83 as amended. However,
the Department does not have data, and
did not receive any comment on the
proposal, to suggest how many credit
unions current rely on these exemptions
or will continue to rely on these
exemptions as amended.
Banks and credit unions relying on
the existing exemptions for investment
advice will be required to comply with
PTE 2020–02 for prohibited transaction
relief for investment advice. Banks and
credit unions will 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.540
Under such arrangements, bank
employees are limited to performing
only clerical or ministerial functions in
connection with brokerage transactions.
540 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.
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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 will not constitute
fiduciary investment advice.
In the proposal, the Department
estimated that no banks or credit unions
would be impacted by the amendments
to PTE 2020–02 but requested comment
on what other types of activities banks
or credit unions may engage in that
would require reliance on PTE 2020–02.
The Department did not receive any
comments on this topic. However, the
Department revisited a comment it
received on PTE 2020–02 in 2020. This
comment suggested that banks may be
providing investment advice outside of
networking arrangements, such as
recommendations to roll over assets
from a plan or IRA or advice to invest
in deposit products.541 The Department
agrees that, if the recommendation
meets the facts and circumstances test
for individualized best interest advice,
or the adviser acknowledges ERISA
fiduciary status, and the remaining
provisions of the final rule are satisfied,
such transactions will require banks to
comply with PTE 2020–02 for relief
from the prohibited transactions
provisions.
Banks may act as investment advisers
to registered investment companies,
often through a separately identifiable
department or division within the bank.
In such cases, the banks, or their
separately identifiable department or
division, would be registered
investment advisers and already
included in our estimate of affected
entities. The Department acknowledges
that some banks may provide
investment advice outside such
arrangements and requested comments
in the proposal on the frequency with
which bank employees recommend
their products to Retirement Investors
and how they currently ensure such
recommendations are prudent to the
extent required by ERISA. The
Department also requested comments on
the magnitude of any such costs and
data that would facilitate their
quantification. The Department did not
receive any comments in response. The
Department does not know how
541 Comment letter received from the American
Bankers Association on the Notification of Proposed
Class Exemption: Improving Advice for Workers &
Retirees, (August 2020).
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frequently these entities use their own
employees to perform activities that will
otherwise be covered by the prohibited
transaction provisions of ERISA and the
Code. Similarly, the Department does
not know how often credit unions
engage in such activities.
The Department acknowledges that
some banks and credit unions may need
to comply with PTE 2020–02. However,
the Department believes that in such
cases, the banks, or their separately
identifiable department or division,
would be registered investment advisers
and already included in the estimate of
affected entities.
Mutual Fund Companies
The amendments will 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
amendments, these mutual funds will
need to rely on PTE 2020–02 for relief
concerning investment advice.
According to the ICI, in 2022, there
were 812 mutual fund companies.542
The Department assumes that all of
these companies are service providers to
pension plans, providing investment
management services.
Non-Bank Trustees
In the proposal, the Department
received several comments concerning
how the rulemaking would affect IRSapproved non-bank trustees and
custodians and HSAs. These comments
are discussed in greater detail in the
preamble. The Department has decided
not to exclude HSAs as Retirement
Investors under the final rule and to
include IRS-approved non-bank trustees
and custodians as Financial Institutions
in the final amendment to PTE 2020–02,
but only to the extent they are serving
in these capacities with respect to
HSAs. In 2022, there were 70 approved
non-bank trustees.543 Many of these
entities are already covered by other
affected Financial Institution categories
under PTE 2020–02. The Department
considered the entities on the approved
non-bank trustee list. The Department
estimates that there are 31 entities that
are not captured in other categories of
Financial Institutions under PTE 2020–
02.
542 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.
543 Internal Revenue Service, Nonbank Trustees
Approved as of October 1, 2022, (October 2022),
https://www.irs.gov/pub/irs-tege/nonbank-trusteelist.pdf.
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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 amendments will modify PTE 83–
1 to exclude exemptive relief for
investment advice. As amended,
mortgage pool sponsors operating as or
under a Financial Institution will be
able to rely on PTE 2020–02 for relief
concerning investment advice. In the
proposal, the Department requested
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. The
Department did not receive any
comments.
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6. Benefits and Transfers
The Department believes that, as a
result of this rulemaking, Retirement
Investors will achieve greater retirement
security by selecting investments that
are more appropriate for their retirement
goals and that reflect an appropriate
level of risk for their situation.
Additionally, the Department expects
that Retirement Investors will avoid
losses resulting from advisory conflicts
of interest. More specifically, this
rulemaking will 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),
• ensuring that advice for Retirement
Investors adheres to a stringent
professional standard of care (i.e., is
prudent),
• giving Retirement Investors
increased trust and confidence in their
advisers and in the reliability of their
advice, and
• better aligning investors’ portfolio
with their risk preferences and savings
horizons as advisers provide
individualized advice based on their
individual circumstances.
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
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other entities in society. The available
data do not allow the Department to
quantify the gains to investors or the
components of social welfare ‘‘benefits’’
and ‘‘transfers.’’ These transfers
represent a gain to Retirement Investors
and are one of the primary objectives of
the final rule and amended PTEs.
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, nonRetirement 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 forgo
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 regulatory
impact analysis, the magnitude of the
gains to Retirement Investors is
uncertain. As noted earlier, advisory
conflicts—which this rulemaking, in
harmony with Federal securities laws,
will 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 imprudent or overpriced annuity or other investment.
Investors stand to gain much from the
mitigation of advisory conflicts. In the
proposal, the Department invited
comments and data related to how it
might quantify these benefits as part of
the regulatory impact analysis of any
final rule. The Department received
multiple comments that quantified
benefits of the rulemaking, and the
Department has considered those
analyses and discussed them in the
section titled Implications for
Retirement Savings Estimates.
Benefits of a Fiduciary or Best Interest
Standard
In response to the proposal, several
commenters asserted that parts of the
economic analysis relied on outdated
studies that do not reflect recent
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regulatory changes and their impact on
the behavior of market actors. These
commenters focused specifically on the
Department’s discussion of mutual fund
load fees and variable annuities,
suggesting that they were irrelevant to
this rulemaking. While the Department
acknowledges that some of the conflicts
of interest it discussed in its 2016
regulatory impact analysis have been
addressed by actions of other regulatory
bodies, it believes that the experience
following its 2016 rulemaking and SEC’s
Regulation Best Interest is instructive in
identifying harm caused by conflicted
advice, how a fiduciary or best interest
standard can reduce those harms, and
the potential benefit to Retirement
Investors of this rulemaking. The
discussion below highlights studies
concerning market segments that have
benefited from the imposition of higher
standards of care. This discussion does
not attribute these benefits to this
rulemaking, but rather illustrates why
the Department expects that extending a
higher standard of conduct to other
sectors will benefit Retirement
Investors.
Evidence in Mutual Funds
The 2016 Rule and recent SEC actions
highlighted inherent conflicts of interest
in how broker-dealers or registered
investment advisers are compensated
for recommending certain share classes
of mutual funds. In the 2016 regulatory
impact analysis, the Department
estimated that, at that time, broker-sold
mutual funds underperformed directsold mutual funds by approximately 50
basis points per year.544 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.’’ 545 Their support of
the Department’s estimate was based on
a study looking at mutual fund T shares.
However, this share class has faded
following the revocation of the 2016
Final Rule.546 As a result, it is largely
544 EBSA, 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.
545 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).
546 Greg Iacurci, T Shares Are Dead,
InvestmentNews (December 20, 2018), https://
www.investmentnews.com/t-shares-are-dead-77482.
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uncertain how many Retirement
Investors would have adopted the new
share class had it been permitted to go
fully into effect.
Despite the decline of T shares
following the revocation of the 2016
Final Rule, mutual fund sales continued
to shift away from more conflicted share
classes. 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.547 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.’’ 548 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.549 550
Meanwhile, other types of share
classes have emerged and grown more
prevalent, including unbundled and
semi-bundled share classes. The
different compensation arrangements for
each of the types of share classes create
different types and magnitudes of
conflicts for financial professionals. 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. Semi-bundled share classes
547 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).
548 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).
549 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.
550 The performance reduction presented in
Christoffersen, Evans and Musto (2013) does not
include loads paid by investors in front-end-load
funds.
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use revenue sharing or sub-accounting
fees. In an unbundled or ‘‘clean’’ share
class, the investor pays any
intermediaries directly, while in a semibundled share class, the fund pays subaccounting fees for recordkeeping
services and uses revenue sharing for
other services, such as distribution.551
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.552
This trend is confirmed by other data
sources. For instance, data published by
the ICI in 2023 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 91
percent in 2022. 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, noload share classes.553 Morningstar
similarly finds that unbundled and
semi-bundled shares accounted for 58
percent of fund assets in 2003 but had
grown to 86 percent by the end of
2022.554 This trend is also observable in
401(k) plans. In 2021, 95 percent of
401(k) mutual fund assets were invested
in no-load funds, compared to 66
percent in 2000.555
These trends were highlighted by
commenters. One commenter remarked
that fees paid by plans and IRA owners
had started to decline independent of
the rule and would likely continue to
decline absent the amendments in the
proposal. This commenter also argued
that the results from Sethi, Spiegel, and
Szapiro (2019) could not have
accounted for the effects of the 2016
551 Ibid.
552 Ibid.
553 Investment Company Institute, Trends in the
Expenses and Fees of Funds, 2022, 29(3) ICI
Research Perspective (March 2023).
554 Morningstar, 2022 U.S. Fund Fee Study,
Exhibit 15 (2022), https://www.morningstar.com/lp/
annual-us-fund-fee-study.
555 Investment Company Institute, The Economics
of Providing 401(k) Plans: Services, Fees, and
Expenses, 2022, 29(6) ICI Research Perspective
Figure 5. (June 2023), https://www.ici.org/system/
files/2023-07/per29-06.pdf.
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Final Rule because the study only
analyzed data through 2017. While data
does indicate that load sharing began to
decline in 2010 after the passage of the
Dodd-Frank Act and that it is difficult
to detangle the changes directly
attributable to the 2016 Final Rule from
changes attributable to existing trends,
there is reason to believe that the 2016
Final Rule did play a significant role.
As written by Sethi, Spiegel, and
Szapiro (2019), ‘‘flows into mutual
funds paying unusually high excess
loads declined after the DOL proposed
its fiduciary rule in 2015, and this shift
was statistically significant. This
reduction in the distortionary effect of
conflicted payments suggests that firms
put in place effective policies and
procedures to mitigate conflicts of
interest in response to the DOL rule.’’ 556
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.557 In the 2016 regulatory impact
analysis, the Department had also
considered how conflicts of interest in
compensation structures may
incentivize excessive trading. Good
advice can help investors avoid timing
errors when trading by reducing panicselling 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.558
The Department sponsored research
studies by Padmanabhan et al. (2017)
and Panis and Padmanabhan (2023) to
analyze recent trends in how investors
timed the purchase and sale of mutual
funds.559 Padmanabhan et al. (2017)
found that during the decade from 2007
to 2016, investors in load funds had
556 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).
556 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).
557 Mercer Bullard, Geoffrey C. Friesen, & Travis
Sapp, Investor Timing and Fund Distribution
Channels, Social Science Research Network (2008).
558 YiLi Chien, The Cost of Chasing Returns, 18
Economic Synopses (2014), https://doi.org/
10.20955/es.2014.18.
559 Constantijn W.A. Panis & Karthik
Padmanabhan, Buy Low, Sell High: The Ability of
Investors to Time Purchases and Sales of Mutual
Funds, Intensity, LLC. (August 14, 2023). https://
www.dol.gov/sites/dolgov/files/ebsa/researchers/
analysis/retirement/buy-low-sell-high-the-ability-ofinvestors-to-time-purchases-and-sales-of-mutualfunds.pdf.
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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.560
After Regulation Best Interest took
effect, there appears to have been a
dramatic improvement in the timing of
trades. Panis and Padmanabhan (2023)
found that 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.561 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
brokers in the earlier period were
associated with customers making more
timing errors, in the later period brokers
were apparently persuading customers
to chase returns a little bit less. It is not
certain what factors underlie the
reduction in timing errors, but 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.
Evidence in Variable Annuities
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The 2016 Final Rule and the SEC’s
Regulation Best Interest also addressed
conflicts of interests in variable
annuities. Similar to mutual funds,
insurance agents and brokers are often
compensated through load fees for
selling variable annuities.562 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.563 This creates a strong
incentive for brokers to sell some
variable annuities over others. Egan, Ge,
560 Karthik Padmanabhan, Constantijn W.A. Panis
& Timothy J. Tardiff, The Ability of Investors to
Time Purchases and Sales of Mutual Funds,
Advanced Analytical Consulting Group, Inc.
(November 1, 2017). https://www.dol.gov/sites/
dolgov/files/EBSA/researchers/analysis/retirement/
the-ability-of-investors-to-time-purchases-and-salesof-mutual-funds.pdf.
561 Panis & Padmanabhan, Buy Low, Sell High,
2023.
562 Frank Fabozzi, The Handbook of Financial
Instruments 596–599 (2002).
563 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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and Tang (2022) showed that variable
annuity sales were four times more
sensitive to brokers’ financial interests
than to investors’ financial interests.564
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 52 percent.565
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 2021.566 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 2021.567
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. 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 riskadjusted 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.568
564 Id.
565 Cerulli Associates, U.S. Annuity Markets 2022:
Acclimating to Industry Trends and Changing
Demand, Exhibit 4.09. The Cerulli Report.
566 Ibid. Data excludes sales of fee-only
independent RIAs.
567 Cerulli Associates, U.S. Annuity Markets 2022:
Acclimating to Industry Trends and Changing
Demand, Exhibit 2.07. The Cerulli Report.
568 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
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It is uncertain what the long-run
effects of the 2016 Final Rule on
variable annuities would have been
because it was vacated. One approach
the Department can use to illustrate the
possible long-run impact of such a
regulation is to apply 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.569
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 (2022) 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.570 A few commenters
argued that the Egan, Ge, and Tang
(2022) study does not account fully for
the benefits annuities may provide or
give context for why some annuities
may be more expensive than others. The
Department agrees that annuities are an
important investment option for
Retirement Investors, which is why it is
important to ensure that the products
being sold are in the best interests of
Retirement Investors. It is possible that
a reduction in investors’ access to
certain products or services occurred
because those products and services
were high cost or low quality. While it
is challenging for a research study to
capture all aspects of a complex market
during a changing policy environment,
Egan, Ge, and Tang (2022) have
performed a rigorous analysis that the
Department can incorporate into its
assessment of the likely impact and
magnitude of how a fiduciary standard
will affect the types of products sold
and how these products are sold.
2022), https://academic.oup.com/rfs/articleabstract/35/12/5334/6674521.
569 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.
570 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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Another study, examining 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 commonlaw fiduciary duty, similarly found 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. (2024) found that
fiduciary duty increased risk-adjusted
returns by 25 basis points.571
Summary
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When the Department first started
looking at conflicts of interest,
compensation practices with mutual
funds and variable annuities were a
source of measurable harm. As
evidenced above, many of those harms
abated in these asset classes once they
were subject to a higher standard of
care. This evidence supports the belief
that Retirement Investors benefit from
imposing a higher standard of care on
advisers.
Further, it underscores the premise of
this rulemaking, that Retirement
Investors will benefit from the
expansion of a higher standard of care
to other asset classes. The benefits for
Retirement Investors of a fiduciary or
best interest standard in the mutual
fund and variable annuity space have
been well established. As discussed in
the Baseline section of this analysis,
there are significant segments of the
investment advice market for
Retirement Investors that do not have
such protections. In these markets,
many of the practices identified as
sources of conflicts of interest in mutual
funds and variable annuities continue to
be common business practice. With the
expansion of a higher standard of care
to these markets, namely non-security
annuities, the Department expects that
there will be significant benefits to
Retirement Investors and that the
findings discussed above provide
insight into the magnitude of these
benefits.
571 Vivek Bhattacharya, Gaston Illanes, & Manisha
Padi, Fiduciary Duty and the Market for Financial
Advice, Working Paper, at 2 (February 27, 2024),
https://www.dropbox.com/scl/fi/
gj5skfflsip2nhee1662c/
Draft.pdf?rlkey=msd12c734n8ddrct
8uzqg0qut&dl=0. This is an updated version of the
working paper cited in the proposal. (See Vivek
Bhattacharya, Gaston Illanes, & Manisha Padi,
Fiduciary Duty and the Market for Financial
Advice, Working Paper, (May 20, 2020), https://
www.nber.org/papers/w25861.
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Regulatory Uniformity
This rulemaking will make the rules
that govern fiduciary advice to plan and
IRA investors across all markets 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 will also remove incentives
for advisers to steer recommendations in
ways that customers cannot monitor and
that run counter to the customers’ best
interest.
The Department received several
comments supporting the Department’s
approach to creating broader regulatory
uniformity for Retirement Investors.
Some commenters expressed concern
that limitations in other regulators’
approaches leave Retirement Investors
at risk. These commenters confirmed
concerns expressed by the Department
with respect to uneven regulatory
standards across products and types of
investors. One commenter noted that
IRA agreements are sometimes used to
specify that advice is not being provided
on a regular basis or that the advice is
not the primary basis for investment
decisions.
The Department also received
comments suggesting that the proposal
would further complicate the regulatory
environment. Another commenter
suggested that the Department’s analysis
did not identify the extent of the
regulatory gap and remaining conflicts.
But, as detailed by another commenter,
[T]he applicable regulations governing the
investment advice will vary based on the role
of the individual providing advice and the
type of investment recommended. For
example, an investment adviser who gives
advice in connection with an IRA may be
subject to the Investment Advisers Act of
1940. A broker giving securities investment
advice in connection with an IRA may be
subject to Regulation Best Interest. An
insurance broker who recommends that a
Retirement Investor rollover their 401(k) into
an IRA and then invest in an indexed annuity
may be subject to the NAIC’s Suitability in
Annuity Transactions Model Regulation, if
their state has adopted the regulation. A
professional who gives advice to invest in a
bank CD or real estate may not be subject to
any of these regulations.’’ 572
572 Comment letter received from St. John’s
University on the Notification of Proposed
Rulemaking: Retirement Security Rule: Definition of
an Investment Advice Fiduciary, (January 2024).
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32211
In describing the limitations of the
NAIC’s Model Regulation for ensuring
that brokers and insurance producers
act in a Retirement Investor’s best
interest, acknowledging that the
Regulation Best Interest only applies to
retail investments in securities, and
highlighting that Regulation Best
Interest rules do not cover an
Investment Professional’s
recommendations made to plan
fiduciaries regarding the investment of
plan assets, the Department has, in fact,
identified those remaining regulatory
gaps that this rulemaking addresses.
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.’’ 573 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.’’ 574 Simply put,
requiring that only some professionals
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.575
The authors conclude, ‘‘These results
suggest that the disclosure requirements
for financial products need to be
consistent across the menu of
substitutable products.’’ This
573 Alec Smith, Advisers, Brokers, and Online
Platforms: How a Uniform Fiduciary Duty Will
Better Serve Investors, 2017(3) Colum. Bus. L. Rev.
1200–1243, at 1233–34 (2017), https://doi.org/
10.7916/cblr.v2017i3.1730.
574 Ibid.
575 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.
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underscores that regulatory regimes that
are not uniform allow advisers to engage
in regulatory arbitrage, leaving their
clients vulnerable to conflicts of
interest.
This rulemaking will help create a
uniform standard, as it will apply to all
retirement investment advice. This will
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.576 The rulemaking’s broad
application to all retirement investment
advice will help different market
participants and different financial
products compete on similar terms for
IRA and plan business. This will 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 rulemaking will help
ensure that these new approaches
evolve toward less conflicted and more
innately impartial business models. The
Department expects that 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 rulemaking will 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 will 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.
576 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.
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Protections Concerning Rollover
Investment Advice
The rulemaking will generate benefits
for, and transfers to, Retirement
Investors 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. The final rule and
amended PTEs will require those
providing advice to consider the higher
fees along with other benefits and costs
when determining whether a rollover is
in a Retirement Investor’s best interest
and making a recommendation.
Large 401(k) plans often have lower
fees than IRAs, though smaller 401(k)
plans sometimes find it difficult to keep
fees low.577 However, one commenter
argued that this rulemaking would
result in plan fiduciaries examining
their investment lineups and the fees
that plans pay, resulting in average costs
for small plan participants decreasing
from 93 basis points down to 75 basis
points, while there would be minimal
changes for most other plans. IRAs often
utilize 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.578
Some commenters suggested that
under the amendments, fewer rollovers
would occur due to higher burdens
associated with making rollover
recommendations. These commenters
expressed concerns that fewer rollovers
from employment-based retirement
plans would prevent the consolidation
of individual retirement accounts,
making it difficult for individuals to
577 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-profile401k.pdf.
578 Pew Charitable Trusts, Small Differences in
Mutual Fund Fees Can Cut Billions from
Americans’ Retirement Savings, Pew Charitable
Trusts Issue Brief, at 4–9 (June 2022), https://
www.pewtrusts.org/-/media/assets/2022/05/
smalldifferenceinmutualfunds_brief_v1.pdf.
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keep track of their retirement savings.
The Department agrees that account
consolidation is an important
consideration for retirement savers but
disagrees that this rulemaking will
prevent rollovers that are in a retirement
saver’s best interest.
SECURE 2.0 codified the option for
recordkeepers to offer an automatic
portability feature to employersponsored plans they service, which
allows for automatic consolidation of
certain IRA accounts with modest
balances into the saver’s new employersponsored retirement plan. Significant
growth in low-cost automatic portability
transactions is expected which will
result in the retention of retirement
savings in retirement plans.579 For a
broader discussion related to the burden
to provide advice for rollover
transactions, see the Costs Associated
with Rollover Documentation and
Disclosure for Financial Institutions
section.
The investment fiduciaries of 401(k)
plans have responsibilities under ERISA
to act in the best interests of, and solely
for the benefit of, the plan participants,
whereas IRA providers have not had
such responsibilities under ERISA.580
Turner and Klein (2014) suggested that
the services and investment
performance associated with higher fees
paid in an IRA are not necessarily
justified,581 meaning a plan participant
would be able to obtain similar
investment performance and services in
a lower cost 401(k) plan.
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 will 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 rulemaking will generate
additional benefits by extending
579 89
FR 5624.
580 Ibid.
581 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.
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protections to investment advice from
insurance agents or Independent
Producers to IRA investors.
In response to the proposal, the
Department received several comments
on how annuities are sold. One
commenter remarked that it takes sales
agents a significant amount of time to
learn about the annuities they
recommend and how to explain these
products to investors. This commenter
stated that fee-based advisers would not
be incentivized to spend as much time
learning about products as those earning
a commission and that fee-based
advisers may face conflicts of interest to
maintain their assets under
management. Another commenter stated
that fee-based advice models serve more
affluent individuals, while commissionbased models work better for ‘‘average
Americans’’ though this was countered
by another commenter that specifically
provides fiduciary advice, primarily
with moderate income clients, using
either a fixed fee or hourly rate.
In response to concerns by
commenters that this rulemaking will
require that advisers change their
payment model, the Department notes
that it does not require the elimination
of sales commissions or other payment
methods; rather, it requires that when
presenting an individualized financial
recommendation to a Retirement
Investor who is expected to act on that
recommendation, the adviser must
uphold their duty of care and loyalty
and place the investor’s interest before
their own. Similarly, it requires that
Insurers adopt and oversee protective
policies and procedures to ensure that
adviser’s recommendations adhere to
these stringent fiduciary standards.
The Department also received
comments that annuities, as an
insurance product, are essentially
different from investment products and
thus comparisons between annuities
and investments otherwise held in
retirement accounts are not appropriate.
These commenters stressed that the
insurance element of annuities provide
a guarantee to investors and protect
investors from risk. Many of these
commenters remarked that the
guarantees of risk mitigation come at an
expense, particularly with regard to
solvency rules that require insurance
companies to meet reserve and capital
requirements. Another commenter
noted that expense ratios and
commissions of annuities are linked to
the type of benefit offered and that the
products with more benefits to investors
have higher costs. The Department
agrees that there are important
differences in the nature of annuities
and investments and that annuities
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serve an important role in preparing for
retirement for many.
However, when Retirement Investors
are considering what products to put
their savings in, they must evaluate how
much to invest in traditional
investments and how much to put into
products, such as annuities. One
commenter expressed support for the
Department’s rulemaking, in light of
significant increases in annuity sales in
recent years. The increase in sales
coupled with the increasing complexity
of annuity products described later in
this section, makes it imperative that a
Retirement Investor can trust an
Investment Professional to be offering
advice in their best interest.
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, and the fact that
investors can face high surrender fees
when attempting to leave inappropriate
annuity contracts early. 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.582
Given their current complexity and
the likelihood that investors may end up
with annuities that are inconsistent with
their individual circumstances, one
commenter posited that if the
rulemaking results in products sold
being more consistent with the needs of
Retirement Investors, there would be a
decline in surrender fees.
As discussed 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.583 Additionally, they differ in
regulatory standards and the required
582 Financial Industry Regulatory Authority,
Annuities, Financial Industry Regulatory Authority,
https://www.finra.org/investors/investing/
investment-products/annuities.
583 Frank Fabozzi, The Handbook of Financial
Instruments 579, (2002), https://
seekingworldlywisdom.files.wordpress.com/2011/
08/the-handbook-of-financial-instrumentsfabozzi.pdf.
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protections owed to customers. While
variable annuities and some indexed
annuities are considered securities, such
that their sale is subject to SEC and
FINRA regulation,584 the standard of
care owed to a customer for other types
of annuities depends on the State
regulation.
Further, the compensation structures
used by financial entities selling
annuities can encourage investment
advice professionals to recommend
annuities that are not in the Retirement
Investor’s best 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’’—luxurious, all expensespaid vacations, golf outings, iPads and
other electronics, expensive dinners,
theatre or professional sports tickets,
and sports memorabilia—to their agents
in exchange for sales to retirees.585
Insurance agents, brokers, and
Independent Producers are often
compensated through commissions for
selling variable and fixed annuities. As
discussed earlier in this analysis,
research has found load fees create a
conflict of interest in investment advice,
leading to decreased returns.586 While
the conflicts, including load fees,
previously identified in variable
annuities have improved, the industry’s
practices relating to commissions in
other product lines remain a concern.
The insurance industry has started to
increase their focus on-fee-based
annuities; however, they still constitute
a small portion of annuity sales.587
Though fee-based annuities do not have
transaction-based conflicts of interest
often associated with commissions, the
products themselves are not conflict
free. Retirement Investors invested in
fee-based annuities are not protected
from other conflicts of interest, so a duty
of care and loyalty on the Investment
Professional would be necessary.
The Department also has concerns
about sales tactics of insurance agents,
brokers, and Independent Producers for
584 Securities and Exchange Commission,
Annuities, Securities and Exchange Commission,
https://www.investor.gov/introduction-investing/
investing-basics/glossary/annuities.
585 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.
586 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.
587 Cerulli Associates, U.S. Annuity Markets 2021:
Acclimating to Industry Trends and Changing
Demand, The Cerulli Report, (2022).
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annuity products. This concern was
echoed by several commenters,
remarking that sales tactics are used to
scare investors into buying complex
products with features that even
experienced investors may have
difficulty comprehending. Additionally,
commenters noted that marketing
materials often suggest a relationship of
trust and confidence. One commenter
remarked that when faced with legal
action for imprudent recommendations
or mismanaged accounts, firms will
argue that ‘‘non-security investment
products, such as equity indexed and
fixed annuities, are not securities and
therefore the brokers were ‘merely’
acting as an insurance agent with a
minimal duty of care, not even subject
to the suitability rule.’’ 588
A number of State regulators have
issued website alerts regarding
deceptive sales practices to sell
annuities to seniors, including ‘‘highpressure sales pitch[es]’’ and ‘‘quickchange 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.589
588 Comment letter received from the Public
Investors Advocate Bar Association on the
Notification of Proposed Rulemaking: Retirement
Security Rule: Definition of an Investment Advice
Fiduciary, (January 2024).
589 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/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.
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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.’’ 590 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.591
Supporting this call for caution, Egan
et al. (2019) found substantial amounts
of misconduct disputes in the sales of
annuities between 2005 and 2015.592 In
another example of conflicted advice,
the SEC barred an adviser for
fraudulently ‘‘[persuading] hundreds of
current and former Federal employees
to liquidate their Thrift Savings Plan
accounts in order to purchase high-fee
variable annuities that netted Cooke and
three other defendants in the case nearly
$2 million in commissions.’’ 593
Barbu (2022) strengthens these
findings with their analysis of ‘‘1035
Exchanges,’’ which allow an annuity
owner to transfer funds from one
annuity contract to another on a tax-free
basis.594 These transactions can involve
any annuity, but they frequently involve
policies originated before the financial
reforms and low interest rate
environment of the late 2000s and early
2010s, which tended to have more
generous benefits, particularly regarding
minimum benefit guarantees.595
Following the Great Financial Crisis of
2008, annuity providers sought to
590 Minnesota Attorney General, Annuities:
Unsuitable Investments for Seniors, Minnesota
Attorney General, https://www.ag.state.mn.us/
consumer/Publications/
AnnuitiesUnsuitableInvforSeniors.asp.
591 Ibid.
592 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.
593 Brian Anderson, SEC Bars Advisor for Federal
Retirement Plan Rollover Fraud https://
401kspecialistmag.com/sec-bars-advisor-forfederal-retirement-plan-rollover-fraud/ (September
2, 2022) accessed February 13, 2024.
594 Barbu, A., Ex-Post Loss Sharing in Consumer
Financial Markets. Tech. rep.,INSEAD. https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=4079524
595 Barbu finds that 70% of 1035 exchanges come
from policies originating before the financial crisis.
Barbu at 10. Minimum benefit guarantees guarantee
consumers certain benefits regardless of market
conditions.
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encourage consumers to forfeit these
generous contracts and exchange them
for newer, less generous contracts and
often offered additional, discretionary
compensation to brokers to encourage
such transactions. Barbu found that for
each one percent increase in
discretionary compensation from
annuity providers, there is a
corresponding 0.85 percent increase in
the intensity of these exchanges.596
Barbu (2022) also found that
customers initiating these 1035
Exchanges are often poorer and more
likely to report an established
relationship with their broker than new
annuity buyers, with 37 percent stating
that broker recommendation was the
main reason for the purchase. The
author concluded that the combination
of high trust and compensation-based
conflicts caused tangible harms to
consumers. In an analysis of FINRA
disciplinary actions against four large
annuity firms, the author found material
omissions or misrepresentations which
undervalued the contracts in 50 to 77
percent of the investigated annuity
exchanges.597
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. (2024)
found that fiduciary duty increases riskadjusted returns of deferred annuities by
25 basis points, though it was
accompanied by a 16 percent decline in
the entry of affected firms.598 Barbu
(2022) strengthens these findings with
his analysis of the effects of New York’s
Best Interest Regulation 187. Barbu
finds that, immediately after New York
implemented its rule, 1035 annuity
exchange transactions in New York fell
60 percent from their baseline values in
comparison with the rest of the
country.599 It is unclear how those
effects would persist in the long-term,
596 The definition of 1035 exchange intensity,
according to Barbu, is the total amount of 1035
exchanges divided by total assets.
597 Barbu, A., Ex-Post Loss Sharing in Consumer
Financial Markets at 61 (Table X). Tech.
rep.,INSEAD. https://papers.ssrn.com/sol3/papers.
cfm?abstract_id=4079524.
598 Vivek Bhattacharya, Gaston Illanes, & Manisha
Padi at 2, Fiduciary Duty and the Market for
Financial Advice, Working Paper, (February 27,
2024), https://www.dropbox.com/scl/fi/gj5skffl
sip2nhee1662c/Draft.pdf?rlkey=msd12c734n8ddrct
8uzqg0qut&dl=0. This is an updated version of the
working paper cited in the proposal. (See Vivek
Bhattacharya, Gaston Illanes, & Manisha Padi,
Fiduciary Duty and the Market for Financial
Advice, Working Paper, (January 13, 2020), https://
www.nber.org/papers/w25861.
599 Barbu, A., Ex-Post Loss Sharing in Consumer
Financial Markets at 28. Tech. rep.,INSEAD.
https://papers.ssrn.com/sol3/papers.cfm?abstract_
id=4079524
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though these results suggest that the
rulemaking will improve the quality of
advice in the investment market and
protect the welfare of investors and
retirees.
Approximately $3.8 trillion in
pension entitlements are held in
annuities at life insurance companies,
including those within IRAs.600 Advice
associated with many of these assets are
already subject to a best interest
standard, such as variable annuities and
registered index-link annuities that are
covered by Regulation Best Interest or
annuities that are sold in States with a
fiduciary standard. LIMRA estimates
that variable annuities and registered
index-linked annuities account for $98.8
billion, or 26 percent of total annuity
sales in 2023.601 In addition, the State
of New York, which enforces a higher
standard of care on annuity sales,602
accounted for 2.6 percent of fixed
annuity sales in 2016.603 Accordingly,
the Department estimates that
approximately 30 percent of annuity
sales are subject to the SEC’s Regulation
Best Interest or a similar standard while
the remaining 70 percent of the annuity
market is not subject to a material
conflicts of interest standard as stringent
as either the Department’s approach
under ERISA or the SEC’s approach.
Additionally, the Department has
assumed in this rulemaking that 80
percent of annuity sales are covered by
ERISA, suggesting that $2.1 trillion in
ERISA-covered pension entitlements
held in annuities are not covered by a
best interest standard.604 If, consistent
with Bhattacharya et al. (2024), the
rulemaking results in a 25-basis point
increase in risk-adjusted returns, the
expansion of fiduciary duty would lead
to annual gains for investors (a mix of
societal benefits and transfers) of $5.3
billion.605
The benefits of this rulemaking’s
application of fiduciary status to
investment advice from insurance
agents, brokers, and Independent
Producers include eliminating the
600 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/
z1/20230608/html/l227.htm.
601 LIMRA, Preliminary U.S. Individual Annuity
Sales Survey (2023, 4th Quarter).
602 N.Y. Comp. Codes R. & Regs. Tit. 11 § 224.4.
603 National Association for Fixed Annuities,
2016 State-by-State Fixed Annuity Sales Study,
(2017), https://nafa.com/online/library/2016-NAFAAnnual-Sales-Study.pdf.
604 For more information on this assumption,
refer to the Affected Entities section.
605 $3.8 trillion in assets × 70% of the assets not
covered by a fiduciary standard × 80% covered by
ERISA × 0.25% increase in returns = $5.3 billion.
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incentives for regulatory arbitrage by
those agents. Without this rulemaking,
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 or
investment advisers operating under
Regulation Best Interest or the Advisers
Act fiduciary duty, respectively, cannot.
Case Study: Indexed Annuities
The Department is 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.’’ 606 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.607 Additionally, the sheer
number of indexes has increased from a
dozen in 2005 to at least 150 in 2022,
and their complexity has expanded,
with 94 percent including a mix of one
or more indexes plus a cash or bond
component.608 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
• Interest caps limit the returns if the
underlying index sees large returns.609
606 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.
607 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.
608 John Hilton, Kings of the Hill: Indexed
products spur life, annuity sales, InsuranceNewsNet
Magazine (July 1, 2022), https://
insurancenewsnet.com/innarticle/kings-of-the-hill.
609 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.
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FINRA also warns that indexed
annuities may be able to change these
contractual limitations, depending on
the terms of the contract.610
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.’’ 611 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.’’ 612
Early versions of fixed index
annuities were fairly straightforward,
with a guaranteed minimum value
based on a share of premium payments
with a potential for additional interest
returns based on the performance of an
underlying equity index. Over time,
additional features and enhancements
were added, including alternative
crediting strategies such as multi-year
and monthly index averaging; the
introduction of new and increasingly
complex indices; and optional riders,
including long-term care, death, and
guaranteed lifetime withdrawal benefit
(GLWB) riders.613 The structure of fixed
index annuities created added
complexity on both the product level
from multiple formulas required to
calculate interest to be credited to an
account within a stated period, and the
investment decision level given the
number of potential, both standard and
engineered, indexes.
610 Id.
611 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.
612 Id.
613 Low, Zi Xiang, Manabu Shoji, and David
Wang. ‘‘Fixed Index Annuity Overview in the U.S.
and Japan,’’ Miliman White Paper (November 2023).
https://www.milliman.com/-/media/milliman/pdfs/
2023-articles/11-15-23_fixed-indexed-annuityjapan-vs-us-markets.ashx.
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The complexity of some index options
allows insurance companies to reduce
volatility by adjusting the index’s
exposure to risk based on market
conditions. These include volatilitytargeting indexes, which are designed to
maintain a consistent level of volatility
over time by automatically adjusting
exposure to riskier assets, and minimum
variance indexes, which select stocks
with the lowest historical volatility and
adjust the weights of each stock to
achieve a target level of risk.614 Some
indexes incorporate an ‘‘excess return’’
component, where a benchmark return
is subtracted from the gross return to
determine the amount of ‘‘excess’’
return that contract owner will earn.
Depending on market conditions, it is
possible that the excess return feature
will materially erode the return on the
annuity, which may create confusion
and disappointment for owners who do
not fully understand the complexity and
potential impact of this feature.615
In 2023, CEA examined the proposed
rule and analyzed publicly available
data to provide an example of how
retirement savers investing in fixed
index annuities could end up with
lower returns than they would if they
had the rule in place. CEA provided an
illustration of how to try to quantify the
benefits and costs of a fixed index
annuity, using the fair market price of
the options. In this example, CEA used
the S&P 500 price index on Bloomberg’s
options pricing calculator for a specified
day in 2023. Based on those
calculations, CEA estimated that
investors on that date could be paying
1.2% of the assets they invested, as the
downside protection and loss of upside
potential at the time of investment.616
CEA noted that this 1.2% cost did not
include the additional explicit sales
charges or fees, or any transaction costs
or operational costs. CEA also observed
that a risk-averse investor might be
willing to pay more than fair value, to
insure against the possibility of loss,
which would add further to the cost. All
of this highlights the lopsided fair value
of the contract for a fixed index annuity,
CEA opined. This is consistent with the
614 Bhauwala, Nikhil. What Are Volatility Control
Indexes? What Does It Mean For You As An
Annuity Holder and Advisor?, AdvisorWorld (Feb.
25, 2023), https://advisorworld.com/annuities/
annuity-faqs/what-are-volatility-control-indexeswhat-does-it-mean-for-you-as-an-annuity-holderand-advisor/#What%20Are%20RiskControlled%20Indexes.
615 Ibid.
616 CEA’s estimate was calculated using August 1,
2023 end-of-day prices, using the historic volatility
of the S&P 500 price index on Bloomberg’s options
pricing calculator, with the put option’s strike price
at the current index price, the call option’s strike
price at 6.75% above the index’s price on August
1, and the maturity of the option at 1 year.
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Department’s analysis on the benefit of
this rulemaking to plan participants and
Retirement Investors purchasing
annuities. Indeed, as CEA noted
elsewhere in its analysis, if total assets
invested in fixed index annuities in
2021 had paid 1.2 percent of assets 617
for the protection of an annuity, forgone
returns could be as high as $7 billion.
In its comment letter on the proposal to
the Department, Morningstar evaluated
the impact of the rule on Retirement
Investors rolling funds into fixed
indexed annuities. To capture how
commissions might decline,
Morningstar compared pricing spread
for fixed index annuities and fixed-rate
annuities, where the pricing spread is
defined as ‘‘the yield that the insurance
company takes from the earned rate of
the supporting general account portfolio
for overhead costs and profit.’’ Based on
the annual premium volume of total
fixed index annuities sales in 2023, they
estimated that retirement savers rolling
funds into fixed index annuities would
save $3.25 billion per year in fees under
this rulemaking, and this is without
considering other benefits, such as the
reduction in surrender fees due to more
appropriate annuity contracts.618
Protections Concerning Advice Given to
Plan Fiduciaries
This rulemaking will also yield
economic benefits by extending
protections to advice given to ERISA
plan fiduciaries. Accordingly, the
rulemaking will 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 generally is not
covered by Regulation Best Interest
because the plan fiduciaries are
typically not retail customers.619 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
617 1.2 is the percent of assets paid for a fixed
indexed annuity on Aug. 1, 2023, as noted in the
Appendix to CEA’s analysis.
618 Comment letter received from Morningstar on
the Notification of Proposed Rulemaking:
Retirement Security Rule: Definition of an
Investment Advice Fiduciary, (January 2024). This
estimate is a result of a forecast of mean account
balances for fixed annuities after seven years. The
estimate assumes that 55 percent of annuities sales
would be affected by the final rule.
619 Advice provided by an investment adviser to
a plan fiduciary is subject to the Advisers Act
fiduciary duty.
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funds.’’ 620 The rulemaking aims to
reduce or eliminate such harmful
favoritism.
Pool et al. (2022) demonstrated that
funds that 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.621 Pool states
that this is ‘‘consistent with the notion
that . . . less transparent indirect
payments allow record keepers to
extract additional rents from plan
participants.’’ 622 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.623
In its comment letter regarding the
proposal, Morningstar argued that under
this rulemaking, Retirement Investors
would save $55 billion in fees over the
next 10 years as workplace retirement
plan seek cheaper investment
options.624 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’ savings.
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
620 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.
621 Veronika K. Pool, Clemens Sialm, & Irina
Stefanescu, Mutual Fund Revenue Sharing in 401(k)
Plans, Vanderbilt Owen Graduate School of
Management Research Paper at 30–31 (November 8,
2022), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3752296.
622 Ibid. at 36.
623 See Employee Benefits Security
Administration, 2013–03A, Advisory Opinions,
(2013), https://www.dol.gov/agencies/ebsa/aboutebsa/our-activities/resource-center/advisoryopinions/2013-03a.
624 Comment letter received from Morningstar on
the Notification of Proposed Rulemaking:
Retirement Security Rule: Definition of an
Investment Advice Fiduciary, (January 2024).
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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.625
Likewise, if investors trust investment
advice providers more than is
warranted, they may reduce their
monitoring of the adviser’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.626 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
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).627
By ensuring that, when advisers hold
themselves out as occupying a position
of trust and confidence, they are
actually held to that standard, this
rulemaking will ensure that legitimate
investor expectations of advice that is in
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625 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.
626 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-99b15fd43782b0c4%40redis.
627 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.
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their best interest are upheld, rather
than dishonored. Relatedly, persons
who are not in fact, willing to adhere to
a fiduciary standard when making
recommendations to Retirement
Investors will need to be candid about
that fact. Accordingly, this rulemaking
will facilitate efficient, trust-based
relationships between Retirement
Investors and investment advice
providers of all types, so investors will
be more likely to obtain and follow
beneficial advice that is consistent with
their retirement goals.
In response to the proposal, several
commenters weighed in on the benefits
of advice to investors, such as better
asset allocation, diversification, tax
strategies, and investment strategies.
Some of these commenters suggested
investors will lose access to education
and advice and that these benefits of
having access to this type of advice may
outweigh the risks of conflicted advice,
and as a result, the Department
overestimates the benefits of the
proposal. This argument, however,
assumes, in large part, that as a result of
the rulemaking, investors will no longer
have access to basic information and
education regarding such matters as
asset allocation, diversification, as well
as tax and investment strategies, which
the Department has expressly carved out
from the scope of fiduciary advice.
Moreover, the rule has carefully limited
its treatment of investment
recommendations as fiduciary
recommendations to those
circumstances where a reasonable
investor would believe that the adviser
occupies a position of trust and
confidence. And, in those
circumstances, the obligations imposed
by the rulemaking are clearly aligned
with the obligations imposed by
Regulation Best Interest. The
Department does not believe that
requiring trusted advisers to act with
care and loyalty, or avoid misleading
statements or overcharges—the core
obligations of the rulemaking—will
result in the loss of access to the wide
range of investment products and
advisory services available today in the
financial marketplaces. In substantial
part, the rulemaking simply requires
advisers to adhere to standards
consistent with the way they hold
themselves out to their customers.
Moreover, many other commenters
shared the Department’s concern for
conflicted advice, particularly with onetime advice, referencing the magnitude
of potential losses.
There is extensive evidence that
investors are often subject to behavioral
biases that lead to costly systematic
investment errors. There is evidence
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that good advice can improve saving
and investing decisions. Accordingly,
the rulemaking 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.’’ 628
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.’’ 629
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.’’ 630 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 rulemaking, the full range
of covered investment advice
interactions with Title I Plans will be
subject to enforcement by the
Department, as well as to private claims
628 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.
629 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.
630 Id.
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by Retirement Investors. 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 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 rulemaking is
implemented effectively. For advice
interactions that are subject to State
regulation, under the rulemaking they
will 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.631 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. Consequently, the
addition of ERISA’s remedial provisions
and enforcement can be expected to
enhance compliance with the obligation
to give advice that is prudent and loyal,
even under the SEC’s closely aligned
conduct standards.
The rulemaking will 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 will 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, will make a
Financial Institution ineligible to rely
on PTE 2020–02 and PTE 84–24,
631 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.
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provided that a finding of ineligibility
satisfies the timing and scope of
ineligibility provisions under the
amendments to PTE 2020–02 and/or
PTE 84–24, as applicable. The
Department believes these additional
conditions will provide important
protections to Retirement Investors by
enhancing the existing protections of
PTE 2020–02 and PTE 84–24.
7. Impact of the Rulemaking on Small
Account Retirement Investors
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 regulatory
action and become worse off. The
Department has considered in detail the
overall impact of this rulemaking on
small savers and, after careful review,
disagrees.
The Department recognizes that
investment advice is often very valuable
for small savers. There is 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.632 In particular, less
sophisticated investors may benefit from
additional guidance to make sure they
are taking basic steps such as saving
adequately and allocating their
investments with an appropriate
amount of risk.
However, small savers are especially
vulnerable to the detrimental effects of
conflicted advice as they cannot afford
to lose any of their retirement savings,
and therefore stand to benefit
significantly from this rule. Advisory
conflicts have historically distorted the
market in ways that have prevented
consumers from accessing less
conflicted investment alternatives. With
632 EBSA, 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’’).
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fewer economic resources, small savers
are particularly susceptible to any
practices that diminish their resources
by extracting unnecessary fees or by
yielding lower returns. 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.633 This is
supported by research illustrating that
consumers have difficulty observing
fees and accounting for them in their
financial decisions.634 Moreover,
limited transparency in what can be
complex compensation arrangements of
potentially conflicted adviser
relationships impedes the ability of
even knowledgeable investors to fully
understand the cost and impact of
conflicts of interest on their
investments.635 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.636 Moreover, it is possible that
these small savers do not understand
the potential effects of their advisers’
conflicts and that disclosure directly to
these consumers is unlikely to change
this without other protections in
place.637 Cain, Loewenstein, and Moore
find just that, observing that while
investors do not sufficiently discount
advice when conflicts are disclosed,
advisers that disclose a conflict ‘‘feel
morally licensed’’ to provide biased
advice, potentially exacerbating the
conflict at the expense of investors.638
633 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.
634 Edelen, Roger M., Evans, Richard B. and
Kadlec, Gregory B., ‘‘Disclosure and agency conflict:
Evidence from mutual fund commission bundling,’’
Journal of Financial Economics, Elsevier, vol.
103(2), pp. 308–326 (2012).
635 Beh, Hazel, and Amanda M. Willis. ‘‘Insurance
Intermediaries.’’ Connecticut Insurance Law Journal
15, no. 2 (2009): 571–98.
636 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).
637 EBSA, 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-andregulations/completed-rulemaking/1210-AB32-2/
ria.pdf.
638 Cain, Daylian M., George Loewenstein, and
Don A. Moore. ‘‘The Dirt on Coming Clean: Perverse
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The Department also believes that
having a common, high standard of
conduct associated with retirement
investment advice will increase trust in
advisers and Financial Institutions, and
make it more likely that small savers
will seek advice.
Small investors often save using an
ERISA plan, with roughly 38 percent of
U.S. households having one or more
defined contribution retirement plans
with a non-zero balance and of those,
more than one-third having a balance
with less than $25,000.639 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.640
This rulemaking will require advice
given to the plan fiduciaries to meet a
fiduciary standard, resulting in
improvements in plan design and
selection of investments on the menu
that will benefit small savers as 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.641
Moreover, because research shows that
lower-income participants tend to be
more influenced by default options than
high income participants, small savers
will benefit from plan fiduciaries
choosing default options that are well
selected and well monitored.642
The Department received comments
to its proposal arguing that extending
the fiduciary definition would result in
advisers exiting smaller account markets
such as small employer-based plans and
lower balance IRAs which would cause
small investors to have less access to
Effects of Disclosing Conflicts of Interest.’’ Journal
of Legal Studies 34 (2005): 1–25.
639 EBSA tabulations based on the 2019 and 2022
Federal Reserve Board, Survey of Consumer
Finances.
640 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.
641 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.
642 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.
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professional financial advice. These
comments largely relied on a survey of
broker-dealers and other financial
advisory firms conducted after the
Department’s 2016 Rulemaking, which
theorized that ‘‘in order for investors to
retain access to advice on retirement
accounts from the study participants,
who eliminated or limited advised
brokerage access, 10.2 million accounts
would have to move to a fee-based
option.’’ It is important to note,
however, that the survey was
commissioned by a party that sued to
block the Department’s 2016
Rulemaking, that participants were selfselected, responses were not verified,
and the Department is not aware of any
follow-up study having been conducted
to determine how many of those
accounts actually lost access to advice
as the survey did not account for
customers’ ability to move to different
firms or the availability of a full range
of investment choices and advisory
arrangements in the market as a
whole.643 In particular, the same survey
cited by commenters stated that while
firms may eliminate or limit advised
brokerage platforms, they generally also
acknowledged they would still give
Retirement Investors other options such
as a fee-based program, a self-directed
brokerage account, robo-advice, or a
call-center.644 Moreover, the analysis
was not based on the current
rulemaking, which is more narrow in
scope.
Because the 2016 rulemaking was
vacated prior to full implementation, it
is not possible to ascertain precisely
what impact the rule would have had if
it had been permitted to move forward.
Irrespective of one’s views on that
question, however, this rulemaking is
not the equivalent of the 2016 rule, as
discussed above, but rather is much
more aligned with the SEC’s Regulation
Best Interest. It is worth noting that
there has not been a decline in access
to advice associated with the
implementation of Regulation Best
Interest. In fact, analysis of the Survey
of Consumer Finances found that the
use of brokers as a source of advice for
savings and investing among
households under 65 with below
643 See Deloitte, The DOL Fiduciary Rule: A Study
in How Financial Institutions Have Responded and
the Resulting Impacts on Retirement Investors,
(August 9, 2017) (Deloitte 2017 study). The Deloitte
2017 study explains that the study participants
were ‘‘invited’’ by SIFMA and notes that Deloitte
‘‘was not asked to and did not independently verify,
validate or audit the information presented by the
study participants.’’ Id. at 4–5, 5 fn. 5.
644 Deloitte, The DOL Fiduciary Rule: A Study in
How Financial Institutions Have Responded and
the Resulting Impacts on Retirement Investors,
(August 9, 2017).
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32219
median incomes increased modestly
between 2019 and 2022.645
Moreover, in a 2024 random survey of
its members, the Certified Financial
Planner (CFP) Board found that most
members’ ability and willingness to
serve their client was not impacted by
the adoption of SEC’s Regulation Best
Interest, with 82 percent not raising the
required investable asset minimum for
clients and 86 percent not terminating
client services following the rule.646
Given these responses to similar
regulatory changes, the Department is
skeptical that the market will react to
this rulemaking and its requirement that
entities provide advice that is prudent
and loyal, by ceasing to offer the full
range of investment and advice models.
Rather, the Department anticipates that
by requiring advisers to accurately
represent the nature of their relationship
and advice, retirement investment
advice markets will work more
efficiently and result in innovations and
cost-efficient delivery models to provide
prudent and loyal advice to small
investors. While individual firms may
adjust their offerings, and investors may
respond by switching firms, there is still
every reason to expect that after a
transitional period there will be a wide
range of products and services available
across the market.
The Department also received several
comments that argued this rulemaking
would exacerbate the racial wealth gap,
citing a study conducted in 2021, two
years prior to the proposal, that cannot
address the contours of this more
targeted rulemaking. Additionally, the
cited 2021 study does not account for
changes to the regulatory and legal
environment since the 2016 Final Rule,
including the SEC imposing a Best
Interest standard on financial advice
provided to retail investors for securities
by brokers and dealers, and the SECURE
and SECURE 2.0 Acts’ provisions which
promote access to retirement plans and
portability within the retirement system.
Furthermore, the cited study does not
account for the share of Black and
Hispanic households that used financial
advisers to estimate how those
population would be impacted by either
the 2016 Final Rule or the current
rulemaking. Moreover, as pointed out by
another commenter, the study ‘‘cites a
2019 Vanguard study by Kinniry Jr., et.
al. that estimates that Vanguard’s
Personal Advisor Services could add 3
percent to annual net returns. However,
645 Tabulations from the 2019 and 2022 Survey of
Consumer Finances.
646 CFP Board of Standards, Access to Financial
Advice Survey, (Mar. 2024). 2024-access-tofinancial-advice-report.pdf (cfp.net).
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Vanguard advisers are fiduciaries who
do not offer conflicted advice and so
would not be affected by the proposed
rule.’’ As such, the Department does not
consider critiques arguing that this
rulemaking will exacerbate the wealth
gap to be valid.
Another commenter stated that for
fixed and fixed indexed annuities, feebased advice models serve more affluent
individuals, while salespeople
compensated using commissions tend to
serve the needs of ‘‘average Americans,’’
suggesting that this rulemaking will
negatively impact access to these types
of annuities for smaller savers.
However, this argument is premised on
two false assumptions: that this
rulemaking eliminates the use of
commissions, and that commissionbased annuities are largely marketed to
lower-income savers. As noted above,
the Department does not require the
elimination of sales commissions or
other payment methods; rather, it
requires that when presenting an
individualized financial
recommendation to a Retirement
Investor who is expected to act on that
recommendation, the adviser must
uphold their duty of care and loyalty
and place the investor’s interest before
their own.
In addition, when making this
argument the commenter referenced a
survey from the Committee of Annuity
Insurers that reported the median
household income of annuity holders is
$79,000 and argued that this is
significantly below that of the median
income for a middle-class household.647
However, the survey also indicates that
78 percent of annuity owners are retired
and that the median age of annuity
owners is 74. Given that the majority of
annuity holders are retired and therefore
do not earn a wage or salary, which
significantly impacts household income,
comparing the median annuity holder’s
household income to that of all
households, including those still in the
workforce, is inappropriate. A more
appropriate comparison is that of
median household incomes for ages 65
to 74 (below the median age of annuity
holders), which in 2022 was $61,000,
suggesting that annuity holders are
actually substantially wealthier than
their peers.648
647 The Committee of Annuity Insurers, Survey of
Owners of Individual Annuity Contract. (July 2022)
https://www.annuity-insurers.org/wp-content/
uploads/2023/07/Gallup-Survey-of-Owners-ofIndividual-Annuity-Contracts-2022.pdf.
648 Federal Reserve Board 2022 Survey of
Consumer Finances. https://
www.federalreserve.gov/econres/scf/dataviz/scf/
chart/#series:Before_Tax_
Income;demographic:agecl;
population:5,6;units:median;range:1989,2022.
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In contrast, other commenters
disputed the claim that this rulemaking
will reduce small savers’ access to
investment advice. The CFP Board
noted that after it ‘‘adopted a broad
fiduciary standard, the CFP Board saw
no evidence that CFP professionals
stopped providing advice to moderateincome clients. The CFP Board also has
seen no evidence to suggest that the
proposed rule would restrict access to
advice, particularly for moderateincome Americans.’’ 649 In fact, the CFP
Board reported that after its new
standards were adopted, only 10 percent
of their members raised required asset
minimums and only 6 percent
terminated client services.650 The new
standards also did not discourage entry
of new financial professionals with a
record number of new CFP certificants
in 2023—also the most diverse class in
the Board’s history.651 Another
commenter noted that they disagreed
with the assertion that the rulemaking
would result in reduced access to
advice, noting that they ‘‘provide
financial planning services and
retirement advice to clients from all
backgrounds and income levels. Rather
than limiting access, adoption of the
Proposed Rule will likely lead to
increased marketplace innovation and
to the development of improved
financial products and services
benefitting all retirement savers.’’
Moreover, the preliminary market
reactions to the 2016 Rule differed from
what the industry anticipated at the
time and reiterated in response to the
2023 proposal. In a survey conducted in
September 2017, 82 percent of brokerdealers 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.652 In
examining the effects of the 2016 Final
Rule, Egan, Ge, and Tang (2022) found
that while variable annuity sales had
649 Comment letter received from the Certified
Financial Planner Board of Standards on the
Notification of Proposed Rulemaking: Retirement
Security Rule: Definition of an Investment Advice
Fiduciary, (January 2024).
650 CFP Board of Standards, Access to Financial
Advice Survey, (Mar. 2024), https://www.cfp.net/-/
media/files/cfp-board/Knowledge/Reports-andResearch/2024-Access-to-Financial-AdviceReport.pdf.
651 CFP Board Approaches 100,000 CFP
Professionals, with the Most Ever Exam-takers in a
Single Year, (January 11, 2023), www.cfp.net/news/
2024/01/cfp-board-approaches-100000-cfpprofessionals-with-most-ever-exam-takers-in-asingle-year. Last accessed 3/7/2023.
652 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.
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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. Therefore, the study
concluded that investor welfare had
improved overall because of the 2016
Rulemaking, despite the fact that it was
vacated.653
Further, as discussed in the Benefits
and Transfers section, one notable
response from the industry to the 2016
Rulemaking was the creation of two new
share classes of mutual funds: clean
shares and T shares (or transactional
shares). Clean shares provide greater
transparency for investors and are sold
‘‘without any front-end load, deferred
sales charge, or other asset-based fee for
sales or distribution.’’ 654 While T shares
have front-end loads, they have ‘‘a
standard, maximum sales charge across
all fund categories of 2.5 percent and a
0.25 percent 12b–1 fee.’’ 655 According
to a 2017 report from Morningstar, T
shares would ‘‘help financial advisors
maintain their traditional business
model—selling mutual funds on
commission—while complying with
new rules. Further, these T shares
would feature uniform commissions,
reducing or eliminating financial
advisors’ conflicts of interest in making
recommendations to clients.656
Following the revocation of the 2016
Rulemaking, the industry has moved
away from offering T shares,657 while
the offering of clean shares has
increased in recent years.658 This
response suggests that, rather than
choosing to stop offering services to
smaller investors, the industry is likely
to find alternative means to provide
services to this segment of the market.
653 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).
654 SEC, Introduction to Investing: Glossary,
https://www.investor.gov/introduction-investing/
investing-basics/glossary/clean-shares.
655 Morningstar, Descriptions of Share Class
Types, https://morningstardirect.morningstar.com/
clientcomm/Share_Class_Types.pdf.
656 Aron Szapiro and 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).
657 Greg Iacurci, T Shares Are Dead,
InvestmentNews (December 20, 2018), https://
www.investmentnews.com/t-shares-are-dead-77482.
658 Rebecca Moore, Clean Shares’ Popularity, Plan
Adviser, (October 2023), https://
www.planadviser.com/print-page/?url=https://
www.planadviser.com/magazine/clean-sharespopularity/&cid=46591.
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As in 2016, the Department expects that
industry’s response to this rulemaking
will be to offer alternative, less
conflicted, products and services to
small investors.
The surveys, papers, and predictions
described above do not support a
finding that small investors would lose
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
final rule and exemptions. This
rulemaking broadly comports with
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 rulemaking accommodates
different types of business models. 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
(which generally provides a customized
investment mix based on information
about the investor’s financial
circumstances and existing investment
assets).659
The Department expects the final rule
and exemptions will not significantly
impact the overall availability of
affordable investment advice, but rather
improve the quality of this advice as
conflicts are removed. This will 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 United Kingdom, which adopted a
far more aggressive stance in addressing
conflicted advice than the Department
proposed in the 2016 Rulemaking or the
current rulemaking. When the United
659 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.
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Kingdom 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 38 percent
increase in the number of United
Kingdom adults that received regulated
financial advice in the past year and a
12-percentage point increase in
consumer awareness of automated
advice,660 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.661 Moreover, while the total
number of firms fell, the number of staff
advising on retail investment products
increased by 5 percent between 2018
and 2022.662
The Department has reason to believe
that such alternative forms of advice
have become more available in the
United States and, as in the United
Kingdom, 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.663 Because the core portfolio
management functions are performed by
660 The United Kingdom Financial Conduct
Authority, Financial Lives 2022 Survey: Consumer
Investment and Financial Advice, Evaluation of the
Impact of the Retail Distribution Review and the
Financial Advice Market Review, (July 2023),
https://www.fca.org.uk/publication/financial-lives/
fls-2022-consumer-investments-financialadvice.pdf.
661 The United Kingdom 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/fs1602.pdf).
662 The United Kingdom Financial Conduct
Authority, Data from the Retail Mediation Activities
Return (RMAR), 2018–2022 (August, 2023), https://
www.fca.org.uk/data/retail-intermediary-market/
previous-editions-retail-intermediary-market-data.
663 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.
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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 are often willing to serve
investors with assets under $500,664 and
some robo-advisers do not require a
minimum investment at all.665 The
financial needs of small investors can
often be met by the degree of
customization offered by robo-advice
and do not justify a more expensive,
extremely personalized strategy.
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 the traditional conflicts of interest
for advisers discussed elsewhere in this
analysis (e.g., 12b–1 fees or subtransfer
agent fees).666
The Department did receive some
comments voicing concerns with regard
to robo-advice, particularly in regard to
market downturns with one commenter
noting, ‘‘the use of model portfolios—a
hallmark of ‘robo-advice’—can lead to
herd like behavior, thus putting
participants at risk of disaster when
their models do the same thing for all
investors at the same time.’’ However,
the use of model portfolios is not unique
to robo-advice and has grown more
prevalent in recent years. Many
traditional investment advisers rely on
model portfolios to outsource
investment management and free up
Investment Professionals’ time to
provide other services. In 2023,
approximately $424 billion were
invested in model portfolios, a 48
percent increase from 2021.667
A recent study by Liu et al. (2021)
looked specifically at the impact of
using robo-advisers on investment
664 Wealthfront, Account Minimums to Invest
with Wealthfront, Wealthfront, https://
support.wealthfront.com/hc/en-us/articles/
210994423--Account-minimums-to-invest-withWealthfront.
665 One example is Betterment. See Betterment,
Pricing at Betterment, Betterment, https://
www.betterment.com/pricing/.
666 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).
667 Millson, Adam, U.S. Model Portfolio
Landscape: 2023 in Review, Morningstar Manager
Research (February 2024).
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performance during the 2020 financial
crisis caused by the COVID–19 global
pandemic.668 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.
Similarly, a study by D’Acunto et al.
(2018) looked at how the introduction of
robo-advice changed investor behavior
in India. The study found that following
the introduction of robo-advice,
investors that had been underdiversified improved their
diversification and experienced better
portfolio performance through roboadvice. On the other hand, investors
that had been well-diversified prior to
the introduction of robo-advice did not
change their diversification, but did
increase their trading activity, which
did not translate into better
performance.669
While the Department does recognize
that robo-advice is not a completely
conflict-free solution to providing lowcost, investment advice, based on these
findings, the Department believes that
robo-advice can still play a vital role in
the investment advice landscape for
Retirement Investors, particularly for
younger, lower-balance investors.
Additionally, while the rate of adoption
of pure robo-advice has slowed, firms
have begun adding hybrid financial
advice offerings that blend access to a
human adviser with automated
advice.670 These hybrid robo-advice
alternatives may mitigate some of the
concerns expressed regarding pure roboadvice.671 With the same fiduciary
668 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.
669 Francesco D’Acunto, Nagpurnanand Prabhala,
& Alberto G. Rossi, The Promises and Pitfalls of
Robo-Advising, 32(5) The Review of Financial
Studies 1983–2020, (April 2019), https://doi.org/
10.1093/rfs/hhz014.
670 Purcell, Kylie. ‘‘Are Robo-Advisers Still the
Answer to Costly Advice or a Dying Breed?’’
Nasdaq (November 24, 2023). https://
www.nasdaq.com/articles/are-robo-advisors-stillthe-answer-to-costly-advice-or-a-dying-breed.
671 Morningstar, ‘‘2023 Robo-Advice Landscape.’’
(August 2023). https://institutional.vanguard.com/
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standard applying to all of these types
of advice, this Rulemaking ensures that
different business models will be treated
in a consistent manner and that
different types of customers, including
small investors, will be protected.
8. 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 United Kingdom
focused its new regulatory regime on
more transparent fee-for-service
compensation structures. The United
Kingdom enacted an aggressive reform
that banned commissions on all retail
investment products, not just those
related to retirement savings; 672
required that customers in the United
Kingdom be charged directly for advice;
and raised qualification standards for
advisers.
In marked contrast to these reforms,
the Department’s rulemaking 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 rulemaking
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
regulatory action is narrower than the
rules passed by the United Kingdom as
it does not prescribe additional
content/dam/inst/iig-transformation/insights/pdf/
Robo-Advisor_Landscape_2023-Vanguard.pdf.
672 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.
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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
oversight 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 United
Kingdom 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, though
there remains a large number of adults
with substantial holdings in cash
outside the investment space.673 In
general, the United Kingdom
experience, which was more broadly
applied, indicates that these reforms
will not result in a significant reduction
of advice.
9. Cost
To estimate compliance costs
associated with the rulemaking, the
Department considers the marginal cost
associated with the rulemaking. The
Department estimates that the
rulemaking will impose total costs of
$536.8 million in the first year and
$332.7 million in each subsequent year.
The estimated compliance costs
associated with the amendments in the
final rule and PTEs are summarized in
the table below. Over 10 years, the costs
associated with the final rule and
associated amendments to the PTEs will
total approximately $2.5 billion,
annualized to $359.9 million per year
(using a 7 percent discount rate).674
673 The U.K. Financial Conduct Authority,
Financial Lives 2022 Survey: Consumer Investment
and Financial Advice, Evaluation of the Impact of
the Retail Distribution Review and the Financial
Advice Market Review, (July 2023), https://
www.fca.org.uk/publication/financial-lives/fls2022-consumer-investments-financial-advice.pdf.
674 The costs would be $3.0 billion over 10-year
period, annualized to $356.0 million per year if a
3 percent discount rate were applied.
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TABLE 7—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 ............................................................................................................................................
PTE 84–24 ................................................................................................................................................
Mass Amendment 1 ..................................................................................................................................
$248,063,209
288,737,197
0
$165,502,919
167,239,823
0
Total ...................................................................................................................................................
536,800,406
332,742,741
1 As
finalized, the amendments to the Mass Amendment do not impose an additional burden on entities continuing to rely on those exemptions. However, the amendments will require entities to rely on PTE 84–24 and PTE 2020–02 for exemptive relief covering transactions involving
the provision of fiduciary investment advice. These costs are accounted for in the cost estimates for PTE 84–24 and PTE 2020–02.
The estimated costs associated with
the amendments to each of the PTEs are
broken down and explained below.
More detail can be found in the
Paperwork Reduction Act sections of
each respective exemption, also
published in today’s Federal
Register.675
The quantified costs are significantly
lower than the corresponding costs in
the 2016 regulatory impact analysis, due
to the smaller scope of this rulemaking
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, the NAIC model rule, PTE
2020–02, and changes made in response
to the Department’s 2016 Rulemaking
before it was vacated. The methodology
for estimating the costs of the final rule
and amendments to the PTEs is
consistent with the methodology and
assumptions used in the 2020 analysis
for the current PTE 2020–02.
Comment Summary
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In the proposal, many of commenters
expressed concern that the Department
had underestimated the costs of the
proposal. Some commenters criticized
that the Department underestimated the
cost of implementation and ongoing
compliance with the exemptions. Some
675 As noted above, the Department is amending
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).
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of these commenters criticized that the
Department did not include certain
types of costs, such as technology or
training costs. Other commenters
criticized that the Department’s estimate
of the time required to comply with the
requirements were too low. Some
commenters expressed concern that the
proposal would cause significant
changes to the market for investment
advice and that this restructuring of the
market would create large costs.
Additionally, some commenters
expressed concern that the rulemaking
would increase uncertainty and that
such uncertainty would be costly.
Some commenters provided estimates
of the cost of the proposal. Some of
these commenters provided general
estimates of the likely magnitudes of the
cost—most of the estimates provided
stated that the actual cost of the
proposal would be between 10 and 20
times the cost estimated in the proposal.
One commenter remarked that the
actual cost would be 100 times the cost
estimated in the proposal.
A few commenters gave more specific
information on how they would
estimate the costs of the proposal. The
Financial Service Institute, based on a
survey conducted by Oxford Economics,
estimated that the costs of the proposal
imposed on broker-dealers would be
approximately $2.8 billion in the first
year and $2.5 billion in subsequent
years, 11 and 12 times the Department’s
estimate in the proposal, respectively.
They noted that their estimates include
costs to upgrade software systems and
incremental time of staff and brokerdealers.676 Additionally, the ICI
estimated that the first-year cost
estimates for PTE 2020–02 would
exceed $2.9 billion. This is 12.1 times
higher than the first-year cost estimates
in the proposal.677
Some commenters provided literature
and data regarding the total costs of the
regulation, but these reports lacked the
specific information needed to separate
out the costs of fiduciary status from
other costs. Additionally, many of these
reports were based on surveys of
expected costs from a small sample of
firms. The reports did not include
information that would allow the
Department to fully assess the report’s
findings, such as including survey
questions or representativeness of
respondents. With these limitations in
mind, the results were used to inform
the analysis, where possible. However,
they were not used as primary
estimates.
Other commenters expressed concern
about the Department’s assessment of
costs relative to other regulatory
requirements. Some commenters noted
that the Department underestimated the
costs relative to the requirements under
the existing PTE 2020–02, SEC
regulations, and the NAIC Model
Regulation. Other commenters noted
that the Department was correct to
consider the existing requirements in its
baseline for cost estimates.
Some commenters addressed specific
concerns about the Department’s
estimates. Many of the commenters
expressed concern that the estimated
costs to draft or update disclosures were
too low. Other commenters noted that
task of drafting and updating policies
and procedures would take a team of
professionals several iterations, noting
that the Department’s estimate did not
consider the complexity of the
requirement. One commenter remarked
that recordkeeping services often
contractually exclude fiduciary
activities, and the proposal would either
result in plans losing the recordkeeping
676 Comment letter received from the Financial
Services Institute on the Notification of Proposed
Rulemaking: Retirement Security Rule: Definition of
an Investment Advice Fiduciary, (January 2024).
677 Comment letter received from the Investment
Company Institute on the Notification of Proposed
Rulemaking: Retirement Security Rule: Definition of
an Investment Advice Fiduciary, (January 2024).
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services they rely upon or significant
costs to renegotiate contracts. Another
commenter expressed concern that the
certification requirement of the
retrospective review would be
particularly burdensome to entities
making digital rollover
recommendations.
Some commenters criticized that the
proposal would increase costs for
Retirement Investors, as Financial
Institutions would pass on costs their
clients. Others predicted that
Retirement Investors would lose access
to advice or certain products,
particularly small savers. Other
commenters remarked that there is no
evidence that a fiduciary status would
increase costs to investors. For a larger
discussion on the current situation and
how the Department approached small
savers in this rulemaking, refer to the
Impact of the Rulemaking on Small
Savers section above.
In preparing for the final rulemaking,
the Department has considered these
comments and has clarified its language
and reevaluated its estimates as
appropriate. In response, the
Department has increased the estimated
costs to comply with PTE 2020–02 and
PTE 84–24 and made changes to the
requirements to further harmonize this
rulemaking with other requirements
faced by the industry. The specific
adjustments to the estimates are
discussed in greater detail below.
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Preliminary Assumptions and Cost
Estimate Inputs
The final rulemaking requires the use
of amended PTE 2020–02 or PTE 84–24
for compensation resulting from
fiduciary investment advice related to
retirement savings. For the purposes of
this analysis, the Department assumes
that the percent of Retirement Investors
who are in employment-based plans
receiving electronic disclosures would
be similar to the percent of plan
participants receiving electronic
disclosures under the Department’s
2002 and 2020 electronic disclosure safe
harbors.678 Accordingly, the Department
estimates that 96.1 percent of the
disclosures sent to Retirement Investors
will be sent electronically, and the
remaining 3.9 percent will be sent by
mail.679
678 67 FR 17263 (Apr. 9, 2002); 85 FR 31884 (May
27, 2020).
679 The Department estimates that 58.3 percent of
Retirement Investors receive electronic disclosures
under the 2002 electronic disclosure safe harbor
and that an additional 37.8 percent of Retirement
Investors receive electronic disclosures under the
2020 electronic disclosure safe harbor. In total, the
Department estimates 96.1 percent (58.3 percent +
37.8 percent) of Retirement Investors receive
disclosures electronically.
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One commenter suggested that this
assumption overstates the use of
electronic disclosures for IRA owners
and that 60 percent would be more
appropriate. The Department is not able
to substantiate that suggestion but
understands that IRA owners may be
different than plan participants with
regards to electronic delivery of
documents. In response, the Department
reevaluated its estimate. In this analysis,
the Department assumes that
approximately 72 percent of IRA owners
will receive disclosures
electronically.680
Furthermore, the Department
estimates that communications between
businesses (such as disclosures sent
from one Financial Institution to
another) will be 100 percent electronic.
For disclosures sent by mail, the
Department estimates that entities will
incur a cost of $0.68 681 for postage and
$0.05 per page for material and printing
costs.
Additionally, the Department assumes
that several types of personnel will
perform the tasks associated with
information collection requests at an
hourly wage rate of $65.99 for clerical
personnel, $133.24 for a top executive,
$165.29 for an insurance sales agent,
$165.71 for a legal professional, $198.25
for a financial manager, and $228.00 for
a financial adviser.682
The Department received several
comments on the Department’s labor
cost estimate in the proposal,
particularly the cost for legal support,
remarking that it was too low. The
Department assumes that tasks
involving legal professionals will be
completed by a combination of legal
professionals, likely consisting of
680 The Department used information from a
Greenwald & Associates survey which reported that
84 percent of retirement plan participants find
electronic delivery acceptable, and data from the
National Telecommunications and Information
Administration Internet Use Survey which
indicated that 86 percent of adults 65 and over use
email on a regular basis, which is used as a proxy
for internet fluency and usage. Therefore, the
assumption is calculated as: (84% find electronic
delivery acceptable) × (86% are internet fluent) =
72% are internet fluent and find electronic delivery
acceptable.
681 United States Postal Service, First-Class Mail,
United States Postal Service (2023), https://
www.usps.com/ship/first-class-mail.htm.
682 Internal Department calculation based on 2023
labor cost data and adjusted for inflation to reflect
2024 wages. For a description of the Department’s
methodology for calculating wage rates, see: EBSA,
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,
EBSA, https://www.dol.gov/sites/dolgov/files/
EBSA/laws-and-regulations/rules-and-regulations/
technical-appendices/labor-cost-inputs-used-inebsa-opr-ria-and-pra-burden-calculations-june2019.pdf.
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attorneys, legal support staff, and other
professionals and in-house and outsourced individuals. The labor cost
associated with these tasks is estimated
to be $165.71, which is the
Department’s estimated labor cost for an
in-house attorney. The Department
understands that some may feel this
estimate is comparatively low to their
experience, especially when hiring an
outside ERISA legal expert. However,
the Department has chosen this cost
estimate understanding that it is meant
to be an average, blended, or typical rate
from a verifiable and repeatable
source.683
Finally, the Department assumes
affected entities will likely incur only
incremental costs if they were already
subject to rules or requirements from the
Department or another regulator related
to investment advice.
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
The final rule changes the definition
of a fiduciary such that some Financial
Institutions previously not considered
fiduciaries will be so under the final
rule. Additionally, some Financial
Institutions, who already provide
fiduciary services for some clients or
types of services, will be required to act
as a fiduciary for more services under
the final rule.
Entities may incur costs associated
with the 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 will be
associated with the amendments to
related PTEs, entities who did not
previously identify as a fiduciary may
also incur transition costs. These costs
will likely differ significantly by type of
Financial Institution. For instance, retail
broker-dealers subject to Regulation Best
Interest or investment advisers subject
to the Advisers Act will be closer to
satisfying the requirements of a
fiduciary under ERISA than an
insurance company or Independent
Producer selling annuity products.
The Department requested comment
on the costs these entities would incur
by becoming fiduciaries under this rule,
as well as the underlying data to
683 For a description of the Department’s
methodology for calculating wage rates, see: EBSA,
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,
EBSA, https://www.dol.gov/sites/dolgov/files/
EBSA/laws-and-regulations/rules-and-regulations/
technical-appendices/labor-cost-inputs-used-inebsa-opr-ria-and-pra-burden-calculations-june2019.pdf.
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Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations
estimate these costs. The Department
was particularly interested in costs that
would 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 received several
comments regarding the costs of
transitioning to fiduciary status. Several
commenters noted that the change in
definition would significantly increase
the costs and risks associated with
providing investment advice, and a few
commenters specifically mentioned the
increased costs associated with the
rulemaking’s inclusion of Title I Plans.
The commenters did not provide data to
estimate these costs. Some commenters
provided literature and data regarding
the total costs of the regulation, but
these reports lacked the specific
information needed to separate out the
costs of fiduciary status from other
costs. Additionally, these reports were
primarily based on surveys of expected
costs from a small sample of firms. The
reports did not include information that
would allow the Department to fully
assess the report’s findings, such as
including survey questions or
representativeness of respondents. With
these limitations in mind, the results
were used to inform the analysis, where
possible. However, they were not used
as primary estimates.
The Department also received several
comments concerning the increased
legal liability or cost of insurance that
Financial Institutions would incur. The
Department has clarified that this
rulemaking does not create a new
private right of action. These comments
did not provide specific information on
the additional cost of insurance
premiums. However, firms or
individuals providing financial advice
may choose to purchase insurance, or
purchase additional insurance, to
protect against the cost of errors,
omissions, fiduciary breaches, and other
liabilities arising from their work. The
Department expects that insurance
premiums for some firms could increase
as a result of the change in fiduciary
status resulting from this rulemaking.
Much of the additional premiums
would consist of transfers from service
providers to harmed investors as
compensation for breaches of fiduciary
duty. There would also be transfers
among insured service providers
between providers who have claims
versus those who do not. In both cases,
the net recipients of the transfers are
investors who are harmed and now
compensated. Part of the price of
insurance does reflect a cost due to
payment of profits to insurers and costs.
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The commenters did not provide
specific information on the additional
cost of insurance premiums, and the
Department does not have sufficient
data to estimate the size of these
transfers or costs.
The Department believes that most
costs incurred by entities that will now
be considered ERISA fiduciaries under
this rulemaking are attributable to
compliance with the PTEs. These costs
are discussed in greater detail below. In
consideration of the comments on the
costs imposed by the definition change,
the Department has significantly
increased its cost estimate to review and
implement the amendments for all
entities. It has also reevaluated the
assumption that all entities eligible to
rely on PTE 2020–02 were doing so. As,
discussed below, the estimates now
reflect an assumption that 30 percent of
broker-dealers, registered investment
advisers, and insurance companies
would be newly reliant on PTE 2020–
02.
Costs Associated With PTE 2020–02
The Department is amending PTE
2020–02 to cover more transactions and
revising some of the specific obligations
to emphasize the existing core
conditions of the exemption. This
amendment is intended to align with
other regulators’ rules and standards of
conduct. As such, the Department
expects that satisfying the amendment
will not be unduly burdensome.
Summary of Affected Entities
The entities that the Department
expects to be affected by the
amendments to the PTE are also affected
by the existing PTE 2020–02. The
Department estimates that 18,632
Financial Institutions, composed of
1,920 broker-dealers, 16,398 registered
investment advisers,684 84 insurers, 200
pure robo-advisers, and 31 non-bank
trustees.685
The Department recognizes that the
rulemaking may change the number of
Financial Institutions who choose to
rely on PTE 2020–02. Consistent with
its initial analysis in 2020, the proposal
assumed that all entities eligible to rely
on the existing PTE 2020–02 were
relying on it. However, one commenter
indicated that some entities eligible to
use PTE 2020–02 had determined that
their business practices did not trigger
fiduciary status or had modified their
business practices to avoid relying upon
684 The Department estimates that 16,264
registered investment advisers do not provide pure
robo-advice.
685 For more information on how the number of
each type of entity is estimated, refer to the Affected
Entities section.
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32225
it. The definitional changes in this
rulemaking may now require these
entities to rely on PTE 2020–02. As a
result, these entities will now incur the
full compliance costs of PTE 2020–02.
In response to this concern, this analysis
assumes that 30 percent of currently
eligible entities would begin to rely on
PTE 2020–02 in response to the
rulemaking.686
The analysis below considers the cost
to comply to the amendments by entity
type, given existing compliance
requirements of other regulators, such as
the SEC and State regulators where
applicable. 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 subject to regulation by
the SEC or State insurance departments.
Costs To Review the Rule
The Department estimates that all
18,632 Financial Institutions affected by
the amendments to PTE 2020–02 will
need to review the rule. The Department
acknowledges that the review process
will vary significantly by institution.
Some organizations may use in-house
teams to review the rule and devise an
implementation plan, others may
outsource review to a third party, and
still others may choose a hybrid
approach. Outsourcing the review
process can lead to efficiencies as one
organization reviews the rule and then
provides information to many others.
These efficiencies may be particularly
beneficial to small entities, which make
up the majority of entities.
In the proposal, the Department
estimated that it would take an average
of nine hours for a legal professional to
review the rule. The Department
received several comments indicating
that this was a significant underestimate
with some commenters suggesting that
the review would take a team of
professionals. In response to these
comments and in further consideration
of what review processes affected
Financial Institutions may employ, the
686 The Department is not aware of any source to
determine the percentage of firms currently eligible
for, but not using PTE 2020–02, but which now
need to rely on the exemption. In response to the
lack of information, the Department selected a
meaningful percentage of firms that would be in
this category, in order to provide an estimate of the
cost to comply with PTE 2020–02. As a point of
reference, each percentage point change to this
assumption (the share of currently eligible newly
reliant entities) results in a 0.28 percentage point
change in the estimated total cost of compliance for
PTE 2020–02.
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Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations
Department has updated its estimate.
The Department estimates that, on
average, it will take a Financial
Institution 20 hours to review the rule
and develop an implementation plan,
resulting in a total hour burden of
372,646 hours and an estimated cost of
$61.8 million in the first year.687
Costs Associated With General
Disclosures for Investors
In the proposal, the Department
received several comments indicating
that its estimates of the hourly burden
associated with preparing and updating
disclosures underestimated the burden
of the proposed amendments. In
response, the Department has reviewed
and updated its assumptions. The
Department’s considerations for each
requirement are discussed in more
detail below. Additionally, the
Department has made changes to
harmonize the disclosure requirements
of PTE 2020–02 with the disclosure
requirements of other regulators.
Costs Associated With Modifications of
Existing Disclosure Requirements
Section II(b) of the existing
exemption, finalized in 2020, requires
Financial Institutions to provide the
following disclosures to Retirement
Investors before engaging in or at the
time of a transaction pursuant to the
exemption:
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(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 meets
the Care Obligation and Loyalty Obligation,
before engaging in a rollover or offering
recommendations on post-rollover
investments.
The Department is finalizing the
disclosure conditions from the proposal
with some modifications. The
Department proposed requiring 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. The Department received
several comments regarding its estimate
of the number of annual requests per
firm, and the cost burdens associated
with the proposed Provision of
687 The burden for rule review and planning is
estimated as: (18,632 entities × 20 hours) ≈ 372,646
hours. A labor rate of $165.71 is used for a legal
professional. The labor rate is applied in the
following calculation: (18,632 entities × 20 hours)
× $165.71 ≈ $61,751,119.
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Disclosures. After reviewing the
comments and existing disclosures
associated with the rulemaking, the
Department has removed this
requirement. The modifications to the
disclosure requirements included in the
final rulemaking are described below.
Costs Associated With the Written
Acknowledgement of Fiduciary Status
Financial Institutions will 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 investment recommendations.
This condition would not be met if the
fiduciary acknowledgement states that
the Financial Institution and its
Investment Professionals ‘‘may’’ be
fiduciaries or will become fiduciaries
only ‘‘if’’ or ‘‘when’’ providing fiduciary
investment advice as defined under the
applicable regulation.
The amendment makes minor changes
to the existing requirement for a written
acknowledgment that the Financial
Institution and its Investment
Professionals are fiduciaries. The
Department does not have data on how
many Financial Institutions will need to
modify their disclosures in response to
these amendments; 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. As
discussed above, the Department also
assumes that 30 percent of brokerdealers, registered investment advisers,
and insurance companies will be newly
reliant on the exemption and will incur
the full costs to comply.
Additionally, of the 70 percent of the
broker-dealers, registered investment
advisers, and insurance companies
currently assumed to be reliant on the
existing exemption, the Department
assumes that 10 percent will need to
update their disclosures and that it will
take a legal professional at a Financial
Institution, on average, 10 minutes to
update existing disclosures.
Robo-advisers, non-bank trustees, and
newly reliant broker-dealers, registered
investment advisers, and insurance
companies will need to draft the
acknowledgement. The Department
estimates that it will 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
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approximately $0.5 million in the first
year.688
Costs Associated With the Relationship
and Conflict of Interest Disclosure
The rulemaking also expands 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.
This disclosure is consistent with the
disclosure requirements under
Regulation Best Interest. Accordingly,
the Department expects that retail
broker-dealers will not incur a cost to
satisfy this requirement.
For all other Financial Institutions
which relied on the existing exemption
(i.e., 70 percent of non-retail brokerdealers, registered investment advisers,
and insurance companies), the
Department assumes it will take a legal
professional 30 minutes to update
existing disclosures to include this
information. Robo-advisers, non-bank
trustees and newly reliant brokerdealers, registered investment advisers,
and insurance companies will need to
draft the Relationship and Conflict of
Interest disclosure, which the
Department estimates will take a legal
professional at a large institution five
hours and a legal professional at a small
institution one hour, on average, to
prepare such a draft.689 This results in
an estimated cost of approximately $4.8
million in the first year.690
688 The number of financial entities needing to
update their written acknowledgement is estimated
as: (1,920 broker-dealers × 10% × (100% ¥ 30%))
+ (8,035 SEC-registered investment advisers × 10%
× (100% ¥ 30%)) + (8,363 State-registered
investment advisers × 10% × (100% ¥ 30%)) + (84
insurers × 10% × (100% ¥ 30%)) ≈ 1,288 Financial
Institutions updating existing disclosures. The
number of financial entities needing to draft their
written acknowledgement is estimated as: 200 roboadvisers + 31 non-bank trustees + (1,920 brokerdealers × 30%) + (8,035 SEC-registered investment
advisers × 30%) + (8,363 State-registered
investment advisers × 30%) + (84 insurers × 30%)
≈ 5,751 Financial Institutions drafting new
disclosures. The burden is estimated as: (1,288
Financial Institutions × (10 minutes ÷ 60 minutes))
+ (5,751 Financial Institutions × (30 minutes ÷ 60
minutes) ≈ 3,090 hours. A labor rate of $165.71 is
used for a legal professional. The labor rate is
applied in the following calculation: 3,090 burden
hours × $165.71 ≈ $512,106. Note: Due to rounding
values may not sum.
689 As discussed in the Regulatory Flexibility Act
analysis, the Department estimates that 10 roboadvisers and 31 non-bank trustees are considered
small entities. For more information, refer to the
Affected Entities discussion in the Regulatory
Flexibility Act section of this document.
690 The number of financial entities needing to
update their written description of services to
comply with the Relationship and Conflict of
Interest disclosure is estimated as: 84 insurers +
((600 non-retail broker-dealers + 8,035 SECregistered investment advisers + 8,363 State-
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Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules and Regulations
Costs Associated With New Disclosure
Requirements
As amended, PTE 2020–02 requires
Financial Institutions to provide
investors with a Written Statement of
the Care Obligation and Loyalty
Obligation disclosure. As presented in
more detail in the preamble, this
disclosure defines the Care and Loyalty
Obligations as related to the investor’s
relationship with the financial
professional.
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Cost Associated With the Written
Statement of Care Obligation and
Loyalty Obligation Disclosure
Under the Advisers Act, the SEC’s
Regulation Best Interest, and Form CRS,
most registered investment advisers and
broker-dealers with retail investors
already provide disclosures that the
Department expects will satisfy these
requirements.691
The Department expects that the
written statement of Care Obligation and
Loyalty Obligation will not take a
significant amount of time to prepare 692
and will be uniform across clients. The
Department assumes that a legal
professional employed by a brokerdealer or registered investment advisers,
on average, will take 30 minutes to
modify existing disclosures and that it
will take insurers, robo-advisers, and
non-bank trustees, on average, one hour
to prepare the statement. This results in
a cost estimate of approximately $1.6
million in the first year.693
registered investment advisers) × (100% ¥ 30%))
≈ 11,983 Financial Institutions updating existing
disclosures. The number of financial entities
needing to draft their Relationship and Conflict of
Interest disclosure is estimated as: (200 roboadvisers + 31 non-bank trustees) + ((600 non-retail
broker-dealers + 8,035 SEC-registered investment
advisers + 8,363 State-registered investment
advisers) × 30%) ≈ 5,330 Financial Institutions
drafting new disclosures. Of these 5,330 Financial
Institutions, 976 are small. The hours burden is
calculated as: ((11,983 entities updating × (30
minutes ÷ 60 minutes)) + ((976 small entities
drafting × 1 hour) + (4,354 entities drafting × 5
hours)) ≈ 28,738 burden hours. The labor rate is
applied as: 28,738 burden hours × $165.71 ≈
$4,762,239. Note: Due to rounding values may not
sum.
691 Form CRS Relationship Summary;
Amendments to Form ADV, 84 FR 33492 (July 12,
2019), 17 CFR 240.15l–1(a)(2)(i).
692 This requirement is consistent with
requirements under the SEC’s Advisers Act,
Regulation Best Interest, and Form CRS that require
most registered investment advisers and brokerdealers with retail investors to provide disclosures.
(See Form CRS Relationship Summary;
Amendments to Form ADV, 84 FR 33492 (July 12,
2019), 17 CFR 240.15l–1(a)(2)(i).)
693 The burden is estimated as: [(1,920 brokerdealers + 16,398 registered investment advisers) ×
(30 minutes ÷ 60 minutes)] + [(84 insurers + 200
robo-advisers + 31 non-bank trustees) × 1 hour] ≈
9,474 hours. A labor rate of $165.71 is used for a
legal professional. The labor rate is applied in the
following calculation: 9,474 burden hours × $165.71
≈ $1,569,868.
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Costs Associated With the Provision of
Disclosures to Retirement Investors
Financial Institutions will 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 defined contribution plan
participants (114.9 million).694
According to the Plan Sponsor Council
of America, 38.8 percent of plans offer
investment advice to participants.695
Accordingly, the Department estimates
that 44.6 million plan participants will
receive the disclosures.696 Additionally,
the Department estimates that 67.8
million IRA owners will receive
disclosures.697
Of the 44.6 million plan participants,
it is assumed that 3.9 percent, or 1.7
million plan participants would receive
paper disclosures.698 The Department
assumes that there will not be a
measurable increase in the time burden
for a clerical worker to prepare the
additional disclosures for individuals
already receiving plan disclosures. The
Department estimates that providing the
additional disclosures would require
two additional pages, resulting in a
material cost estimate of $173,914.699
Of the 67.8 million IRA owners, it is
assumed that 28.2 percent, or 19.1
million IRA owners would receive
paper disclosures.700 Again, 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 who would already receive
account disclosures. The Department
estimates that providing the additional
694 In 2021, there were approximately
114,931,000 defined contribution participants. (See
U.S. Department of Labor, EBSA, Private Pension
Plan Bulletin Abstract of 2021 Form 5500 Annual
Reports, (September, 2023), Table A1, https://
www.dol.gov/sites/dolgov/files/ebsa/researchers/
statistics/retirement-bulletins/private-pension-planbulletins-abstract-2021.pdf.)
695 Plan Sponsor Council of America, PSCA’s
66th Annual Survey of Profit Sharing and 401(k)
Plans, Table 110, (2023).
696 This is estimated as: 114,931,000 × 38.8% ≈
44,593,228.
697 In 2023, there were 67,781,000 IRAs. (See
Cerulli, The Cerulli Report, U.S. Retirement EndInvestor 2023, Exhibit 5.12, (2023)).
698 The number of plan participants receiving
paper disclosures is estimated as: (44,593,228 plan
participants receiving investment advice × 3.9%) ≈
1,739,136 paper disclosures.
699 The cost is estimated as: (1,739,136 paper
disclosures × 2 pages) × $0.05 ≈ $173,914.
700 This is estimated as: 67,781,000 IRA owners
× 28.2% ≈ 19,114,242 paper disclosures.
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32227
disclosures would require two
additional pages, resulting in a material
cost estimate of $1.9 million.701
Summary of Costs Associated With the
General Disclosures
The Department estimates that the
total cost associated with preparing and
providing the general disclosures
discussed above to be approximately
$8.9 million in the first year and $2.1
million in subsequent years.702
Costs Associated With Rollover
Documentation and Disclosure for
Financial Institutions
Compared to the requirements in the
existing exemption, the amendment
clarifies the rollover disclosure
requirements in Section II(b)(3) and
II(c)(3). Before engaging in a rollover or
making a recommendation to a plan
participant as to the post-rollover
investment of assets, the Financial
Institution and Investment Professional
is required to document the basis for
their conclusions to recommend a
rollover, and must provide that
documentation to the Retirement
Investor.
In the proposal, the Department
proposed requiring the rollover
documentation for all rollovers,
including plan to IRA rollovers, IRA to
IRA rollovers, and plan to plan
rollovers. In the finalized exemption,
the Department is limiting this
requirement to plan to IRA rollovers. As
discussed in the Affected Entities
section, the Department estimates that
4.5 million rollovers will be affected by
the amendments to PTE 2020–02
annually.703
As a best practice, the SEC already
encourages broker-dealers to record the
basis for significant investment
decisions, such as rollovers, although
doing so is not required under
Regulation Best Interest or the Advisers
701 The cost is estimated as: (19,114,242 paper
disclosures × 2 pages) × $0.05 ≈ $1,911,424.
702 The cost in the first year is estimated as:
($512,106 to prepare the written acknowledgment +
$1,569,868 to prepare the written statement of the
Care Obligation & Loyalty Obligations + $4,762,239
to prepare the written statement of all material facts
+ 2,085,338 to prepare and send disclosures) ≈
$8,929,550. The cost in subsequent years is
attributable to the $2,085,338 to prepare and send
disclosures. Note that the total value may not equal
the sum of the parts due to rounding.
703 The Department estimates that 4,485,059
rollovers from defined contribution plan accounts
will occur annually. 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.
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Act.704 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
broker-dealers surveyed indicated they
already require their financial advisers
to provide the rationale documentation
for rollover recommendations.705
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 result in a labor cost estimate of
$142.0 million.706
These rollover disclosures are
expected to be two pages in length and
accompany other documentation
associated with the transactions at no
additional postage cost. The materials
cost is estimated as $0.05 per page,
totaling $8,571 annually.707
This results in an estimated annual
cost of approximately $142.0 million.708
The Department received a comment
stating that these hourly burdens were
underestimated. The Department
acknowledges this comment but deems
this a reasonable estimate of the
marginal time for this requirement. In
practice, this requirement should be a
logical outgrowth of a consultation,
where the financial professional is
simply documenting the relevant factors
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704 See
84 FR 33318, 33360 (‘‘[W]e encourage
broker-dealers to record the basis for their [rollover]
recommendations . . . .’’).
705 Deloitte, Regulation Best Interest: How Wealth
Management Firms are Implementing the Rule
Package, Deloitte, (Mar. 6, 2020).
706 The burden is estimated as: (4,485,059
rollovers × 49% advisor assisted × 48% not already
documenting × (30 minutes ÷ 60 minutes)) +
(4,485,059 rollovers × 49% advisor assisted × 52%
already documenting × (5 minutes ÷ 60 minutes))
≈ 622,676 hours. A labor rate of $228.00 is used for
a personal financial adviser. The labor rate is
applied in the following calculation: 622,676
burden hours × $228 ≈ $141,970,058. Note, the total
values may not equal the sum of the parts due to
rounding.
707 The number of disclosures mailed is estimated
as: 4,485,059 rollovers × 49% advisor assisted ×
3.9% disclosures sent by mail ≈ 85,709 disclosures.
The material and postage cost is estimated as:
85,709 disclosures mailed × $0.05 per page × 2
pages ≈ $8,571. Note, the total values may not equal
the sum of the parts due to rounding.
708 Total cost is estimated as: $8,571 materials
and postage cost + $141,970,058 to produce the
disclosures ≈ $141,978,629. Note, the total values
may not equal the sum of the parts due to rounding.
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that resulted in the investment
recommendation. Initially, firms may
differ in the time burdens of this
requirement according to their
complexity and level of current
implementation of Regulation Best
Interest. However, the Department
assumes that the regulatory uniformity
introduced by this rulemaking,
including in its disclosure requirements,
will bring the marginal costs associated
with this requirement in-line with these
estimates. The Department has
increased its estimate of the number of
disclosures needing to be sent out,
which result in an overall increase in
the cost estimate.
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 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
retrospective review must include a
discussion of any self-corrections of
violations.
Robo-advisers, non-bank trustees, and
newly reliant broker-dealers, registered
investment advisers, and insurance
companies will incur costs associated
with conducting the annual review as a
result of this rulemaking.
The Department does not have data
on how many will incur costs associated
with this requirement; however, the
Department expects that many of
entities already develop an audit report.
Broker-dealers are subject to similar
annual review and certification
requirements under FINRA Rule
PO 00000
Frm 00108
Fmt 4701
Sfmt 4700
3110,709 FINRA Rule 3120,710 and
FINRA Rule 3130; 711 SEC-registered
investment advisers are already subject
to retrospective review requirements
under SEC Rule 206(4)–7; and insurance
companies in many States are already
subject to State insurance law based on
the NAIC’s Model Regulation.712
Accordingly, in this analysis, the
Department assumes that these entities
will incur minimal costs to meet this
requirement.
In 2018, the Investment Adviser
Association estimated that 92 percent of
SEC-registered investment advisers
voluntarily provide an annual
compliance program review report to
senior management.713 The Department
assumes that State-registered investment
advisers exhibit similar retrospective
review patterns as SEC-registered
investment advisers. Accordingly, the
Department estimates that eight percent
of advising retirement plans will incur
costs associated with producing a
retrospective review report.
The Department assumes that 10
percent of robo-advisers, non-bank
trustees, and newly reliant brokerdealers and insurance companies will
incur the full cost of producing an audit
report. The Department estimates that
0.8 percent of newly reliant registered
investment advisers will incur the full
cost of producing the audit report.
This results in an estimate of 123
entities not currently producing audit
reports, of which 26 are small
entities.714 The remaining 5,629 entities
will need to make modifications to
satisfy the requirements, of which 1,062
709 Rule 3110. Supervision, FINRA Manual,
https://www.finra.org/rules-guidance/rulebooks/
finra-rules/3110.
710 Rule 3120. Supervisory Control System,
FINRA Manual, https://www.finra.org/rulesguidance/rulebooks/finra-rules/3120.
711 Rule 3130. Annual Certification of
Compliance and Supervisory Processes, FINRA
Manual, https://www.finra.org/rules-guidance/
rulebooks/finra-rules/3130.
712 NAIC Model Regulation, Section 6.C.(2)(i)
(The same requirement is found in the NAIC
Suitability in Annuity Transactions Model
Regulation (2010), Section 6.F.(1)(f).)
713 2018 Investment Management Compliance
Testing Survey, Investment Adviser Association
(Jun. 14, 2018), https://
higherlogicdownload.s3.amazonaws.com/
INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/publications/2018Investment-Management_Compliance-TestingSurvey-Results-Webcast_pptx.pdf.
714 This is estimated as: {[(1,920 broker-dealers +
[(8,035 SEC-registered investment advisers + 8,363
State-registered investment advisers) × 8%] + 84
insurers) × 30% that are newly relying on PTE
2020–02] + (200 robo-advisers + 31 non-bank
trustees)} × 10% ≈ 123 Financial Institutions. Note:
Due to rounding values may not sum.
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are small.715 The Department received
no comments on this assumption.
The Department estimates that it will
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 $0.2
million.716 The Department estimates
that it will 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 $1.7 million.717
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 $4.1
million.718
This results in a total cost annual cost
of $6.0 million.
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 section labeled costs
is estimated as: {[(1,920 broker-dealers +
84 insurers + 8,035 SEC-registered investment
advisers + 8,363 State-registered investment
advisers) × 30% that are newly relying on PTE
2020–02] + (200 robo-advisers + 31 non-bank
trustees)} ¥ ({[(1,920 broker-dealers + [(8,035 SECregistered investment advisers + 8,363 Stateregistered investment advisers) × 8%] + 84 insurers)
× 30% that are newly relying on PTE 2020–02] +
(200 robo-advisers + 31 non-bank trustees)} × 90%)
=5,629 Financial Institutions. Note: Due to
rounding values may not sum.
716 The burden is estimated as: (26 small
Financial Institutions × 5 hours) + [(96 large
Financial Institutions) × 10 hours] ≈ 1,094 hours. A
labor rate of $165.71 is used for a legal professional.
The labor rate is applied in the following
calculation: {(26 small Financial Institutions × 5
hours) + [(96 large Financial Institutions) × 10
hours]} × $165.71 ≈ $181,289. Note, the total values
may not equal the sum of the parts due to rounding.
717 The burden is estimated as: (1,062 small
Financial Institutions × 1 hours) + [(4,567 large
Financial Institutions) × 2 hours] ≈ 10,196 hours. A
labor rate of $165.71 is used for a legal professional.
The labor rate is applied in the following
calculation: {(1,062 small Financial Institutions × 1
hours) + [(4,567 large Financial Institutions) × 2
hours]} × $165.71 ≈ $1,689,582. Note, the total
values may not equal the sum of the parts due to
rounding.
718 The burden is estimated as: (1,088 small
Financial Institutions × 2 hours) + [(4,663 large
Financial Institutions) × 4 hours] ≈ 20,830 hours. A
labor rate of $198.25 is used for a financial manager.
The labor rate is applied in the following
calculation: 20,830 burden hours × $198.25 ≈
$4,129,476 Note, the total values may not equal the
sum of the parts due to rounding.
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715 This
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associated with written policies and
procedures for Financial Institutions,
below.
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 will depend on the
size and complexity of the Financial
Institution. Entities, particularly small
entities, may also get compliance
support from third parties which could
lead to efficiencies of implementation.
Entities newly reliant upon PTE
2020–02 due to this rulemaking will
likely need to develop these policies
and procedures. The Department
estimates that, for entities newly reliant
upon PTE 2020–02 due to this
rulemaking, this requirement will take
legal professionals 40 hours at a large
firm and 20 hours at a small firm in the
first year.719 Retail broker-dealers and
all registered investment advisers
should have policies and procedures in
place to satisfy other regulators that can
be amended to comply with this
rulemaking. For instance, the
Department acknowledges that for
registered investment advisers, this
rulemaking may apply to a broader
range of activities performed than the
Advisers Act, and therefore, some
registered investment advisers may need
to revisit their policies and procedures
to ensure compliance. The Department
estimates it will take 10 hours for small
firms and 20 hours for large firms to
amend their policies and procedures.
The Department estimates the
requirement to have an estimated cost of
$18.5 million in the first year.720
719 The Department estimates that 3,531 entities,
consisting of 302 retail broker-dealers, 129 nonretail broker-dealers, 85 SEC-registered retail
registered investment advisers, 144 SEC-registered
non-retail registered investment advisers, 2,192
State-registered retail registered investment
advisers, 568 State-registered non-retail registered
investment advisers, 71 insurers and insurance
agents, 10 robo-advisers, and 31 non-bank trustees,
are considered small entities. For more information,
refer to the Affected Entities discussion in the
Regulatory Flexibility Act section of this document.
720 The burden is estimated as follows: [(302
small retail broker-dealers + 85 small SECregistered retail registered investment advisers +
144 small SEC-registered non-retail registered
investment advisers + 2,192 small State-registered
retail registered investment advisers + 568 small
State-registered non-retail registered investment
advisers) × 30% newly reliant on the PTE × 10
hours] + {[(1,017 large retail broker-dealers + 129
small non-retail broker-dealers + 4,859 large SECregistered retail registered investment advisers +
2,947 large SEC-registered non-retail registered
investment advisers + 4,450 large State-registered
retail registered investment advisers + 1,153 large
State-registered non-retail registered investment
PO 00000
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32229
The rulemaking adds a requirement to
review policies and procedures at least
annually and to update them as needed
to ensure they remain prudently
designed, effective, and current. This
includes a requirement to update and
modify the policies and procedures, as
appropriate, after considering the
findings in the retrospective review
report. The Department estimates that it
will take a legal professional an
additional five hours for all entities
reliant on the exemption. The
Department estimates that the
requirement results in an estimated first
year cost of $10.9 million and an annual
cost of approximately $15.4 million in
subsequent years.721
The amendments 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 it
will request 165 policies and procedures
in the first year and 50 policies and
procedures in subsequent years. The
Department assumes that a clerical
worker will prepare and send their
complete policies and procedures to the
Department and that it will take them 15
minutes to do so. The Department
received no comments on these
assumptions. The Department estimates
advisers + 71 small insurers) × 30% newly reliant
on the PTE] + (10 small robo-adviser + 31 non-bank
trustees) × 20 hours} + {[(471 large non-retail
broker-dealers + 13 large insurers) × 30% newly
reliant on the PTE] + 190 large robo-advisers) × 40
hours]} ≈ 111,864 hours. The labor rate is applied
in the following calculation: 111,864 burden hours
× $165.71 ≈ $18,536,977. Note, the total values may
not equal the sum of the parts due to rounding.
721 The burden is estimated as follows: The firstyear cost of updating policies and procedures for
plans that currently have policies and procedures:
[(302 small retail broker-dealers + 85 small SECregistered Retail registered investment advisers +
144 small SEC-registered non-retail registered
investment advisers + 2,192 small State-registered
retail registered investment advisers + 568 small
State-registered non-retail registered investment
advisers) × 30% newly reliant on the PTE] + [(1,018
large retail broker-dealers + 129 small non-retail
broker-dealers + 4,859 large SEC-registered retail
registered investment advisers + 2,947 large SECregistered non-retail registered investment advisers
+ 4,450 large State-registered retail registered
investment advisers + 1,153 large State-registered
non-retail registered investment advisers + 71 small
insurers) × 30% newly reliant on the PTE] + (10
small robo-adviser + 30 small non-bank trustees) +
[(471 large non-retail broker-dealers + 13 large
insurers) × 70% already reliant on the PTE] + (190
large robo-advisers + 1 large non-bank trustees) ≈
13,112 entities. The burden estimate is calculated
as: 13,112 × 5 hours ≈ 65,559 hours. The labor rate
is applied in the following calculation: 65,559
hours × $165.71 ≈ $10,863,864. In subsequent years
the cost of updating is calculated as: (All 18,632
affected entities × 5 hours) ≈ 93,161 burden hours.
The labor rate is applied in the following
calculation: 93,161 burden hours × $165.71 burden
hours = $15,437,780. Note, the total values may not
equal the sum of the parts due to rounding.
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that the requirement will result in an
estimated cost of approximately $2,700
in the first year 722 and $800 in
subsequent years.723 The Department
assumes Financial Institutions will send
the documents electronically and thus
will not incur costs for postage or
materials.
This results in a total cost of $29.4
million in the first year and $15.4
million in subsequent years.724
Summary of Total Cost for the
Amendments to PTE 2020–02
The Department estimates that in
order to meet the additional conditions
of the amended PTE 2020–02, affected
entities will incur a total cost of $248.1
million and a per-firm cost of $13,314
in the first year and a total cost of
$165.5 million and a per-firm cost of
$8,883 in subsequent years.725
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Costs Associated With PTE 84–24
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 amending PTE 84–
24 to exclude the receipt of
compensation received as a result of
providing investment advice from the
722 The burden is estimated as: (165 × (15 minutes
÷ 60 minutes)) ≈ 41 hours. A labor rate of $65.99
is used for a clerical worker. The labor rate is
applied in the following calculation: (165 × (15
minutes ÷ 60 minutes)) × $65.99 ≈ $2,722. Note, the
total values may not equal the sum of the parts due
to rounding.
723 The burden is estimated as: (50 × (15 minutes
÷ 60 minutes)) = 13 hours. A labor rate of $65.99
is used for a clerical worker. The labor rate is
applied in the following calculation: (50 × (15
minutes ÷ 60 minutes)) × $65.99 ≈ $825. Note, the
total values may not equal the sum of the parts due
to rounding.
724 The cost in the first year is estimated as:
($18,536,977 + $10,863,864 + $2,722) ≈
$29,403,563. The cost in subsequent years is
estimated as: ($15,437,780 + $825) ≈ $15,438,605.
Note, the total values may not equal the sum of the
parts due to rounding.
725 The first-year total cost includes: ($61,751,119
for rule review + $8,929,550 for general disclosures
+ $141,978,629 for rollover disclosures +
$6,000,348 for the retrospective review +
$29,403,563 for policies and procedures) =
$248,063,209. The total cost in subsequent years
includes: ($2,085,338 for general disclosures +
$141,978,329 for rollover disclosures + $6,000,348
for the retrospective review + $15,538,605 for
policies and procedures) = $165,502,919. Note, the
total values may not equal the sum of the parts due
to rounding.
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existing relief. Except for Independent
Producers, fiduciary advisers will be
expected to rely on the relief provided
by PTE 2020–02, rather than PTE 84–24.
The rulemaking provides 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.
Some commenters remarked that the
proposal had underestimated the
number of Independent Producers that
would be affected by the proposal. As
discussed in the Affected Entities
section of this analysis, the Department
has considered the comments and
revised its estimate of the number of
Independent Producers and the number
of transactions affected by the
amendments to PTE 84–24. Commenters
also remarked that the Department had
underestimated the costs that entities
relying on the NAIC Model Regulation
would incur to comply with the
proposal. Accordingly, the Department
has reviewed the requirements of the
NAIC Model Regulation and has
modified its time estimates, described in
further detail below.
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, SEC, or State insurance
departments. The analysis below
considers a level of prior compliance
with other regulators, when estimating
the cost of compliance as many of these
entities are already meeting some, if not
most, of the requirements of this
rulemaking.
Summary of Affected Entities
The Department expects that 87,799
entities will be affected by the
amendments to PTE 84–24, consisting of
1,011 pension consultants, 10
investment company principal
underwriters that service plans, 10
investment company principal
underwriters that service IRAs, 86,410
Independent Producers, and 358
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Frm 00110
Fmt 4701
Sfmt 4700
insurance companies.726 Additionally,
the Department estimates that 1,727
plans will be affected by the
amendments.727
Costs of Rule Review
The Department estimates that
entities—including pension consultants,
investment company principal
underwriters, and insurance
companies—currently relying on the
exemption will need to review the rule.
In the proposal, the Department
assumed that rule review would take, on
average, two hours. The Department
received several comments indicating
that this was an underestimate. Upon,
further consideration and consistent
with the changes made to PTE 2020–02,
the Department estimates that such a
review will take each Financial
Institution, on average, 20 hours to
review the rule. Applying the labor rate
associated with legal professionals, this
results in an estimated cost of
approximately $4.6 million.728
The Department understands that
Independent Producers will also need to
understand the rule and how it affects
their business. It is expected that they
will get substantial help in compliance
from third parties such as the insurance
carriers they represent or the IMOs they
contract with in preparing materials and
training. The Department allocates five
hours of time per Independent Producer
to review the policies and procedures
developed by the carriers and integrate
the standards into their independent
business practices. The Department
estimates this to cost roughly $71.4
million in total, assuming an
opportunity cost of $165.29 per hour for
the Independent Producer.729 Therefore,
the total cost associated with rule
familiarization is estimated to be $76.0
million.730
726 For more information on how the number of
each entity type is calculated, refer to the Affected
Entities section.
727 For more information on how the number of
each entity type is calculated, refer to the Affected
Entities section.
728 The burden is estimated as: (1,389 entities ×
20 hours) ≈ 27,772 hours. A labor rate of $165.71
is used for a legal professional. The labor rate is
applied in the following calculation: 27,772 burden
hours × $165.71 ≈ $4,602,148.
729 The cost estimate for Independent Producers
is estimated as: 86,410 Independent Producers × 5
hours ≈ 432,050 burden hours. The labor rate is
applied in the following calculation: (86,410
Independent Producers × 5 hours) × $165.29 ≈
$71,413,545. Note, the total values may not equal
the sum of the parts due to rounding.
730 Combining the $4,602,148 for firms and the
$71,413,545 results in a total estimated cost of
$76,015,692.
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Costs Associated With Disclosures to
Investors
Costs Associated With the Written
Fiduciary Acknowledgement
approximately $773,000 in the first
year.732
The amendment requires Independent
Producers to provide disclosures to
Retirement Investors at or before
engaging in a transaction covered by
this exemption. Under the amendments,
Independent Producers seeking relief
will be required to provide:
The Department is including model
language in the preamble to PTE 84–24
that details what should be included in
the fiduciary acknowledgment for
Independent Producers. The
Department assumes that the time
associated with preparing the
disclosures will be minimal. Further,
these disclosures are expected to be
uniform in nature. Accordingly, the
Department estimates that these
disclosures will not take a significant
amount of time to prepare.
Due to the nature of Independent
Producers, the Department assumes that
most Insurers will make draft
disclosures available to Independent
Producers, pertaining to their fiduciary
status. However, the Department
expects that a small percentage of
Independent Producers—about 5
percent or 4,320 Independent
Producers—may draft their own
disclosures. The Department assumes
that a legal professional for each of the
358 insurance companies and an
insurance sales agent for 4,320
Independent Producers, will spend 30
minutes to produce a written
acknowledgement in the first year. This
results in an estimated cost of
approximately $387,000 in the first
year.731
Costs Associated With the Relationship
and Conflict of Interest Disclosure
(1) a written acknowledgment that the
Independent Producer is providing fiduciary
investment advice to the Retirement Investor
and is a fiduciary under Title I of ERISA,
Title II of ERISA, or both with respect to the
recommendation;
(2) a written statement of the Care
Obligation and Loyalty Obligation that is
owed;
(3) a disclosure of all material facts relating
to the scope and terms of the relationship
with the Retirement Investor, such as
material fees and costs, the types and scope
of services provided, and notice of the
Retirement Investor’s right to request
additional information regarding cash
compensation;
(4) a disclosure of all material facts relating
to Conflicts of Interest that are associated
with the recommendation;
(5) a written explanation of the basis to
recommend an annuity; and
(6) a written explanation of the basis to
recommend a rollover.
Costs Associated With Preparing
General Disclosure Documents
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32231
For more generalized disclosures, the
Department assumes that insurance
companies will prepare and provide
disclosures required by the exemption
to Independent Producers selling their
products. Additionally, in the PTE 84–
24, the Department is providing model
language that will satisfy the
requirements associated with the
written fiduciary acknowledgement and
written statement of the Care Obligation
and Loyalty Obligation.
However, some of the disclosures
required by the exemption are tailored
specifically to the Independent
Producer. For these, the Department
assumes that the disclosure will 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 will be covered by
charges imposed by the intermediary for
its services. The costs for the
intermediary to prepare the disclosure
may result in an increase in charges.
The Department expects that this charge
will not exceed the cost of preparing the
disclosure in house.
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Cost Associated With the Statement of
the Care Obligation and Loyalty
Obligation
Regarding the required written
statement of the Care Obligation and
Loyalty Obligation owed by the
Independent Producer, the Department
similarly assumes that most Insurers
will make draft disclosures available to
Independent Producers. Further, the
Department has provided model
language that satisfied this requirement.
The Department assumes that a legal
professional for each of the 358
insurance companies will spend one
hour of legal staff time and 5 percent of
Independent Producers, or 4,320
Independent Producers, will spend one
hour to prepare the statement in the first
year. This results in an estimated cost of
731 The burden is estimated as: [(358 Financial
Institutions + 4,320 Independent Producers) × (30
minutes ÷ 60 minutes)] ≈ 2,339 hours. A labor rate
of approximately $165.71 is used for a legal
professional and $165.29 is used for an
independent producer. The labor rates are applied
in the following calculation: [(358 Financial
Institutions × (30 minutes ÷ 60 minutes)) × $165.71]
+ [(4,320 Independent Producers × (30 minutes ÷ 60
minutes)) × $165.71] ≈ $386,657. Note, the total
values may not equal the sum of the parts due to
rounding.
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Frm 00111
Fmt 4701
Sfmt 4700
The rulemaking expands 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.
This disclosure must also include a
notice of the Retirement Investor’s right
to request additional information
regarding cash compensation.
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 these costs associated with
the preparation will be covered by
charges imposed 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
received several comments regarding
the number of Independent Producers
and has revised its estimate of them in
its analysis.
Accordingly, the Department assumes
that all 86,410 Independent Producers
in this analysis will need to prepare the
disclosure. The Department assumes
that for small Independent Producers, a
legal professional will spend three
hours of legal staff time drafting the
written material facts disclosure, while
for large Independent Producers, a legal
professional will spend five hours of
legal staff time drafting the written
disclosure. This results in an estimated
cost of approximately $43.2 million in
the first year.733
732 This is estimated as: (4,320 Independent
Producers + 358 insurance companies) × 1 hour ≈
4,678 hours. A labor rate of $165.29 is used for an
Independent Producer and $165.71 for a legal
professional at an insurance company. The labor
rate is applied in the following calculation: (4,320
Independent Producers × 1 hour × $165.29) + (358
insurance companies × 1 hour × $165.71) ≈
$773,313. Note, the total values may not equal the
sum of the parts due to rounding.
733 The burden is estimated as: [(85,541 small
Independent Producers × 3 hours) + (869 large
Independent Producers × 5 hours)] ≈ 260,967 hours.
A labor rate of $165.71 is used for a legal
professional. The labor rate is applied in the
following calculation: [(85,541 small Independent
Producers × 3 hours) + (869 large Independent
Producers × 5 hours)] × $165.71 ≈ $43,244,858.
Note, the total values may not equal the sum of the
parts due to rounding.
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Costs Associated With the
Compensation Disclosure
Upon request of the Retirement
Investor, the Independent Producer
must disclose a reasonable estimate of
the amount of cash compensation
received and the frequency of
occurrence. The Department is adopting
a structure similar to that of the NAIC
Model Regulation and New York Rule
194, such that Retirement Investors will
first receive a notice of their right to
request additional information regarding
cash compensation and will only
receive such information if requested.
The Department expects that
Independent Producers will not incur a
significant cost to provide this
information. Based on observations of
similar disclosure structures, the
Department estimates that 10 percent of
the estimated 500,000 annual
transactions will include a request for
this disclosure. The cost associated with
the provision of this custom disclosure
will be discussed in the Costs
Associated with the Provision of
Disclosures to Retirement Investors
section below.
Costs Associated With Documenting the
Basis for an Annuity Recommendation,
Rollover Recommendation, or Making a
Recommendation to a Plan Participant
as to the Post-Rollover Investment of
Assets Currently Held in a Plan
The amendment requires an
Independent Producer to provide a
disclosure to investors that documents
the Independent Producer’s
consideration to recommend an annuity
or rollover. Due to the fact-specific
nature of this disclosure, the
Department assumes that the content of
the disclosure will 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 will prepare the
disclosure themselves. The Department
received no comments on this
assumption.
The Department estimates that
500,000 Retirement Investors will
receive documentation of the basis for
recommending an annuity each year.734
The Department assumes that, for each
of these Retirement Investors, an
Independent Producer will spend one
hour of their time drafting the
documentation. This results in an
734 For information on this estimate, refer to the
estimate of IRAs affected by the amendments to PTE
84–24 in the Affected Entities section.
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estimated cost of approximately $41.3
million annually.735
Costs Associated With the Provision of
Disclosures to Retirement Investors
As described in the Affected Entities
section, the Department estimates that
500,000 Retirement Investors will
engage in covered transactions with an
Independent Producer, and therefore
receive documentation of the basis for
recommending an annuity each year.736
As discussed at the beginning of the
cost section, the Department assumes
that 28.2 percent of disclosures sent to
IRA owners will be mailed.
Accordingly, of the estimated 500,000
affected Retirement Investors, 141,000
Retirement Investors are estimated to
receive paper disclosures.737 For paper
copies, an insurance sales professional
is assumed to take two minutes to
prepare and mail the required
information to the Retirement Investor.
Thus, this requirement results in an
estimated labor cost of approximately
$777,000.738 The Department assumes
that each disclosure will include seven
pages, resulting in annual material and
paper costs of approximately
$145,000.739 Additionally, as discussed
above, the Department estimates that 10
percent of Retirement Investors will
request additional compensation
information and will need to be
provided with an additional
compensation disclosure. The
Department assumes it will take 10
minutes to complete the estimated twopage disclosure and prepare it for
mailing, resulting in a cost of
approximately $1.5 million annually.740
735 The burden is estimated as: 500,000 rollovers
× (30 minutes ÷ 60 minutes) = 250,000 hours. A
labor rate of approximately $165.29 is used for an
Independent Producer. The labor rate is applied in
the following calculation: [500,000 rollovers × (30
minutes ÷ 60 minutes)] × $165.29 = $41,322,500.
Note, the total values may not equal the sum of the
parts due to rounding.
736 For information on this estimate, refer to the
estimate of IRAs affected by the amendments to PTE
84–24 in the Affected Entities section.
737 This is estimated as: (500,000 Retirement
Investors × 28.2%) = 141,000 paper disclosures.
Note, the total values may not equal the sum of the
parts due to rounding.
738 This is estimated as: (141,000 paper
disclosures × (2 minutes ÷ 60 minutes)) = 4,700
hours. A labor rate of $165.29 is used for an
insurance sales agent. The labor rate is applied in
the following calculation: (141,000 paper
disclosures × (2 minutes ÷ 60 minutes)) × $165.29
= $776,863. Note, the total values may not equal the
sum of the parts due to rounding.
739 This is estimated as: 141,000 rollovers
resulting in a paper disclosure × [$0.68 postage +
($0.05 per page × 7 pages)] = $145,230. Note, the
total values may not equal the sum of the parts due
to rounding.
740 The labor cost is estimated as: (50,000
disclosures × 28.2% sent by mail × (10 minutes ÷
60 minutes)) = 8,803 hours. A labor rate of $165.29
PO 00000
Frm 00112
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Additionally, Independent Producers
are required to send the documentation
to the Insurer. The Department expects
that such documentation will be sent
electronically and result in a de minimis
burden. The Department received no
comments on this assumption.
Summary Costs Associated With
Disclosures
The estimates described above result
in a total cost estimate of $88.1 million
in the first year and $43.7 million in
subsequent years for the preparation
and provision of all disclosures.741
Costs Associated With Policies and
Procedures
The amendment requires Insurers 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 Insurer’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.
Insurers’ policies and procedures must
also include a prudent process for
determining whether to authorize an
Independent Producer to sell the
Insurer’s annuity contracts to
Retirement Investors, and for taking
action to protect Retirement Investors
from Independent Producers who have
is used for an insurance sales agent. The labor rate
is applied in the following calculation: (50,000
disclosures × 28.2% sent by mail × (10 minutes ÷
60 minutes)) × $165.29 = $1,455,103. The material
cost is estimated as: 14,100 rollovers resulting in a
paper disclosure × [$0.68 postage + ($0.05 per page
× 2 pages)] = $10,998. The total cost is estimated
as: $1,455,103 + $10,998 = $1,466,101. For more
information on the assumptions included in this
calculation, refer to the regulatory impact analysis
of this document. Note, the total values may not
equal the sum of the parts due to rounding.
741 The cost in the first year is estimated as:
($386,657 for the disclosure confirming fiduciary
status + $773,313 for the written statement of the
Care Obligation & Loyalty Obligation Owed +
$43,244,858 for the statement in the Relationship
and Conflict of Interest disclosure + $41,322,500 for
the rollover disclosure) + ($776,863 to prepare and
send disclosures + $145,230 for material and
postage costs) + ($1,455,103 for additional
compensation disclosure preparation + $10,998 for
materials and postage) = $88,115,522.The cost in
subsequent years is estimated as: ($41,322,500 for
the rollover disclosure + $776,863 to prepare and
send disclosures + $145,230 for material and
postage costs) + (1,455,103 for additional
compensation disclosure + $10,998 for materials
and postage) = $43,710,694. Note, the total values
may not equal the sum of the parts due to rounding.
Note, the total values may not equal the sum of the
parts due to rounding.
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failed to adhere to the Impartial
Conduct standards, or who lack the
necessary education, training, or skill.
Finally, Insurers must provide their
complete policies and procedures to the
Department within 30 days upon
request.
These requirements are consistent
with, though more protective than, the
requirements in NAIC Model
Regulation. The NAIC Model Regulation
has been updated and revised several
times; however, both the 2010 NAIC
Model Regulation 742 and the 2020
revisions to the NAIC Model
Regulation 743 include a requirement to
‘‘establish and maintain procedures for
the review of each recommendation
prior to issuance of an annuity.’’ 744
While the 2010 version required that
such procedures be ‘‘designed to ensure
that there is a reasonable basis to
determine that a recommendation is
suitable,’’ 745 the 2020 version requires
such procedures be ‘‘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.’’ 746
Most States have adopted some form
of the NAIC Model Regulation, and, to
date, 43 States have adopted the most
recent version, and New York has
adopted its own, more protective set of
requirements in New York Rule 187.747
742 NAIC, Model Suitability Regulations,
§ 6(F)(1)(d) NAIC (2010), https://
naic.soutronglobal.net/Portal/Public/en-GB/
RecordView/Index/25201.
743 NAIC, Model Suitability Regulations,
§ 6(F)(1)(d) NAIC (2010), https://
naic.soutronglobal.net/Portal/Public/en-GB/
RecordView/Index/25201.
744 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).
745 NAIC, Model Suitability Regulations,
§ 6(F)(1)(d) NAIC (2010), https://
naic.soutronglobal.net/Portal/Public/en-GB/
RecordView/Index/25201.
746 NAIC, Model Suitability Regulations,
§ 6(F)(1)(d) NAIC (2020), https://content.naic.org/
sites/default/files/inline-files/MDL-275.pdf.
747 When the Department conducted its analysis
of States in July 2023, 39 States had adopted the
NAIC Model Regulation, including its best interest
standard: 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. Since then, the NAIC Model Regulation
has also been adopted by Utah, Oklahoma,
Vermont, and California. NAIC, Implementation of
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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.748
While many Insurers may have
policies and procedures in place that
largely satisfy the requirements of the
rulemaking, the Department expects that
many will need to change and improve
policies and procedures to be fully
compliant.
The Department received several
comments indicating that the time
needed to develop policies and
procedures was underestimated. In
response, the Department has revised
upwards both the time to develop
policies and procedures, as well as the
time to review the rule, which includes
any planning necessary for
implementation.
The Department expects that
satisfying this requirement will be more
time consuming for larger entities due to
the complexity of their businesses. The
Department assumes that, for each large
Insurer, legal professionals will spend,
on average, 40 hours of legal staff time
drafting or modifying the policies and
procedures, and for each small
insurance company, legal professionals
will spend, on average, 20 hours of legal
staff time. This results in an estimated
cost of approximately $1.4 million in
the first year.749
The rulemaking requires that the
Insurer update and modify policies and
procedures in response to the findings
of the retrospective review.
Accordingly, in the following years, the
Department assumes for each Insurer,
legal professionals will spend five hours
reviewing. This results in an estimated
cost of approximately $296,000 in
subsequent years.750
2020 Revision to Model #275: Suitability in Annuity
Transaction Model Regulations, (January
2024),https://content.naic.org/sites/default/files/
files/cmte-a-aswg-mdl-275-adoption-map_4.pdf.
New York’s Rule 187 also contains a best interest
standard in Section 224.4 and policy and procedure
requirements in Section 224.6.
748 NAIC. Suitability in Annuity Transactions
Model Regulation (#275) Best Interest Standard of
Conduct Revisions Frequently Asked Question,
(May 2021).
749 This is estimated as: (301 small insurance
companies × 20 hours) + (57 large insurance
companies × 40 hours) ≈ 8,286 hours. A labor rate
of $165.71 is used for a legal professional. The labor
rate is applied in the following calculation: 8,286
hours × $165.71 ≈ $1,373,123. Note, the total values
may not equal the sum of the parts due to rounding.
750 This is estimated as: 358 insurance companies
× 5 hours ≈ 1,788 hours. A labor rate of $165.71 is
used for a legal professional. The labor rate is
applied in the following calculation: (358 insurance
companies × 5 hours) × $165.71 ≈ $296,302. Note,
the total values may not equal the sum of the parts
due to rounding.
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32233
The rule also requires Insurers 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. The
Department assumes that for each
Insurer, reviewing the recommendations
of Independent Producers will take
approximately 30 minutes. This results
in an estimated cost of approximately
$49.6 million each year.751
The rulemaking also requires Insurers
to provide their complete policies and
procedures to the Department within 30
days of request. As discussed above for
PTE 2020–02, the Department estimates
that it will 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 three policies and procedures
from insurers in the first year and one
request in subsequent years, on
average.752 This results in an estimated
cost of approximately $50 in the first
year 753 and $15 in subsequent years.754
The Department estimates that
satisfying the requirements described
above will result in a total cost of
approximately $50.9 million in first year
and $49.9 million in subsequent
years.755
751 This is estimated as: (500,000
recommendations × (30 minutes ÷ 60 minutes)) ≈
250,000 hours. A labor rate of $198.25 is used for
a financial professional. The labor rate is applied in
the following calculation: (500,000
recommendations × (30 minutes ÷ 60 minutes)) ×
$198.25 ≈ $49,562,500. Note, the total values may
not equal the sum of the parts due to rounding.
752 The number of requests in the first year is
estimated as: 358 insurance companies × (165
requests in PTE 2020–02 ÷18,632 Financial
Institutions in PTE 2020–02) ≈ 3 requests. The
number of requests in subsequent years is estimated
as: 358 insurance companies × (50 requests in PTE
2020–02 ÷18,632 Financial Institutions in PTE
2020–02) ≈ 1 request.
753 The burden is estimated as: 3 requests × (15
minutes ÷ 60 minutes) = 0.75 hours. A labor rate
of $65.99 is used for a clerical worker. The labor
rate is applied in the following calculation: (3
requests × (15 minutes ÷ 60 minutes)) × $65.99 =
$49.49.
754 The burden is estimated as: 1 request × (15
minutes ÷ 60 minutes) = 0.25 hours. A labor rate
of $65.99 is used for a clerical worker. The labor
rate is applied in the following calculation: (1
request × (15 minutes ÷ 60 minutes)) × $65.99 =
$16.50.
755 The cost in the first year is estimated as:
($1,373,123 to develop policies and procedures +
$49,562,500 to review rollover recommendations +
$49 to provide policies and procedures to the
Department) = $50,935,672. The cost in subsequent
years is estimated as: ($296,302 to review policies
and procedures + $49,562,500 to review rollover
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Costs Associated With Retrospective
Review
The amendment requires Insurers to
conduct a retrospective review at least
annually. The review is 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 is 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 Insurer
must prudently determine whether to
continue to permit individual
Independent Producers to sell the
Insurer’s annuity contracts to
Retirement Investors. Additionally, the
Insurer 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.
The Insurer annually must provide a
written report to a Senior Executive
Officer which details the review. A
Senior Executive Officer is any of the
following: the chief compliance officer,
the chief executive officer, president,
chief financial officer, or one of the
three most senior officers of the
Financial Institution. The Senior
Executive Officer must annually certify
that (A) the officer has reviewed the
report of the retrospective review; (B)
the Insurer has provided Independent
Producers with the methodology and
results of the retrospective review, has
corrected any prohibited transactions—
including paying excise taxes and
reporting to the IRS, and that the Insurer
has received a certification that the
Independent Producer has filed Form
5330 within 30 days after the form is
due; (C) the Insurer 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
recommendations + $16 to provide policies and
procedures to the Department) = $49,858,818. Note,
the total values may not equal the sum of the parts
due to rounding.
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Insurer has in place a prudent process
to modify such policies and procedures.
Insurers are also required to provide
the Independent Producer with the
underlying methodology and results of
the retrospective review, including a
description of any non-exempt
prohibited transaction the Independent
Producer engaged in with respect to
investment advice defined under Code
section 4975(e)(3)(B). The Insurer must
instruct the Independent Producer to
correct any prohibited transactions,
report those transactions to the IRS on
Form 5330 and provide a copy of that
form to the Insurer, and pay any
resulting excise taxes imposed by Code
section 4975. The Department assumes
that the insurance company will
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 will need to
prepare approximately 259,230
retrospective reviews,756 or on average,
each Insurer will need to prepare
approximately 725 retrospective
reviews.757
The Department received comments
remarking that its estimate for the
retrospective review understated the
burden of this requirement. In the final
rulemaking, the Department has stated
that Insurers may use sampling in their
review of an Independent Producer’s
transactions so long as any sampling or
other method is designed to identify
potential violations, problems, and
deficiencies that need to be addressed.
With this in mind, the Department has
not revised its estimate of the average
time conducting the retrospective
review of each Independent Producer
will take. However, the Department
received several comments regarding
the number of Independent Producers
and has revised them upward in our
analysis. This has increased the total
estimated cost of the retrospective
review requirement.
The Department assumes that, for
each Independent Producer selling an
Insurer’s products, legal professionals at
756 This is estimated as: 86,410 Independent
Producers × 3 insurance companies covered ≈
259,230 retrospective reviews.
757 This is estimated as: 259,230 retrospective
reviews ÷ 358 insurance companies ≈ 725
retrospective reviews, on average.
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Sfmt 4700
the insurance company will spend one
hour of legal staff time, on average,
conducting and drafting the
retrospective review. This results in an
estimated cost of approximately $43.0
million.758
The Department assumes it will take
a Senior Executive Officer four hours to
review and certify the reports. This
results in an estimated annual cost of
approximately $0.2 million.759
The Department assumes that the
insurance company will provide the
methodology and results electronically.
The Department received no comments
on this assumption. The Department
estimates that it will take clerical staff
five minutes each to prepare and send
each of the estimated 259,230
retrospective reviews. This results in an
estimated annual cost of approximately
$1.4 million.760 The Department expects
the results to be provided 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 will result in an
estimated total annual cost of
approximately $44.6 million.761
The cost associated with updating and
modifying policies and procedures in
response to the findings of the
retrospective review is discussed above
in the discussion of policies and
procedures.
Costs Associated With Self-Correction
The amendment requires an
Independent Producer that chooses to
use the self-correction provision of the
exemption to notify the Insurer of any
corrective actions taken due to a
violation of the exemption’s conditions.
As discussed above, the Insurer must
758 This is estimated as: 259,230 retrospective
reviews × 1 hour ≈ 259,230 hours. A labor rate of
$165.71 is used for a legal professional. The labor
rate is applied in the following calculation:
(259,230 retrospective reviews × 1 hour) × $165.71
≈ $42,957,003. Note, the total values may not equal
the sum of the parts due to rounding.
759 This is estimated as: 358 firms × 4 hours ≈
1,430 hours. A labor rate of $133.24 is used for a
Senior Executive Officer. The labor rate is applied
in the following calculation: 1,430 hours × $133.24
≈ $190,594.
760 This is estimated as: 259,230 retrospective
reviews × (5 minutes ÷ 60 minutes) ≈ 21,603 hours.
A labor rate of $65.99 is used for a clerical worker.
The labor rate is applied in the following
calculation: (259,230 retrospective reviews × (5
minutes ÷ 60 minutes)) × $65.99 ≈ $1,425,549. Note,
the total values may not equal the sum of the parts
due to rounding.
761 The annual cost is estimated as: ($42,957,003
to conduct the retrospective review + $190,594 for
the review of the retrospective review + $1,425,549
for the provision of the report to Independent
Producers) = $44,573,147. Note, the total values
may not equal the sum of the parts due to rounding.
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discuss corrective actions in the
retrospective review. The Department
does not have data on how often
violations will occur, or on how often
Independent Producers will choose to
use the self-correction provisions of the
amendment. The Department expects
that such violations will be rare. For
illustration, the Department assumes
that one percent of transactions will
result in self-correction, which would
result in 5,000 notifications of selfcorrection being sent. Assuming it will
take an Independent Producer 30
minutes, on average, to draft and send
a notification to the insurance company,
it will result in an annual cost of
approximately $413,000.762
The self-correction provisions of this
rulemaking allow entities to correct
violations of the exemption in certain
circumstances, when either the
Independent Producer has refunded any
charge to the Retirement Investor or the
Insurer has rescinded a mis-sold
annuity, canceled the contract, and
waived the surrender charges. The
correction must occur within 90 days of
the day the Independent Producer
learned or should have learned of the
violation. The Independent Producer
must notify the Insurer responsible for
conducting the retrospective review,
and the violation and correction must
both appear in the written report of the
retrospective review. Without the selfcorrection provisions, an Independent
Producer would also be required to
report those transactions to the IRS on
Form 5330 and pay the resulting excise
taxes imposed by Code section 4975 in
connection with non-exempt prohibited
transactions involving investment
advice under Code section
4975(e)(3)(B).763
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Costs Associated With Recordkeeping
The final amendment incorporates a
new recordkeeping provision for
transactions involving the provision of
fiduciary investment advice that is
similar to the recordkeeping provision
in PTE 2020–02 and retains the existing
recordkeeping requirements in Section
V(e) of PTE 84–24 for transactions that
do not involve the provision of fiduciary
762 The burden is estimated as: (500,000
transaction × 1% of transactions resulting in selfcorrection × (30 minutes ÷ 60 minutes)) = 2,500
hours. A labor rate of $165.29 is used for an
Independent Producer. The labor rate is applied in
the following calculation: (500,000 transaction ×
1% of transactions resulting in self-correction × (30
minutes ÷ 60 minutes)) × $165.29 = $413,225. Note,
the total values may not equal the sum of the parts
due to rounding.
763 The Retrospective Review also requires a
certification that Form 5330 and any resulting
excise taxes have been filed and paid as
appropriate.
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investment advice. In the proposal, the
Department proposed a broader
recordkeeping requirement, but in
response to comments, the final
amendment scaled back the amended
recordkeeping conditions in the
exemption. The recordkeeping
provision in the final amendment
requires Independent Producers to
maintain for six years from the date of
a covered transaction sufficient records
to demonstrate that the conditions of the
exemption have been met.
For this analysis, the Department only
considers the cost for Insurers and
Independent Producers complying with
the new recordkeeping requirements.
The Department estimates that the
additional time needed to maintain
records to be consistent with the
exemption will require an Independent
Producer and Insurers two hours,
resulting in an estimated cost of $28.7
million.764
Summary of Total Cost for the
Amendments to PTE 84–24
The Department estimates that in
order to meet the additional conditions
of the amended PTE 84–24, affected
entities will incur a total cost of $288.7
million in the first year and $167.2
million in subsequent years.765
Costs Associated With the Mass
Amendments
The following analysis summarizes
the changes and associated costs to PTE
75–1, PTE 77–4, PTE 1980–83, PTE 83–
1, and PTE 86–128. For more
information on the cost estimates, refer
to the Paperwork Reduction Act
statements for the amendments,
published elsewhere in today’s edition
of the Federal Register.
The most significant change in the
amendments to PTEs 75–1, 77–4, 80–83,
83–1, and 86–128 is the removal of
relief for the receipt of compensation by
an investment advice fiduciary in
764 This is estimated as: (86,410 Independent
Producers + 358 insurance companies) × 2 hours ≈
173,535 hours. A labor rate of $165.29 is used for
an Independent Producer and $165.71 for a legal
professional at an insurance company. The labor
rate is applied in the following calculation: (86,410
Independent Producers × 2 hours × $165.29) + (358
insurance companies × 2 hours × $165.71) ≈
$28,683,939.
765 The first-year total cost includes: ($76,015,692
for rule review + $88,115,522 for general
disclosures + $50,935,672 for policies and
procedures + $44,573,147 for the retrospective
review + $413,225 for self-correction + $28,683,939
for recordkeeping) = $288,737,197. The total cost in
subsequent years includes: ($43,710,694 for
disclosures + $49,858,818 for policies and
procedures + $44,573,147 for the retrospective
review + $413,225 for self-correction + $28,683,939
for recordkeeping) = $167,239,823. Note, the total
values may not equal the sum of the parts due to
rounding.
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connection with the provision of
fiduciary investment advice. Entities
previously relying on these exemptions
for relief concerning investment advice
will be required to meet the conditions
of PTE 2020–02 or PTE 84–24 to receive
relief. Several commenters on the
proposal expressed concern about the
cost burden associated this change, with
many stating that the Department had
not considered the cost associated with
moving to PTE 2020–02. In
consideration with these comments, the
Department has increased its cost
estimates for entities newly relying on
PTE 2020–02 and PTE 84–24. The
increases include significant increases
in the cost estimates to review and
implement the rule and to establish
policies and procedures. For a complete
discussion of the cost estimates, refer to
the discussion of costs associated with
PTE 2020–02 and PTE 84–24 above.
Costs Associated With PTE 75–1
In the proposal, the Department
proposed to amended PTE 75–1 Parts II
and V to adjust the recordkeeping
requirement to shift the burden from
plans and IRA owners to Financial
Institutions. In the final rulemaking, the
Department has decided to keep the
recordkeeping requirement unchanged
from the existing exemption.
Summary of Affected Entities
The amendment to PTE 75–1 affects
banks, reporting dealers, and brokerdealers registered under the Securities
Exchange Act of 1934. As discussed in
the Affected Entities section above, the
Department estimates that 1,919 brokerdealers and 2,025 banks will use PTE
75–1.766
Costs Associated With Disclosure
Requirements in Part V
The Department amends 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 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, and (2) 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.
766 For more information on how the number of
each type of entity is estimated, refer to the Affected
Entities section.
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The Department believes that it is a
usual and customary business practice
to maintain records required for
demonstrating compliance with SECmandated disclosure distribution
regulations. Further, 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.767 Therefore, the
Department concludes that this
requirement produces no additional
burden to the public.
estimates that 25 fiduciary-banks with
public offering services will be affected
by the amended PTE 80–83.769
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.
Costs Associated With Removing
Fiduciary Investment Advice From Parts
III and IV
The Department is amending PTE 77–
4, PTE 80–83, and PTE 83–1, which
include relief for investment advice
fiduciaries, by removing fiduciary
investment advice from the covered
transactions. Investment advice
providers will instead have to rely on
the amended PTE 2020–02 for
exemptive relief covering investment
advice transactions and the investment
advice providers’ costs are accounted
for in the cost estimates for PTE 2020–
02.
Additionally, the Department is
amending PTE 75–1 Parts III and IV,
which provide relief for investment
advice fiduciaries, by removing relief for
compensation received as a result of
providing fiduciary investment advice
from the covered transactions.
Investment advice providers will
instead have to rely on the amended
PTE 2020–02 and the investment advice
providers costs are accounted for in the
cost estimates for PTE 2020–02.
The removal of investment advice
from PTE 75–1 Parts III and IV moves
the estimated costs of providing
investment advice to the cost estimates
for PTE 2020–02. While the Department
estimates that most entities will rely on
PTE 2020–02, the increase in the total
cost for PTE 75–1 results from revisions
to some estimates, such as time burdens
for compliance, which have been
adjusted in response to comments.
Costs Associated With PTE 77–4, PTE
80–83, PTE 83–1
Summary of Affected Entities
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The amendment to PTE 77–4 affects
mutual fund companies. As discussed
in the Affected Entities section, the
Department estimates that 812 mutual
fund companies will be affected by the
amended PTE 77–4.768
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
767 EBSA, Regulating Advice Markets Definition
of the Term ‘‘Fiduciary’’ Conflicts of Interest—
Retirement Investment Advice Regulatory Impact
Analysis for Final Rule and Exemptions, pp. 258
(Apr. 2016), https://www.dol.gov/sites/dolgov/files/
EBSA/laws-and-regulations/rules-and-regulations/
completed-rulemaking/1210-AB32-2/ria.pdf.
768 For more information on how the number of
each type of entity is estimated, refer to the Affected
Entities section.
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Costs Associated With Amendment to
PTE 86–128
Summary of Affected Entities
Summary of Total Cost for the
Amendments to PTE 75–1
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Summary of Total Cost for the
Amendments to PTE 77–4, PTE 80–83,
and PTE 83–1
The amendments to PTE 86–128 will
affect fiduciaries of employee benefit
plans and IRAs that rely on the class
exemption to effect or execute securities
transactions (‘‘transacting fiduciaries’’)
and independent plan fiduciaries that
authorize the plan or IRA to engage in
the transactions (‘‘authorizing
fiduciaries’’). Fiduciaries of employee
benefit plans and IRAs will be affected
by the removal of relief for the receipt
of compensation as a result of providing
investment advice. Fiduciaries who fall
under the definition of a Financial
Institution under PTE 2020–02 may rely
on that exemption for relief for
compensation as a result of investment
advice. The costs associated with PTE
2020–02 are discussed elsewhere in this
analysis. For more information about
the cost for Fiduciaries of employee
benefit plans that will continue to rely
on PTE 86–128, refer to the Paperwork
Reduction Act sections for PTE 86–128,
also published in today’s Federal
Register.
As discussed in the Affected Entities
section, the Department estimates that
251 broker-dealers will be affected by
the amendments to PTE 86–128.
Additionally, the Department estimates
that 10,000 IRAs will engage in
transactions covered under this class
769 For more information on how the number of
each type of entity is estimated, refer to the Affected
Entities section.
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exemption, of which 210 are new
IRAs.770
In the proposal, a few commenters
expressed concern that disruption
would be caused by the amendments.
One commenter expressed concern that
the removal of investment advice would
increase costs to retirement investors, as
entities would need to comply with PTE
2020–02. The Department did not
receive comments specifically
addressing the Department’s estimates
of the number of entities that would
continue to rely on PTE 86–128 or plans
receiving services from those entities.
Summary of Total Cost for the
Amendments to PTE 86–128
The Department is adding a new
Section II(d) which removes relief in
this exemption for the receipt of
compensation as the result of the
provision of fiduciary investment
advice. Instead, investment advice
providers will have to rely on PTE 84–
24 and PTE 2020–02 for exemptive
relief covering transactions involving
the provision of fiduciary investment
advice and the investment advice
providers’ costs are accounted for in the
cost estimates for PTE 84–24 and PTE
2020–02.
The Department had proposed
imposing additional requirements on
the independent plan fiduciaries
authorizing the IRA to engage in these
transactions (‘‘authorizing fiduciary’’)
under the conditions contained in the
exemption. In the final rulemaking, the
Department has decided to not impose
such requirements. Additionally, the
Department proposed including a new
recordkeeping requirement applicable to
Section VII. The Department received
several comments opposing this
requirement, particularly the
requirement to make records available
to participants and beneficiaries. In
consideration of the comments received,
the Department has also removed this
requirement in the final amendment.
As such, as finalized, the amendments
to PTE 86–128 do not impose additional
burdens on the entities who continue to
rely on the exemption.
10. Regulatory Alternatives
The Department considered various
alternative approaches in developing
this rulemaking. Those alternatives are
discussed below.
Broader Rule
The Department considered a
definition of an investment advice
770 For more information on how the number of
each type of entity is estimated, refer to the Affected
Entities section.
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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 other nonTitle I ERISA plans.
In developing this rulemaking, the
Department has crafted a more focused
definition that addresses the scope
issues identified by the Fifth Circuit’s
Chamber opinion while still protecting
Retirement Investors. The Department
was also cognizant of stakeholders’
concerns that 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.
Unlike the 2016 Final Rule, the
amended definition 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. The current rulemaking instead
limits application of investment advice
fiduciary status to 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
rulemaking 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. For example, an entity can
satisfy the test under (c)(1)(i) of this
rulemaking only if a recommendation is
made under circumstances that would
indicate to a reasonable investor in like
circumstances that the recommendation
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is individualized to the Retirement
Investor, reflects professional or expert
judgment as applied to the individual
investor’s circumstances, and may be
relied upon by the Retirement Investor
to advance their own interests;
essentially, the entity has held
themselves out as a trusted advice
provider and invited the Retirement
Investor’s reliance on them.
No Amendment to PTE 2020–02
The Department considered not
amending PTE 2020–02 and leaving the
exemption in its present form. The
Department has retained the core
components of the original PTE,
including the Impartial Conduct
Standards and the requirement for
strong policies and procedures aimed at
avoiding and mitigating conflicts of
interest. 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 broadening the exemption to cover
all principal transactions and roboadvice, as well as providing additional
protections are necessary to more fully
protect Retirement Investors and ensure
that fiduciary investment advice
providers adhere to the standards
outlined in PTE 2020–02. Therefore, as
discussed in greater detail in the
preamble to amended PTE 2020–02, also
published in today’s Federal Register,
the amendments clarify and tighten the
existing text of PTE 2020–02, while also
broadening the scope of the exemption
so more parties can use it.
No Amendment to PTE 84–24
The Department is aware that
insurance companies sometimes sell
insurance products through
independent agents who sell multiple
insurance companies’ products. Thus,
when the Department originally
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, but ultimately
concluded that the amendment will be
a better approach with regards to
covered advice providers.
Since the Department first issued PTE
2020–20, insurance companies that
distribute annuities through
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32237
independent agents have expressed
concerns that they may not be able to
effectively comply with PTE 2020–02
due to the difficulties 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, without the amendments,
PTE 84–24 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 concerns, the
Department has amended PTE 84–24 to
provide exemptive relief for
independent insurance producers who
receive a sales commission or fee(s)
from an insurance company in
connection with the purchase of
annuities or other insurance products
with plan or IRA assets. The
amendment addresses insurance
industry concerns regarding the
workability of PTE 2020–02’s
conditions, while also ensuring that
fiduciary investment advice is delivered
pursuant to the same core principles
that protect Retirement Investors under
PTE 2020–02.
The Department could have amended
PTE 84–24 differently. In particular, the
Department could have utilized a
narrower definition of compensation
that gets relief under the exemption.
This approach could be more protective
of Retirement Investors and reduce
conflicts, but this alternative would
have been more disruptive to business
models than the selected approach.
Including an Individual Contract
Requirement
The Department also considered
amending PTE 2020–02 to require an
enforceable written contract between
the Financial Institution and the
Retirement Investor. The predecessor to
PTE 2020–02, the Best Interest Contract
Exemption in the Department’s 2016
rulemaking,771 required such an
enforceable contract. Ultimately, the
Department concluded that the better
course of action was not to include such
a requirement. The Department is
cognizant of the Fifth Circuit’s finding
that the contractual requirement in the
Department’s 2016 Rulemaking
exceeded the scope of the Department’s
authority. In crafting an exemption that
does not include an enforceable written
771 See
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contract, the Department intends to
avoid any potential disruption in the
market for investment advice.
Instead, the Department believes that
the compliance structure of the
amended exemption includes sufficient
oversight and compliance measures. 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 30 business days of
request. The exemption also includes
eligibility provisions, which the
Department believes will encourage a
culture of compliance among Financial
Institutions and Investment
Professionals.
The amendment also conditions relief
on the Financial Institutions reporting
any non-exempt prohibited transactions
to the IRS, correcting those transactions,
and paying any resulting excise taxes
imposed under Title II of ERISA.
Further, the amendment adds the
repeated failure to report, correct, or 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 will 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 proposed rule 772 advocated that
the Department 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. However, the Department
declines to take this approach because
the Department does not believe that
disclosure alone is adequately
protective of Retirement Investors.
As discussed above in the ‘‘Need for
Regulatory Action’’ section, many of the
issues in the retirement saving space
arise out of a combination of inexpert
customers and conflicted advisers.
Enhanced disclosure requirements help
make the industry more transparent and
accessible. However, most Retirement
Investors are not as financially
sophisticated as those providing
investment advice, which can make it
extremely difficult to detect lapses in
the quality of financial advice. Due to
the complexity of the industry,
Retirement Investors may not fully
understand disclosures of advisers’
conflicts or, the impacts that those
conflicts could have on their
772 See
FR 21927 (Apr. 20, 2015).
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investments. A large body of research
discussed in the regulatory impact
analysis 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.773 Advisers
may inflate the bias in their advice to
counteract any discounting that might
occur because of the disclosure of
conflicts.774 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 and requested
comments on the matter in the preamble
to the proposed amendment. Such
disclosures could allow market-based
forces to extend protections to
consumers by discouraging and
eliminating the most conflicted
compensation practices.
These disclosures 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.775 However, industry
commenters generally opposed the
condition on the grounds that it would
be very costly to maintain such a
website and that it would only provide
773 See
FR 20946, 20950–51 (Apr. 8, 2016).
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).
775 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.
See also 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).
774 George
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a limited benefit to Retirement
Investors. Due to these comments, the
Department decided against inclusion of
a web disclosure exemption condition at
this time.
Allowing for More Parties To Review
Records
For the 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.
Although the proposed broader
recordkeeping condition is consistent
with other exemptions, the Department
understands commenters’ concerns
regarding broader access to the
documents and has concern that broad
access to the documents could have a
counterproductive impact on the
formulation and documentation of
appropriate firm oversight and control
of recommendations by Investment
Professionals.
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
amendments would have resulted in an
annual cost of approximately $15.4
million.776
Proposed Disclosures to Retirement
Investors That Were Modified
The proposed rulemaking included
the Conflict of Interest Disclosures and
the Rollover Disclosures that were
changed for the final rulemaking. The
776 The burden is estimated as follows: (19,528
Financial Institutions × 10 requests) × (30 minutes
÷ 60 minutes) = 96,450 hours. A labor rate of
$165.71 is used for a legal professional. The labor
rate is applied in the following calculation: [(19,528
Financial Institutions × 10 requests) × (30 minutes
÷ 60 minutes)] × $165.71 = $15,368,343.
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changes were to align the disclosure
requirements with requirements under
Regulation Best Interest and the NAIC
model rules. Doing so reduced the cost
of compliance, while the Department
continues to monitor the effectiveness
and utility of the disclosures.
Adding Specificity To Conflict of
Interest & Material Fact Disclosures
The Department received many
comments asserting that the conflict of
interest and material fact disclosure
requirements in the proposal would
burden Financial Institutions without
providing sufficient incremental
benefits to Retirement Investors beyond
those provided by the disclosures
required by the SEC’s Regulation Best
Interest standard. While the Department
also received comments expressing
support for the Department’s proposed
amendments that would have clarified
and tightened the existing PTE 2020–02
disclosure requirements, the
Department ultimately decided to base
the pre-transaction disclosure
requirements on the SEC’s Regulation
Best Interest disclosure requirements.
The Department made this
determination to ensure that Retirement
Investors received sufficient information
to make informed decisions, while also
reducing compliance burdens by
adopting requirements consistent with
existing SEC requirements.
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Eligibility
The Department considered
conditioning eligibility for both PTE 84–
24 and 2020–02 on the actions of both
fiduciaries themselves and any
‘‘affiliates.’’ The benefit of using this
broad term was to foster a wide-reaching
culture of compliance in the retirement
investment industry. However, in
response to industry comments stating
that the Department’s use of the term
‘‘affiliate’’ was confusing and overbroad,
the Department decided to use the
narrower term ‘‘controlled group’’ in the
ineligibility provisions of both final
amendments.
The Department also revised the
ineligibility provisions based on foreign
convictions to exclude any convictions
that occur within foreign jurisdictions
included on the Department of
Commerce’s list of ‘‘foreign
adversaries.’’ 777 This change was made
in response to commenter concerns that
convictions have or could occur in
foreign nations that are intended to
harm U.S.-based Financial Institutions
and thus, would not truly meet the
777 15
CFR 7.4.
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section’s ‘‘substantially equivalent’’
requirement.
Finally, the Department considered
the inclusion of a Department-led
ineligibility determination, again, as a
way to promote a culture of compliance
in the industry. However, the
Department ultimately decided to
condition ineligibility on
determinations in court proceedings,
whether domestic or foreign
convictions, that met the standards
outlined in the ineligibility section. This
decision was made after consideration
of commenters’ due process concerns.
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 final 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
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.
11. 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 expects
that the rulemaking will result in lower
fees and expenses for plan participants,
but the Department faces uncertainty in
estimating the magnitude of savings.
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:
3,944.
Estimated Number of Annual
Responses: 3,944.
Frequency of Response: Initially,
Annually, When engaging in exempted
transaction.
Estimated Total Annual Burden
Hours: 15,778 hours.
Estimated Total Annual Burden Cost:
$0.
N. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (PRA) (44 U.S.C.
3506(c)(2)(A)), the Departments
solicited comments concerning the
information collection requirements
(ICRs) included in the proposed rule. At
the same time, the Departments also
submitted ICRs to OMB, in accordance
with 44 U.S.C. 3507(d).
The Department received comments
that addressed the burden estimates
used in the analysis of the proposed
rule. The Department reviewed these
public comments in developing the
paperwork burden analysis and
subsequently revised the burden
estimates in the amendments to the
PTEs discussed below.
ICRs are available at RegInfo.gov
(https://www.reginfo.gov/public/do/
PRAMain). Requests for copies of the
ICR or additional information can be
sent to the PRA addressee:
By mail: James Butikofer, Office of
Research and Analysis, Employee
Benefits Security Administration, U.S.
PO 00000
Frm 00119
Fmt 4701
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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:
89,818.
Estimated Number of Annual
Responses: 1,498,615.
Frequency of Response: Initially,
Annually, When engaging in exempted
transaction.
Estimated Total Annual Burden
Hours: 1,093,403 hours.
Estimated Total Annual Burden Cost:
$191,759.
PTE 86–128
Type of Review: Revision to an
existing collection.
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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:
326.
Estimated Number of Annual
Responses: 4,150.
Frequency of Response: Initially,
Annually, When engaging in exempted
transaction.
Estimated Total Annual Burden
Hours: 177 hours.
Estimated Total Annual Burden Cost:
$3,300.
PTE 2020–02
OMB Control Number: 1210–0163.
Affected Public: Businesses or other
for-profits; not for profit institutions.
Estimated Number of Respondents:
18,632.
Estimated Number of Annual
Responses: 114,609,171.
Frequency of Response: Initially,
Annually, when engaging in exempted
transaction.
Estimated Total Annual Burden
Hours: 2,599,221 hours.
Estimated Total Annual Burden Cost:
$18,359,543.
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O. Regulatory Flexibility Act
The Regulatory Flexibility Act
(RFA) 778 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.779 Under section 604 of
the RFA, agencies must submit a final
regulatory flexibility analysis (FRFA) of
a final rulemaking 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 FRFA.
1. Need for and Objectives of the Rule
As discussed earlier, the Department
believes that changes to the marketplace
since 1975, when the Department
finalized the five-part ‘‘fiduciary’’ test,
have made the existing definition
inadequate and obsolete. This
rulemaking 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
regulatory impact analysis.
778 5
779 5
U.S.C. 601 et seq.
U.S.C. 601(2), 603(a); see 5 U.S.C. 551.
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Smaller retirement plans may be more
susceptible to conflicts of interest on the
part of service providers, because they
are less likely than larger retirement
plans to receive investment advice from
a service provider that is acting as a
fiduciary. Smaller plans have
historically received investment advice
from insurance brokers or brokerdealers, who may be subject to conflicts
of interest.780 Larger plans may also
have sufficient resources and in-house
expertise to make investment decisions
without outside assistance.781
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 based on the
investment options selected.782
One commenter noted that, according
to the Morningstar 2023 Retirement Plan
Landscape Report, participants in small
plans pay nearly double what
participants in large plans pay.783 As
such, small plans and their participants
could see significant benefits from the
protections provided in the
amendments.
2. Comments From the Small Business
Administration on the RFA
The U.S. Small Business
Administration Office of Advocacy
(SBA) submitted a comment expressing
concern regarding a number of
assumptions and calculations in the
RFA.784 The Department has considered
the comment letter and addressed them
as appropriate.
The SBA first expressed concern that
the number of affected entities is
underestimated, with particular concern
for the estimate of small, affected
entities. In response to this comment,
among others, Department has revised
multiple estimates. The commenter
highlighted the Department’s
assumptions that the regulation would
affect 4,000 Independent Producers. The
number of Independent Producers was
780 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.
781 Id.
782 Id.
783 In this analysis small plans are defined as
plans with less than $25 million in assets, while
large plans are defined as plans with more than
$100 million in assets. (See Lia Mitchell, 2023
Retirement Landscape Report: An In-Depth Look at
the Trends and Forces Reshaping U.S. Retirement
Plans, Morningstar Center for Retirement & Policy
Studies (April 2023).
784 Comment letter received from the U.S. Small
Business Administration Office of Advocacy on the
Notification of Proposed Rulemaking: Retirement
Security Rule: Definition of an Investment Advice
Fiduciary, (January 2024).
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revised upwards from 4,000 to 86,410.
The number of affected insurance
companies was also re-estimated using
a new methodology based on the
Statistics of U.S. Businesses, which
increased the number of affected
insurance companies from 398 to 442.
Additionally, the Department’s estimate
for discretionary fiduciaries was
reconsidered. Instead of looking at all
broker-dealers, the Department decided
to estimate discretionary fiduciaries
with the number of dual-registered
broker-dealers. The Department believes
that this produces a more accurate
estimate of discretionary fiduciaries.
This reduces the estimate of
discretionary fiduciaries from 1,894 to
251. In response to additional
comments, the Department has also
added 31 non-bank trustees to the small
and total affected entities list. This
estimate is described in the Affected
Entities section of the regulatory impact
analysis. Finally, the affected entity
estimates for broker-dealers, registered
investment advisers, and banks all were
revised with the same methodology
used in the proposal using updated
data. None of these changes for brokerdealers, registered investment advisers,
and banks exceeded 5 percent of the
original estimates. These changes are all
discussed in further detail in the
regulatory impact analysis. Since the
Department’s small entity estimates are
based off shares of the total affected
entities, these changes result in an
updated number of affected small
entities in the RFA.
Additionally, the SBA recommended
that the Department use different data
sources to calculate the share of affected
entities that are small. Specifically, they
recommended that the Department use
the Statistics of U.S. Businesses from the
U.S. Census Bureau. In response, the
Department has updated the small,
affected entity estimates using shares
calculated from this data source where
applicable. This change, combined with
the affected entities changes, alter the
small, affected entity estimates. In the
proposal, the rulemaking was estimated
to affect 11,919 small entities in the
regulatory impact analysis and 27,057
small entities in the RFA. In the Final
rule, this estimate has been updated to
affect 91,956 small entities in the
regulatory impact analysis and 107,446
in the RFA. Looking at notable changes,
the number of small Independent
Producers has increased to 85,564 from
3,960 in the proposal. The number of
small discretionary fiduciaries
decreased from 1,835 to 243 and the
number of mutual fund companies
decreased from 796 to 728 in the
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proposal. All other changes in small,
affected entities were smaller than 5
percent of the original estimates. The
Department has also provided tables to
illustrate how small entities are
distributed across size categories based
on revenue.
The SBA also expressed concern that
the Department had not thoroughly
analyzed the costs to small entities
relative to large ones. The commenter
provided a survey of expectations
regarding future compliance costs, but
this survey did not provide a breakdown
of these costs or expectations by
business size.785 They did not provide
additional data or suggest an alternative
methodology for the Department to
analyze the differential costs of the
rulemaking on small entities. In the
absence of such data, the Department is
unable to provide unique estimates of
costs for different small plan sizes.
However, in response to this comment
and others, the Department has chosen
to revise upwards many of the cost
averages described in the FRFA, and has
also instituted different hourly burden
estimates for small and large firms in
certain requirements. Additionally, the
Department has added a discussion to
this analysis about the estimated cost of
small institutions of varying sizes and
displayed these costs as a share of
revenue at these differently sized firms.
This rulemaking applies the same
compliance requirements, regardless of
the size of the entity, under the premise
that the provisions of the rulemaking are
necessary to protect Retirement
Investors when engaged in an otherwise
prohibited transaction. Further, when
considering the SBA size thresholds,
nearly all Financial Institutions affected
by the rulemaking are considered small
entities. As such, all comments received
on the proposal have been considered
with small entities in mind. For more
information on how the Department
considered commenters’ feedback on
the rulemaking and its estimates, refer
to the regulatory impact analysis.
The SBA also expressed concern that
the Department did not properly
analyze regulatory alternatives that
would decrease the burdens on small
entities. As described above, all
alternatives and comments received on
785 Nat’l Ass’n of Ins. & Fin. Advisors, NAIFA
Survey Shows the DOL’s Fiduciary Proposal Will
Increase Costs and Reduce Access to Retirement
Planning Services (Dec. 19, 2023), https://
advocacy.naifa.org/news/naifa-surveyshows-thedols-fiduciary-proposal-will-increase-costs-andreduce-access-to-retirement-planning-services.
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the proposal have been considered with
small entities in mind. In particular,
SBA highlighted two alternatives that
they believe merited further discussion.
First, SBA stated that the Department
should quantify the cost savings
associated with not amending PTE
2020–02. Second, SBA stated that the
Department should consider the cost
savings associated with exempting small
businesses from the definition of an
investment advice fiduciary.
Realistically, these alternatives must be
discussed as one, because if the
Department amended the definition of
an investment advice fiduciary without
amending PTE 2020–02, then that
would leave small businesses without
exemptive relief. This would save small
businesses the compliance costs of PTE
2020–02, but would ultimately leave
them unable to provide investment
advice, potentially incurring much
larger costs in lost business. Exempting
small businesses from treatment as
investment advice fiduciaries, in
combination with not amending PTE
2020–02, would remove all of the costs
described in the Regulatory Flexibility
Analysis, thus incurring a cost savings
of $138.1 million in the first year and
$62.4 million in subsequent years.
However, many investors, plans, and
retirees rely on small Financial
Institutions, especially under the
expansive definitions utilized in the
RFA. Assuming the distribution of the
investment advice amongst firms is
similar to the distribution of revenue,
then this could leave approximately 38
percent of the market for investment
advice without protection.786 The
Department considered this alternative,
but ultimately decided that investors
utilizing these small financial firms
deserve protection, and that the
regulatory uniformity imposed by a
single standard would reduce confusion
and be better for the market for
investment advice.
Finally, the Department notes that
many small entities also sponsor
retirement plans and therefore are
subject to ERISA liability. As noted
above in the Need for Regulatory Action
section, ERISA plan fiduciaries,
particularly those for small plans, are
often confused as to whether the advice
they receive is fiduciary, may receive
inadequate disclosures and can be
786 According to Departmental Analysis of the
Statistics of U.S. Businesses by examining a
weighted average of the receipts attributable to
small firms.
PO 00000
Frm 00121
Fmt 4701
Sfmt 4700
32241
steered into poor performing funds,
negatively impacting the plan and its
participants and beneficiaries. For those
small plan sponsors, this rulemaking
will now ensure that that advice they
receive is held to a fiduciary standard
which will in turn reduce the sponsor’s
expected amount of ERISA liability.
3. Other Significant Comments on the
RFA
In addition to the comment’s received
from the SBA discussed above, several
commenters expressed concern that the
proposal would increase costs on small
businesses. One commenter elaborated
that small businesses do not have
compliance departments to implement
the changes necessary. Some of these
commenters noted that the proposal
could force some small businesses to
stop offering services to Retirement
Investors.
The Department acknowledges that
the transition costs in this rulemaking
may be more burdensome for smaller
businesses; however, as discussed
above, compliance with some of the
requirements will be smaller for entities
with less complex business models.
Additionally, many small institutions
will outsource compliance tasks. The
Department expects that for any entity
choosing to outsource, the cost of hiring
a third party will be less than the cost
to use available staffing.
The Department expects that is
particularly true regarding how
Independent Producers will experience
costs. Nearly all Independent Producers
are considered small entities under the
SBA definition. Many of which are one
person operations or relatively small
firms on a headcount basis. The
Department understands that when
examined in isolation this fact can lead
to erroneous conclusions regarding the
burden these individual firms will
experience. In practice Independent
Producers frequently partner and/or
contract with carriers directly or
through third parties called Insurance
Marketing Organizations. These
organizations provide varying levels of
support to Independent Producers. This
support can take several forms such as
carrier contracting, lead generation,
back-office administration, compliance,
training, and any combination of these
and other pertinent services. While this
structure is exemplified by Independent
Producers, the Department expects that
other small Financial Institutions will
rely on similar mechanisms.
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This structure leads to economies of
scale in areas such as compliance. For
this reason, the Department based its
assumptions on this operational
structure while describing the burdens.
The Department believes that the
burdens described in the FRFA
represent a reasonable blended average
of these approaches across a spectrum of
organizational and relational
complexity.
4. Affected Small Entities
The SBA defines small businesses and
issues size standards by industry.787 788
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. 97
percent of broker-dealers 789 and 99
percent of registered investment
advisers 790 are small businesses
according to the SBA size standards.
TABLE 8—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 ............................
Nonbank Trustees .....................................................................
Pension Consultants .................................................................
2020–02
84–24
75–1
77–4
80–83
86–128
1,862
16,195
10
........................
71
........................
........................
........................
(1)
30
(1)
........................
........................
........................
........................
261
85,564
........................
........................
20
........................
924
1,862
........................
........................
........................
........................
........................
1,538
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
728
........................
........................
........................
........................
........................
........................
........................
........................
........................
19
........................
........................
........................
........................
........................
........................
........................
243
........................
........................
........................
........................
........................
........................
........................
1 Pension consultants and investment company principal underwriters who were relying on PTE 84–24 for investment advice will no longer be able to rely on the
exemption as amended for receipt of compensation as a result of providing investment advice. However, these pension consultants and investment company principal
underwriters can rely on PTE 2020–02 when they are part of a Financial Institution, such as a registered investment adviser, broker-dealer, insurance company, or
bank, which are already accounted for.
lotter on DSK11XQN23PROD with RULES4
In its economic analysis for its initial
issuance of PTE 2020–02, 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, 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 rule will
expand the parties that will be
considered investment advice
fiduciaries and also will narrow the
exemption alternatives. In the proposal,
the Department received several
comments regarding its estimate of the
number of financial entities that would
be affected. Commenters expressed
concern about the Department’s
assumption that all eligible entities
787 13
CFR 121.201.
U.S.C. 631 et seq.
789 This is estimated on the percent of entities
with less than $47.0 million for the industry
Securities Brokerage, NAICS 523120. See NAICS
788 15
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already rely on PTE 2020–02, as some
entities did not consider their conduct
to trigger fiduciary status. These
commenters noted that under the
amended definition of a fiduciary, these
entities would consider themselves
fiduciaries for the first time and incur
transition costs, accordingly. In
response to this comment, the
Department has revised its estimate to
assume that 30 percent of brokerdealers, registered investment advisers,
and insurance companies were not
previously relying upon PTE 2020–02
and will incur the transition costs under
this rulemaking.
In response to comments, the
Department has conducted an analysis
of small entities across a wide range of
revenue and asset categories.
Additionally, the Department has
amended its calculations of small
entities in the RFA to utilize the
Statistics of U.S. Businesses from the
U.S. Census Bureau. Due to a lack of
sufficiently detailed data, the
Department cannot provide a
breakdown of entities by revenue for
robo-advisers and principal
underwriters. Additionally, while data
on insurance companies is presented in
the Statistics of U.S. Businesses, the
Department does not believe that this
data has sufficient granularity to
describe the entities affected by this
rulemaking. This rulemaking will only
affect a select subset of insurance
companies writing annuities and some
life insurance products. Therefore, the
Department will continue to utilize its
existing source from the LIMRA
factbook, which details the largest
sellers of annuities by revenue. From
this number, the Department is able to
calculate the number of large annuity
sellers and use this to calculate the
number of small annuity sellers.
However, since this data only provides
direct data on the largest annuity sellers,
the Department is unable to provide a
revenue breakdown for this industry.
Additionally, since the SBA size
definition for banks is based on assets,
rather than receipts, the Department
will continue to use FDIC asset data to
define bank size in the RFA. The NAICS
codes used in generating this table are
subsequently discussed in the FRFA
during individual discussions of each
small, affected entity.
Association, Count by NAICS Industry Sectors,
https://www.naics.com/business-lists/counts-bynaics-code/.
790 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,
https://www.naics.com/business-lists/counts-bynaics-code/.
PO 00000
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TABLE 9—SHARE OF AFFECTED SMALL ENTITIES BY REVENUE
Revenue
Broker-Dealers ..................
Registered Investment Advisers .............................
Pure Robo-Advisers ..........
Discretionary Fiduciaries ...
Insurance Companies .......
Insurance Producers .........
Mutual Fund Companies ...
Investment Company Principal Underwriters ..........
Pension Consultants .........
Nonbank Trustees .............
Banks 792 ...........................
<$100
Thousand
$100–$500
Thousand
$0.5–$1
Million
$1–$5 Million
$25–$47
Million
$5–$25 Million
SBA large
SBA small 791
16.6%
45.7%
17.6%
12.7%
3.7%
0.8%
3.0%
97.0%
24.3
........................
16.6
........................
18.7
27.1
46.7
........................
45.7
........................
53.6
29.2
14.6
........................
17.6
........................
15.6
8.3
10.8
........................
12.7
........................
9.7
18.1
2.1
........................
3.7
........................
1.7
10.1
0.3
........................
0.8
........................
0.2
2.1
1.2
95.0
3.0
24.9
1.0
10.4
98.8
5.0
97.0
75.1
99.0
89.6
........................
10.8
15.3
4.9
........................
22.7
44.0
10.8
........................
12.9
17.9
18.5
........................
27.9
16.0
22.3
........................
14.7
3.9
11.7
........................
2.3
0.5
7.8
0.0
8.6
2.4
24.1
100.0
91.4
97.6
75.9
In addition to providing the share of
small affected entities in each asset or
revenue category, this data is also
displayed in the form of a calculated
number of small affected entities in
Table 10. This is generated by applying
the percentages from Table 9 to the total
affected entities numbers previously
calculated in the Affected Entities
section of the regulatory impact
analysis. It should be noted that, due to
rounding differences in the table, some
of the numbers presented will not sum
to the total small entity number.
TABLE 10—CALCULATED NUMBER OF AFFECTED SMALL ENTITIES BY REVENUE
Revenue
Broker-Dealers ..................
Registered Investment Advisers .............................
Pure Robo-Advisers ..........
Discretionary Fiduciaries ...
Insurance Companies .......
Insurance Producers .........
Mutual Fund Companies ...
Investment Company Principal Underwriters ..........
Pension Consultants .........
Nonbank Trustees .............
Banks 794 ...........................
<$100
Thousand
$100–$500
Thousand
$25–$47
Million
$5–$25 Million
SBA large
SBA small 793
877
337
244
71
16
58
1,862
3,987
........................
42
........................
16,176
220
7,658
........................
115
........................
46,302
237
2,394
........................
44
........................
13,458
68
1,771
........................
32
........................
8,402
147
339
........................
9
........................
1,469
82
47
........................
2
........................
183
17
203
190
8
110
846
84
16,195
10
243
333
85,564
728
........................
110
5
99
........................
229
14
218
........................
131
6
375
........................
283
5
451
........................
148
1
236
........................
23
0
157
0
87
1
487
20
924
30
1,538
Small, registered investment advisers
who provide investment advice to
retirement plans or Retirement Investors
and registered investment advisers who
act as pension consultants will be
directly affected by the amendments to
PTE 2020–02. The Department estimates
that 16,598 registered investment
advisers, including 200 robo-advisers,
will be affected by the amendments.795
The Department estimates that 98.8
percent of Registered Investment
Advisers are small businesses according
to the SBA size standards.796 Based on
these statistics, the Department
estimates that 16,195 small registered
investment advisers exclusive of pure
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$1–$5 Million
318
Registered Investment Advisers
791 The total value may not equal the sum of the
parts due to rounding.
792 The SBA Size categorization for banks is based
on total assets, not revenue. Banks are presented on
the same chart for simplicity, but their figures are
based off of asset cutoffs at $50, $100, $200, $400,
$600, and $850 million.
793 The total value may not equal the sum of the
parts due to rounding.
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$0.5–$1
Million
20:41 Apr 24, 2024
Jkt 262001
robo-advisers, including those registered
with the SEC and the State, will be
affected by the amendments.797
Broker-Dealers
The amendments to PTE 2020–02 will
affect robo-advisers. The Department
estimates that 200 robo-advisers will be
affected by the amendments.798 The
Department does not have information
on how many of these robo-advisers are
considered small entities. The
Department expects that most roboadvisers will not be considered small.
For the purposes of this analysis, the
Department assumes that 5 percent of
robo-advisers, or an estimated 10 roboadvisers, are small entities.
Small broker-dealers who provide
investment advice to retirement plans or
Retirement Investors and registered
investment advisers who act as pension
consultants will be directly affected by
the amendments to PTE 2020–02.
Additionally, the amendments modify
PTE 75–1 and PTE 86–128 such that
small broker-dealers will no longer be
able to rely on those exemptions 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,
794 The SBA Size categorization for banks is based
on total assets, not revenue. Banks are presented on
the same chart for simplicity, but their figures are
based off of asset cutoffs at $50, $100, $200, $400,
$600, and $850 million.
795 For more information on this estimate, refer to
the Affected Entities section of the regulatory
impact analysis.
796 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,
https://www.naics.com/business-lists/counts-bynaics-code/.
797 The number of small investment advisers, who
do not provide pure robo-advice, is estimated as:
(16,398 investment advisers¥200 robo-advisers) ×
98.7% = 16,185 small investment advisers.
798 For more information on this estimate, refer to
the Affected Entities section of the regulatory
impact analysis.
Robo-Advisers
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regardless of size, will continue to rely
on PTE 75–1 and PTE 86–128 for
transactions that do not involve
investment advice.
The Department assumes that 1,920
broker-dealers will be affected by the
amendments.799 The Department
estimates that 97.0 percent of brokerdealers are small businesses according
to the SBA size standards.800
Accordingly, the Department assumes
that 1,862 small broker-dealers will be
affected by the amendments.801
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Discretionary Fiduciary
The amendments to PTEs 75–1 Parts
III & IV, 77–4, 80–83, 83–1, and 86–128
will exclude the receipt of
compensation from transactions that
result from the provision of investment
advice. Therefore, fiduciaries will have
to rely on another exemption to receive
compensation for investment advice,
such as PTE 2020–02. Fiduciaries that
exercise full discretionary authority or
control could continue to rely on these
exemptions, as long as they comply
with all of the applicable exemption’s
conditions. Discretionary fiduciaries
will still be able to effect or execute
securities transactions. Any
discretionary fiduciaries seeking relief
for investment advice, however, will 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 will rely on the
amended exemption.
For the purposes of this analysis, the
Department believes that the number of
dual-registered broker-dealers that
render services to retirement plans
provides a reasonable estimate of the
number of entities that will rely on the
exemption. As of December 2022, there
were 456 broker-dealers registered as
SEC- or State-registered investment
advisers.802 Consistent with the
assumptions made about broker-dealers
affected by the amendments to PTE
2020–02, the Department estimates that
55 percent, or 251 broker-dealers will be
affected by the amendments to PTE 86–
128.803
799 For more information on this estimate, refer to
the Affected Entities section of the regulatory
impact analysis.
800 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,
https://www.naics.com/business-lists/counts-bynaics-code/.
801 The number of retail broker-dealers affected by
this exemption is estimated as: (1,919 brokerdealers × 96.9%) = 1,860 broker-dealers.
802 Estimates are based on the SEC’s FOCUS
filings and Form ADV filings.
803 In 2023, 55 percent of registered investment
advisers provided employer-sponsored retirement
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20:41 Apr 24, 2024
Jkt 262001
different from the distribution of
The amendments to PTE 2020–02 and insurance companies by distribution
channel but has adopted this
PTE 84–24 affect small insurance
assumption due to a lack of additional
companies and captive agents. The
data.
existing version of PTE 84–24 granted
Also, the Department recognizes that
relief for all insurance agents, including
some insurance companies use multiple
insurance agents who are overseen by a
distribution channels, though the
single insurance company; however, the Department did not receive any
amendments exclude insurance
comment on how common the use of
companies and captive agents currently multiple distribution channels is.
relying on the exemption for investment Looking at the 10 insurance companies
advice. These entities will be required
with the highest annuity sales in 2022,
to comply with the requirements of PTE one relied on captive distribution
2020–02 for relief involving investment
channels, seven relied on independent
advice.
distribution channels, and two relied on
In the proposal, the Department
both.805 Accordingly, most insurance
assumed that the number of companies
companies appear to primarily use
selling annuities through captive or
either independent distribution or a
independent distribution channels
combination of captive and independent
would be proportionate to the sales
distribution. However, any entity using
completed by each respective channel.
a captive insurance channel, or using
The Department requested comments on both captive and independent channels,
this assumption but did not receive any likely has already incurred most of the
directly addressing it. In the proposal,
costs of this rulemaking under PTE
the Department based its estimate on the 2020–02. Costs are estimated by
percent of sales completed by
assuming that entities using a thirdindependent agents and career agents in party distribution system, even if they
the individual annuity distribution
also use captive agents, will incur costs
channel. This resulted in an estimate
for the first time under amended PTE
that approximately 46 percent of sales
84–24. This assumption leads to an
are done through captive distribution
overestimation of the cost incurred by
channels and 54 percent of sales are
insurance companies.
done through independent distribution
Following from the revised
channels.
assumption that 81 percent of activity
One recent source stated that 81
being associated with independent, or
percent of individual annuities sales are third party, channels, the Department
conducted through an independent
estimates that 84 insurance companies
distribution channel.804 The Department distribute annuities through captive
uses this statistic to update its estimate
channels and will rely on PTE 2020–02
of the number of sales through the
for transactions involving investment
independent distribution channel. The
advice. Further, the Department
Department assumes that the percent of
estimates that 358 insurance companies
companies selling annuities through an
distribute annuities through
independent distribution channel is
independent channels and will rely on
proportionate to the percent of sales
PTE 84–24 for transactions involving
conducted through an independent
investment advice.806 Regarding entities
distribution channel. The Department
affected by PTE 84–24, 73.1 percent, or
recognizes that the distribution of sales
approximately 262 entities, are
by distribution channel is likely
estimated to meet the SBA definition of
small entities. For entities affected by
benefits consulting. (See Cerulli Associates, U.S.
PTE 2020–02, the Department continues
RIA Marketplace 2023: Expanding Opportunities to
to rely on the estimated number of small
Support Independence, Exhibit 5.10. The Cerulli
Report.) The Department assumes the percentage of
insurers developed in the Affected
broker-dealers provide advice to retirement plans is
Entities section of the regulatory impact
the same as the percent of investment advisers
analysis, which is 71 small entities. This
providing services to plans. This is calculated as
Insurance Companies
456 hybrid broker-dealers × 55% = 251 affected
entities.
804 This study considers sales by independent
agents, independent broker-dealers, national brokerdealers, and banks to be sales in the independent
distribution channel, while sales by career agents
and direct means are considered to be in the captive
distribution channel. (See Ramnath
Balasubramanian, Christian Boldan, Matt Leo,
David Schiff, & Yves Vontobel, Redefining the
Future of Life Insurance and Annuities Distribution,
McKinsey & Company (January 2024), https://
www.mckinsey.com/industries/financial-services/
our-insights/redefining-the-future-of-life-insuranceand-annuities-distribution.)
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805 Annuity sales are based on LIMRA, U.S.
Individual Fixed Annuity Sales Breakouts, 2022,
https://www.limra.com/siteassets/newsroom/facttank/sales-data/2022/q4/2022-ye-fixed-breakoutresults.pdf. Information on distribution channels is
based on review of insurance company websites,
SEC filings of publicly held firms, and other
publicly available sources.
806 The number of insurance companies using
captive distribution channels is estimated as 442 ×
81% = 358 insurance companies. The number of
insurance companies using independent
distribution channels is estimated as 442¥358 = 84
insurance companies.
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figure was not re-calculated based on
the Statistics of U.S. Businesses because
it accounts exclusively for insurers
selling annuities, while the Statistics of
U.S. Businesses would include all direct
insurers.
Captive Insurance Agents
Additionally, as discussed in the
Affected Entities section of the
regulatory impact analysis, the
Department estimates that 1,577 captive
insurance agents will be affected by the
amendments. The Department estimates
that 99 percent of these captive agents
work for small entities.807 Thus, the
Department estimates there are 1,561
captive insurance agents that will be
affected by the amendments.808
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Independent Producers
The rulemaking also affects
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 may 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 and not Independent
Producers.
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. In the proposal, the
Department assumed that 10 percent, or
4,000, of these Independent Producers
serve the retirement market. As noted in
the Affected Entities section of the
regulatory impact analysis, the
Department received several comments
suggesting that its estimate for the
number of independent insurance
agents was too low. while commenters
provided estimates that were
807 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, https://www.naics.com/
business-lists/counts-by-naics-code/.; Small
Business Administration, Table of Size Standards,
(December 2022), https://www.sba.gov/document/
support-table-size-standards.
808 The number of captive insurance agents is
calculated as: (1,577 captive agents × 99.0%) =
1,561 captive insurance agents serving the annuity
market.
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20:41 Apr 24, 2024
Jkt 262001
substantially higher, asserting an
estimate between 80,000 and 120,000
agents an appropriate level, the
commenters did not provide any
documentation or basis for their
suggestions. In response, the
Department analyzed employment data
from the March 2023 Current
Population Survey to identify the
number of self-employed workers in the
‘‘Finance and Insurance’’ industry
whose occupation was listed as
‘‘Insurance Sales Agents.’’ This
identified 86,410 self-employed
insurance sales agents in the Finance
and Insurance industry.809 The
Department decided to utilize this as the
number of Independent Producers for
the analyses presented even though this
data point likely contains workers who
do not sell annuities or would otherwise
not be impacted by the rulemaking;
therefore, the Department believes this
results in an overestimate of costs
associated with Independent
Producers.810
The Department estimates that 99
percent of these entities are small
entities.811 As such, the Department
estimates that 85,564 small Independent
Producers will be affected by the
amendment.
Pension Consultants
The Department expects that pension
consultants will continue to rely on the
existing PTE 84–24; however, the
amendment will exclude compensation
received by pension consultants as a
result of providing investment advice
from relief under the existing PTE 84–
24. As such, any pension consultants
809 EBSA Tabulations based off the March 2023
Current Population Survey.
810 When revising its estimate of Independent
Producers for the final rulemaking, the Department
considered using the proportion of premiums
attributable to life insurance activity as a proxy for
the share of insurance agents that sell annuities.
Data from the U.S. Department of the Treasury,
Federal Insurance Office, ‘‘Annual Report on the
Insurance Industry,’’ indicates that roughly 23
percent of insurance premiums in 2023 were from
life insurance activity. Assuming that this translates
into 23 percent of insurance agents selling life
insurance products would reduce the number of
estimated independent life insurance producers
affected from 86,410 to 20,185. If the Department
assumed this level of Independent Producers it
would result in a total estimated cost associated
with the PTE 84–24 rulemaking of just $67.7
million in the first year and $36.3 million in
subsequent years. The Department ultimately
decided to not use share of insurance premiums
adjustment in the Final Rule.
811 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, https://www.naics.com/
business-lists/counts-by-naics-code/.; Small
Business Administration, Table of Size Standards,
(December 2022), https://www.sba.gov/document/
support-table-size-standards.
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32245
relying on the existing exemption for
investment advice will be required to
work with a Financial Institution under
PTE 2020–02 to receive compensation
for fiduciary investment advice. In this
analysis, the Department includes
pension consultants in the affected
entities for continued relief for the
existing provisions of PTE 84–24 and as
a part of registered investment advisers
for the amended PTE 2020–02.
As discussed in the Affected Entities
section of the regulatory impact
analysis, the Department estimates that
1,011 pension consultants serve the
retirement market. The Department
estimates that approximately 91.4
percent of these entities are small
entities.812 As such, the Department
estimates that 924 pension consultants
will be affected by the amendments.
Principal Company Underwriter
The Department expects that some
investment company principal
underwriters for plans and IRAs rely on
the existing PTE 84–24. The amendment
excludes compensation received by
investment company principal
underwriters as a result of providing
investment advice from relief under the
existing PTE 84–24. As such, any
principal company underwriter relying
on the existing exemption for
investment advice will be required to
work with a Financial Institution under
amended PTE 2020–02 to receive
compensation for fiduciary investment
advice. 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 registered
investment advisers.
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.813 As a result,
812 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,
https://www.naics.com/business-lists/counts-bynaics-code/.; Small Business Administration, Table
of Size Standards, (December 2022), https://
www.sba.gov/document/support-table-sizestandards.
813 This is estimated on the percent of entities
with less than $47.0 million for the industry
Investment Banking and Securities Intermediation,
NAICS 523110. See NAICS Association, Count by
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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 will be affected
by the proposed amendments.
Banks and Credit Unions
The amendments to PTE 80–83, PTE
75–1, and PTE 2020–02 may affect
banks and credit unions. The
amendments to PTE 80–83 and PTE 75–
1 will exclude entities currently relying
on the existing exemptions for
investment advice, which will instead
be required to comply with PTE 2020–
02 for relief.
The Department estimates that
approximately 76 percent of commercial
banks are small banks.814 As discussed
in the Affected Entities section of the
regulatory impact analysis, the
Department estimates that 4,049
commercial banks will use the amended
PTE 75–1, of which 3,076 are estimated
to be small.815 Additionally, in the
Affected Entities section of the
regulatory impact analysis, the
Department estimates that 25 fiduciarybanks with public offering services will
use the amended PTE 80–83, of which,
19 are estimated to be small.816 The
Department recognizes that these
estimates assume that the proportion of
small banks using the aforementioned
PTEs will 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.817
The amendments could also affect
credit unions. The Department estimates
that there are approximately 4,645
credit unions.818 In 2023, the SBA
estimated that there are 4,586 small
credit unions.819 As discussed in the
Affected Entities section of the
regulatory impact analysis, while the
Department acknowledges that some
credit unions may rely on PTE 75–1 and
PTE 80–83 as amended, the Department
does not have data, and did not receive
any comment on the proposal, to
suggest how many credit unions current
rely on these exemptions or will
continue to rely on these exemptions as
amended.
Mutual Fund Companies
The amendments modify PTE 77–4
such that mutual fund companies
providing services to plans can no
longer rely on PTE 77–4 for relief when
giving investment advice and will
instead need to rely on PTE 2020–02 for
relief.
As discussed in the Affected entities
section of the regulatory impact
analysis, the Department estimates that
812 mutual fund companies will be
affected by the amendments to PTE 77–
4. The Department estimates that
approximately 92 percent of these
mutual fund companies, or 744 mutual
fund companies, are small.820
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 amendments exclude exemptive
relief for investment advice. Under the
rulemaking, these mortgage pool
sponsors operating as or under a
Financial Institution will be able to rely
on PTE 2020–02 for relief concerning
investment advice.
5. Impact of the Rule
The Department believes the costs
associated with the amendments are
modest because the rulemaking 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 rulemaking will
impose a significant compliance burden
on small entities. As discussed, the
Department estimates that the
rulemaking will impose costs of
approximately $536.8 million in the
first year and $332.7 million in each
subsequent year, of which
approximately $328.7 million in the
first year and $140.7 million in each
subsequent year will 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 11—SUMMARY OF TOTAL COST AND AVERAGE PER-ENTITY COSTBY EXEMPTION FOR SMALL ENTITIES
Total cost
First year
Per-entity cost
Subsequent
years
First year
Subsequent
years
PTE 84–24 .......................................................................................................
PTE 2020–02 ...................................................................................................
Mass Amendments 1
$201,839,804
126,887,617
$82,820,265
57,891,821
$2,326
6,984
$954
3,186
Total ..........................................................................................................
328,727,421
140,712,086
9,310
4,140
1 As
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finalized, the amendments to the Mass Amendment do not impose an additional burden on entities continuing to rely on those exemptions. However, the amendments will require entities to rely on PTE 84–24 and PTE 2020–02 for exemptive relief covering transactions involving
the provision of fiduciary investment advice. These costs are accounted for in the cost estimates for PTE 84–24 and PTE 2020–02.
NAICS Industry Sectors, https://www.naics.com/
business-lists/counts-by-naics-code/.
814 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, (September 2023), https://
www.fdic.gov/foia/ris/.; Small Business
Administration, Table of Size Standards, (December
2022), https://www.sba.gov/document/support-table-size-standards.
815 The number of small commercial banks that
would use PTE 75–1 is estimated as: (4,049 banks
× 76%) = 3,076 small banks.
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816 The number of small banks that would use
PTE 80–83 is estimated as: (25 fiduciary-banks with
public offering services × 76%) = 19 banks.
817 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/bthas-the-banking-industry-become-tooconcentrated.pdf.
818 For more information on how the number of
credit unions is estimated, refer to the Affected
Entities section of the regulatory impact analysis.
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819 88
FR 18906 (March 29, 2023).
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, https://www.naics.com/businesslists/counts-by-naics-code/.; Small Business
Administration, Table of Size Standards, (December
2022), https://www.sba.gov/document/support-table-size-standards.
820 This
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32247
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 in plans that are
receiving electronic disclosures will be
similar to those under the Department’s
2020 and 2002 electronic disclosure safe
harbors.821 Accordingly, the Department
estimates that 96.1 percent of the
disclosures sent to Retirement Investors
in plans will be sent electronically, and
the remaining 3.9 percent will be sent
by mail.822 Additionally, the
Department assumes that approximately
72 percent of IRA owners will receive
disclosures electronically.823
Furthermore, the Department estimates
that communications between
businesses (such as disclosures sent
from one Financial Institution to
another) will be 100 percent electronic.
The Department assumes that various
types of personnel will perform the
tasks associated with information
collection requests at an hourly wage
rate of $65.99 for clerical personnel,
$133.24 for a top executive, $165.29 for
an insurance sales agent, $165.71 for a
legal professional, $198.25 for a
financial manager, and $228 for a
financial adviser.824 Additionally, in
response to comments, the Department
has also analyzed these costs according
to different revenue sizes. The per entity
costs for the rulemaking as a share of
revenue are displayed below.
TABLE 12—TOTAL THREE-YEAR AVERAGE PER-ENTITY COST BY ENTITY AND REVENUE, SHARE OF REVENUE 825
Revenue
Independent
producer
(%)
<$100k ..............................
$100–$500k .......................
$0.5–$1m ..........................
$1–$5m .............................
$5–$25m ...........................
$25–$47m .........................
SBA Small .........................
Pension
consultant
(%)
3.16
0.53
0.21
0.05
0.01
0.00
0.01
6.63
1.10
0.44
0.11
0.02
0.01
0.01
........................
........................
........................
........................
........................
........................
0.28
Broker
(%)
Robo adviser
(%)
RIA 826 (%)
5.62
0.97
41
0.12
0.05
0.04
0.01
4.91
1.04
61
0.29
0.22
0.17
0.01
........................
........................
........................
........................
........................
........................
0.11
Nonbank
trustee
(%)
7.34
1.23
0.50
0.14
0.05
0.05
0.01
Bank 827
(%)
<0.001
<0.001
<0.001
<0.001
<0.001
<0.001
<0.01
The analysis presented in this section
is distinct from that presented in the
regulatory impact analysis because the
Department is relying on the SBA
definition of a small entity and an
updated source recommended by the
SBA for the RFA whereas the regulatory
impact analysis utilizes an alternative
definition and data source. The result of
using the SBA definition in conjunction
with its preferred data source is an
increase in the estimated number of
affected small entities from 3,531,
which was used in the regulatory
impact analysis, to 18,169 in the RFA
for PTE 2020–02. Costs are allocated to
small entities in two manners
depending on the task. When allocating
the fixed costs of review, development
of disclosure, and compliance measures
instituted at an entity level, the costs are
distributed using the time, labor, and
other assumptions presented in the
regulatory impact analysis associated
with the task for small entities.
Alternatively, when the costs are
associated with transactional or revenue
generating activity, the costs are
calculated on a revenue weighted basis.
For example, Census Statistics of U.S.
Businesses data show that
approximately 99 percent of Investment
Advice firms reporting under NAIC
523930 have revenues under the SBA
threshold. These firms generate roughly
30 percent of the industry classes’
receipts. Therefore, when the
Department allocates fixed costs, the
costs will be calculated based on the
number of affected small entities such
as for rule review, where 99% of the
total 16,398 Investment Advisers are
allocated 20 hours of a legal
professionals’ time to review. When the
cost is variable or transaction based,
821 85 FR 31884 (May 27, 2020); 67 FR 17263
(Apr. 9, 2002).
822 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).
823 The Department used information from a
Greenwald & Associates survey which reported that
84 percent of retirement plan participants find
electronic delivery acceptable, and data from the
National Telecommunications and Information
Administration internet Use Survey which
indicated that 86 percent of adults 65 and over use
email on a regular basis, which is used as a proxy
for internet fluency and usage. Therefore, the
assumption is calculated as: (84% find electronic
delivery acceptable) × (86% are internet fluent) =
72% are internet fluent and find electronic delivery
acceptable.
824 Internal Department calculation based on 2023
labor cost data. For a description of the
Department’s methodology for calculating wage
rates. See EBSA, 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, 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.
825 Values are displayed as a share of the
midpoint for each revenue category. For instance,
values in the ‘‘<$100k’’ category are displayed as a
share of $50,000.
826 This includes both State-registered and SECregistered investment advisers.
827 The SBA Size categorization for banks is based
on total assets, not revenue. Banks are presented on
the same chart for simplicity, but their figures are
based off of asset cutoffs at $50, $100, $200, $400,
$600, and $850 million.
Cost Associated With PTE 2020–02
Summary of Affected Entities
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such as with rollover documentation
costs, the costs allocated to small firms
will be around 30 percent of the total
costs.
Cost To Review the Rule
The Department estimates that all
18,169 of the small Financial
Institutions affected will each need to
review the rule, as it applies to their
business. The Department acknowledges
that the review process will vary
significantly by institution. Some
organizations may use in-house teams to
review the rule and devise an
implementation plan, others may
outsource review to a third party, and
still others may choose a hybrid
approach. Outsourcing the review
process can lead to efficiencies as one
organization reviews the rule and then
provides information to many others.
These efficiencies may be particularly
beneficial to small entities which make
up the majority of entities. The
Department estimates that such a review
will take a legal professional, on
average, 20 hours to review the rule and
develop an implementation plan,
resulting in a total cost of $60.2
million.828 The Department increased
this burden estimate from 9 hours in
response to comments received.
Cost Associated With General
Disclosures
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The amendments 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
regulatory impact analysis of this
document. The Department estimates
that the total cost for the 18,169 small
Financial Institutions to update their
disclosure materials and distribute the
newly required disclosures is $4.4
million during the first year and
approximately $570,000 in each
subsequent year.829
828 The burden is estimated as: (18,169 entities x
20 hours) ≈ 363,381 hours. A labor rate of $165.71
is used for a legal professional. The labor rate is
applied in the following calculation: (18,169
entities × 20 hours) × $165.71 ≈ $60,215,805.
829 The burden cost for producing and updating
disclosures is estimated as:
Newly reliant entities create fiduciary disclosure
{[(18,169 small entities¥41 robo-advisor, and nonbank trustees) × 30% × (30 minutes ÷ 60 minutes)]
+ (41 × (30 minutes ÷ 60 minutes)} ≈ 2,740 hours;
Previously reliant entities update fiduciary
disclosure [(18,169 small entities¥41 robo-advisor,
and non-bank trustees) × 70% × 10% × (10 minutes
÷ 60 minutes)] ≈ 211 hours;
Previously reliant entities develop written
statement of Care and Loyalty Obligation disclosure
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Cost Associated With Rollover
Documentation and Disclosure
As discussed in the cost section of the
regulatory impact analysis, the
Department bases its estimates on the
rollover activity observed in 2023,
where the nearly half of the 4,485,059
rollovers, or 2,197,679 rollover
transactions, involved receiving
advice.830 The Department lacks reliable
data on the number of rollovers that
involve small Financial Institutions. As
described in the Affected Entities
section of this RFA the Department
assumes the percent of rollovers
conducted by small institutions is
proportional to the percent of revenue
generated by entities classified as small
within the entity category being
discussed. Using the proportional
revenue of each type of entity the
Department estimates that
approximately 579,598 rollovers, or 26.4
percent, will be conducted via small
Financial Institutions.
Building from the discussion above,
the Department estimates an annual cost
of approximately $39.1 million for
rollover transaction documentation.831
Cost Associated With Written Policies
and Procedures
Entities that were not previously
complying with PTE 2020–02 will incur
the cost to develop policies and
[18,057 small entities × (30 minutes ÷ 60 minutes)]
≈ 9,029 hours;
Newly reliant entities develop written statement
of Care and Loyalty Obligation disclosure (112
small entities × 1 hour) ≈ 112 hours;
Newly reliant entities create Relationship and
Conflict of Interest disclosure {[(18,169 small
entities¥41 robo-advisor, and non-bank trustees¥
1,862 broker-dealers) + (1,862 broker-dealers × (600
non-retail ÷ 1,920 total broker-dealers)) × 30%] +
[(41 robo-advisor, and non-bank trustees) × 1 hour]
≈ 5,074 hours;
Previously reliant entities update All Material
Facts disclosure [(18,169 small entities¥41 roboadvisor, and non-bank trustees¥1,862 Brokerdealers) + (1,862 Broker-dealers × (600 non-retail ÷
1,920 total Broker-dealers)) × 70% × (30 minutes ÷
60 minutes)] ≈ 5,897 hours;
Aggregating these tasks results in an hour burden
of 23,062 hours and an equivalent burden cost of
$3,821,660 to produce and update the disclosures.
The burden for disclosure materials is estimated
as: (5,474,608 small entity disclosures × $0.10) ≈
$574,609.
830 For more information on how the number of
IRA rollovers is estimated, refer to the Affected
Entities section of the regulatory impact analysis.
831 The burden is estimated as: 2,197,679
rollovers × 27.6% involving small entities = 605,564
small rollovers. The labor rate of $64.60 per rollover
(based on a rate of $228 per hour for a Personal
Financial Adviser) and a material cost of $0.10 per
paper rollover disclosure are applied in the
following calculation: [(605,564 small rollovers ×
$64.60) + (605,564 small rollovers × 3.9% paper
disclosures × $0.10)] = $39,121,801. For more
information on the assumptions included in this
calculation, refer to the regulatory impact analysis
of this document.
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procedures in the first year. As
described in more detail in the Cost
section of the regulatory impact
analysis, the time burdens assumed
depend on prior reliance on either a
previous version of the PTE or similar
regulatory scheme in which much of the
required work is assumed to be
complete. For small entities that are
currently complying with the
requirement, the Department assumes
10 hours to bring their current policies
and procedures into compliance and 20
hours for firms to develop them from
first principles. Additionally, the
Department estimates that most entities
will require an additional 5 hours to
update their policies and procedures
each year. The amendments will also
require Financial Institutions to provide
their complete policies and procedures
to the Department within 30 days of
request. This cost is incorporated into
the estimate presented above but
discussed separately below for
completeness’s sake. 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 will 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 will request 160
policies and procedures from small
Financial Institutions in the first year
and 49 in subsequent years.832 The
Department estimates that fulfilling the
requirement will result an estimated
cost of approximately $2,656 in the first
year 833 and $808 in subsequent
years.834 The cost for a firm receiving
the request will be approximately $17 in
years when a request is made and no
832 The percent of Financial Institutions that are
small is estimated as: (18,169 small Financial
Institutions/18,632 Financial Institutions) = 97.5%.
The number of policies and procedures requested
from small financial entities in the first year is
estimated as: (165 × 97.5%) = 161. The number of
policies and procedures requested from small
financial entities in the first year is estimated as: (50
× 97.5%) = 49.
833 The burden is estimated as: (161 × (15 minutes
÷ 60 minutes)) = 40 hours. A labor rate of $65.99
is used for a clerical worker. The labor rate is
applied in the following calculation: (161 × (15
minutes ÷ 60 minutes)) × $65.99 = $2,656. For more
information on the assumptions included in this
calculation, refer to the regulatory impact analysis
of this document.
834 The burden is estimated as: (49 × (15 minutes
÷ 60 minutes)) ≈ 12 burden hours. A labor rate of
$65.99 is used for a clerical worker. The labor rate
is applied in the following calculation: (49 × (15
minutes ÷ 60 minutes)) × $65.99 = $808. For more
information on the assumptions included in this
calculation, refer to the regulatory impact analysis
of this document.
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cost in most years when no request is
made.
The requirements to maintain and
review policies and procedures are
estimated to result in an aggregate cost
of $20.0 million in the first year and
$15.0 million in subsequent years for
small Financial Institutions, or roughly
$1,101 average cost per entity in the first
year and $829 in subsequent years.835
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 relying on the existing
exemption will not incur additional
costs with this requirement, roboadvisers, and newly reliant brokerdealers, registered investment advisers,
and insurance companies, who either
were not covered under, or not relying
burden in the first year is estimated as:
[(5,250 small entities × 10 hours) + (229 small
entities × 20 hours) + (12,731 small entities × 5
hours)] ≈ 120,785 hours. A labor rate of $165.71 is
used for a legal professional. The labor rate is used
in the following calculation: [(5,250 small entities
× 10 hours) + (229 small entities × 20 hours) +
(12,731 small entities × 5 hours)] × $165.71 ≈
$20,008,658. Additionally, 160 small entities will
spend 15 minutes each providing the Department
with a copy of their policies and procedures in the
first year resulting an additional burden of
approximately 40 hours. A labor rate of $65.99 is
used for a clerical worker. The labor rate is applied
in the following calculation: [160 small entities ×
(15 minutes ÷ 60 minutes)] × $65.99 ≈ 2,656. The
total cost for the first year is estimated as:
$20,008,658 + $2,656 = $20,011,315. This burden in
the second year is estimated as: (18,169 small
entities × 5 hours) ≈ 90,857 hours. A labor rate of
$165.71 is used for a legal professional. The labor
rate is used in the following calculation: (18,169
small entities × 5 hours) × $165.71 ≈ $15,053,951.
Additionally, 49 small entities will spend 15
minutes each providing the Department with a copy
of their policies and procedures in the first year
resulting an additional burden of approximately 12
hours. A labor rate of $65.99 is used for a clerical
worker. The labor rate is applied in the following
calculation: [49 small entities × (15 minutes ÷ 60
minutes)] × $65.99 ≈ $808. The total cost for the
second year is estimated as: $15,053,951 + $808 =
$15,054,760.
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upon, the existing exemption, will incur
costs associated with conducting the
annual review. As stated in the
regulatory impact analysis, the
Department assumes that 30 percent of
entities that were previously able to rely
on the PTE chose not to do so and will
be newly reliant due to this rulemaking
and incur a full cost of compliance. As
presented previously in the regulatory
impact analysis, the Investment Adviser
Association estimated in 2018 that 92
percent of SEC-registered investment
advisers voluntarily provide an annual
compliance program review report to
senior management.836 The Department
assumes that State-registered investment
advisers exhibit similar retrospective
review patterns as SEC-registered
investment advisers. Accordingly, the
Department estimates that eight percent
of advising retirement plans will incur
costs associated with producing a
retrospective review report.
The Department assumes that 10
percent of robo-advisers and newly
reliant broker-dealers and insurance
companies will incur the full cost of
producing an audit report. The
Department estimates that 0.8 percent of
newly reliant registered investment
advisers will incur the full cost of
producing the audit report.
This results in an estimate of 98
newly affected small entities not
currently producing audit reports.837
The remaining 5,479 newly affected
small entities will need to make
modifications to satisfy the
requirements.838
836 2018 Investment Management Compliance
Testing Survey, Investment Adviser Association
(Jun. 14, 2018), https://
higherlogicdownload.s3.amazonaws.com/
INVESTMENTADVISER/aa03843e-7981-46b2-aa49c572f2ddb7e8/UploadedImages/publications/2018Investment-Management_Compliance-TestingSurvey-Results-Webcast_pptx.pdf.
837 This is estimated as: {[(1,861 broker-dealers +
71 insurers) × 10%] + [(7,935 SEC-registered
investment advisers + 8,260 State-registered
investment advisers) × 0.8%] × 30% that are newly
relying on PTE 2020–02] + (10 robo-advisers + 31
non-bank trustees) × 10%} ≈ 98 Financial
Institutions. Note: Due to rounding values may not
sum.
838 This is estimated as: {[(1,861 broker-dealers +
71 insurers) × 90%] + [(7,935 SEC-registered
investment advisers + 8,260 State-registered
investment advisers) × 99.2%] × 30% that are newly
relying on PTE 2020–02] + (10 robo-advisers + 31
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The Department estimates that it will
take a legal professional five hours for
small firms to produce a retrospective
review report, resulting in an estimated
cost of $0.1 million.839 The Department
estimates that it will take a legal
professional one hour for small firms to
modify existing reports, on average.
This results in an estimated cost of $0.9
million.840
The Department estimates it will take
a certifying officer two hours for small
firms to review the report and certify the
exemption, resulting in an estimated
cost burden of approximately $2.2
million.841
This results in a total cost annual cost
of $3.1 million.
Summary of Total Cost
The Department estimates that in
order to meet the additional conditions
of the amended PTE 2020–02, affected
small entities will incur a total cost of
$131.9 million in the first year and
$62.9 million in subsequent years.842
The cost by requirement and entity type
is summarized below.
non-bank trustees) × 90%} ≈ 5,479 Financial
Institutions. Note: Due to rounding values may not
sum.
839 The burden is estimated as: (98 small entities
creating an audit × 5 hours) ≈ 490 hours. A labor
rate of $165.71 is used for a legal professional. The
labor rate is applied in the following calculation:
630 burden hours × $165.71 ≈ $81,236. Note, the
total values may not equal the sum of the parts due
to rounding.
840 The burden is estimated as: 5,353 small
entities updating an audit × 1 hours) ≈ 5,353 hours.
A labor rate of $165.71 is used for a legal
professional. The labor rate is applied in the
following calculation: 5,353 burden hours × $165.71
≈ $886,983. Note, the total values